The UK’s non-residential building stock (excluding land value) was worth £899 billion at the end of 2020, according to Office for National Statistics (ONS) Blue Book data. Then, by mid-2022 the value of these buildings had probably risen to around £1 trillion.
But since then, the market has collapsed and Schroders Research estimates the value is now down 21%, or £210 billion from June’s peak. This would be the largest ever property writedown in the UK – three times the £71 billion fall between the end of 2008 and the end of 2010.
The consensus amongst property analysts is that the market is likely to stabilise somewhere near its current level, provided there are relatively limited forced sales. Our own forecasts are not too different.
The prime cause of the fall in value has been rising interest rates which seem to have not been expected by the sector (although spending a small fee on Cebr forecasts would have helped them here). Higher interest rates drive up landlord costs, reduce the attractiveness of acquiring property with new debt, and devalue future cash flows for those investing in property.
But underlying the fall has been the lingering impact of the pandemic on high street retail and office occupancy. The value of offices has undoubtedly fallen, with many workplaces now less reliant on in-person working five days a week, while online shopping has become significantly more popular compared to before the pandemic, making up over a quarter of all retail sales in 2022. As these trends seem entrenched, few expect commercial property values to surge back.
In the 2008-10 recession, the fall in property prices created huge knock on problems for banks and for companies. Will the current, much larger fall create similar problems?
Once bitten, twice shy.
Although the current writedowns are larger, on balance we expect less fundamental damage from the current situation than fifteen years ago. This is because of more cautious lending policies through the intervening period, with debt leveraging not near the extreme levels seen in the build up to the financial crisis. Moreover, the situation in 2008 was one of several compounding issues, including an inherent overvaluation and lack of understanding of sub-prime mortgages, an issue not presented to us here.
Having said that, the next rounds of refinancing will be tougher for the sector, who often will be forced to refinance on unfavourable terms. And it is likely that a proportion of loan covenants will be breached, forcing premature refinancing.
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Since the property sector has often looked like a licence to print money, writedowns and falls in share prices are a salutary reminder that there are no one-way bets. These writedowns will constrain future investment for the next three to five years. At a time when the economy is in any case expected to grow relatively slowly, a hit to property investment is at best not helpful.
It is always dangerous to bet on the Bank of England getting it right, given its track record. But we will take that risk. Our forecasts assume the scale of systemic risk from both the property and banking crises is manageable, though the price will be paid in further economic stagnation.
Benjamin Trevis is an economist at the CEBR.
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