Report questions 'sustainability' of real estate recovery

The commercial property sector's recent revival is unlikely to continue this year amid unfavourable wider conditions, a new report has claimed.

Having fallen by 44.2 per cent over the 25 months to July 2009, Investment Property Databank's figures indicate that real estate values subsequently climbed by 8.8 per cent between August and December.

Yet Ernst & Young ITEM Club's report has warned that this recovery is being driven purely by investors seeking to take advantage of historically low property prices, with vacancy rates nonetheless continuing to rise and rents simultaneously dropping.

Moreover, it stated that the Bank of England's asset purchasing scheme had also played a major role in restoring liquidity to the commercial property market and that the flow of income into the sector could soon dry up if the Bank abandons quantitative easing this week.

The ITEM Club also forecast a rash of defaults among real estate firms refinancing their debts, with negative repercussions for future bank lending, although it acknowledged that the declining value of the pound could encourage foreign investment.

The Bank of England, Invista Real Estate Investment Management and property economist Kelvin Davidson from the Capital Economics consultancy have all also warned in recent weeks of the possibility of a renewed drop in commercial property prices.

02/02/2010