The shutters have come down. The lights are out and the signs are being removed. On high streets and in shopping centres across the country once proud stores are being hollowed out, casualties of Britain’s retail slump. Experian, a credit-scoring firm, reckons that by the end of 2009 almost one in six shops will be standing empty as yet more stores close.
If retail property is in a bad way, office developments are even more shaky. In London’s financial district, cranes stand silent behind the hoardings of half-finished buildings. Preliminary figures suggest that demand for office space in the City during the fourth quarter of 2008 was at or close to a record low, says Neil Prime of Jones Lang LaSalle, a property consultancy.
That is contributing to sharp drops in the prices of commercial properties (see chart). IPD, a data provider, says they slumped some 6% in November, the most recent month for which it has statistics. That takes the total drop in property values to about 32 percent since the market peaked some 18 months ago, easily surpassing the 27 percent peak-to-trough crash that took place between November 1989 and May 1992.
Dramatic as these numbers are, they may underestimate the full extent of the decline, because so few transactions are taking place. And few believe prices have reached their bottom. “There is very broad consensus that we are looking at a fall of about 50 percent (from peak to trough) but the risks are to the downside,” says Sabina Kalyan, a strategist at CBRE Investors, a real-estate fund manager.
Rents are falling, too, as the mass of empty space coming on to the market in areas such as London strengthens tenants’ bargaining-power. In the West End, the capital’s swankiest neighbourhood and home to a previously blossoming but now withering crop of hedge funds, rents declined by 8 percent from their peak in the spring of 2008 to November, according to Capital Economics, a consultancy. In the City they are likely to fall by some 15 percent this year, reckons Mr. Prime.
Moreover, falling rents are not the only way in which tenants are getting the upper hand at the expense of landlords. New tenants are being offered much longer rent-free periods as an inducement to sign 15-year leases: 36 months typically, up from 18 months just a year ago. In the 1980s most new leases in Britain committed tenants for 25 years and allowed landlords to raise rents at regular intervals. Now the average length of lease is about ten years and many can be abandoned after five years.
“The 25-year lease is dead,” says John Fraser-Andrews of HSBC, a bank. That is of little comfort to property investors, who for many years were attracted to London’s market precisely because it promised such stable returns. But for the economy as a whole, the shift may be for the better. In the recession of the early 1990s, many firms failed because they were unable to cut the costs of renting as their businesses slowed. Amid the gloom of the current downturn, their ability to do so now may be one of the few sources of comfort to struggling retailers and financial firms.