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Published September 25, 2007

Credit fallout to hit London office building

CBRE sees 2.5m sq ft of new space instead of 4.5m forecast earlier

(LONDON) The equivalent of two to four skyscrapers per year are now unlikely to be built in London in 2009 to 2011 due to fallout from the US subprime crisis, property services firm CB Richard Ellis (CBRE) said yesterday.

CBRE said it expected 2.5 million square feet (232,300 sq metres) of new office space per year to be built in central London in 2009 through 2011, instead of a previously forecast 4.5 million square feet.

But that could help to extend London's commercial property cycle by reducing the risk of too many new offices going up in the crane-dotted UK capital, Peter Damesick, head of UK research at CBRE, said. He said the decision to slash his estimate for London's development programme by 44 per cent was the result of higher funding and construction costs and because financial market turbulence had cast a pall over the UK capital's jobs outlook, potentially holding back rental growth. 'Funding for office developments has become harder to obtain and got more expensive,' Mr Damesick told Reuters, citing anecdotal evidence which showed lending margins doubling in some cases to 175 basis points over benchmark interest rates. J'There is also a feeling that the strength of (occupier) demand in the short-term will be less than was expected six months ago due to the impact of potential financial dislocation on London's financial services,' he said. In addition, the regeneration of a large area of London before the 2012 Olympics was likely to push up construction costs even further, he said.

But a degree of self-regulation now would benefit the property industry going into the next decade, even though the supply of office space was near a record low in central London, with an average vacancy rate of 3.3 per cent at the end of August, according to CBRE data.

'It will reduce the risk, which was beginning to appear in the pipeline, of medium-term oversupply and enhances the prospects for rental stability,' Mr Damesick said. 'So we'll probably see slower rental growth in the short-term but less risk of a rental downturn in the medium term.'

Excessive office building helped to extend and deepen a downturn in London's property market in the early 1990s.

Among the ambitious office development projects that have come into question in recent weeks is the 72-storey London Bridge Tower - nicknamed the Shard of Glass - which is due for completion in 2010/11 and lies on the city's south bank. Property investment firm CLS Holdings plc, one of the joint venture partners behind the Shard project, said financing options were under review and demolition works were still due to begin before the end of the year. -- Reuters