Knight Frank considers the impact of the eurozone crisis on UK commercial property
With the eurozone crisis becoming such a dominant topic for discussion, Knight Frank has considered the scenarios for UK commercial property.
In the case of a so-called ‘messy’ (i.e unmanaged) Greek exit from the euro, the firm says a look at the events following the collapse of Lehman Brothers provide the best historical precedent for what comes next. It notes that IPD capital values fell 26% between September 2008 and July 2009, when the market finally found a floor. But not all of this can be attributed to the Lehman collapse – commercial property was already undergoing a sharp correction before September 2008, it points out. Knight Frank also notes that any exit scenario “is pre-destined to be presented as ‘messy’ by pundits and the media, prompting more speculation on which nation may leave next”.
Owners of UK commercial property are more likely to sit out a euro storm than sell, in Knight Frank’s opinion, because they would view a Greek exit as a storm that will blow over. The UK is on the margins of the crisis and the London commercial property market has in fact benefited from it so far. In the medium term, the UK commercial property market may also benefit from the perception among overseas investors that the eurozone is too focused on internal squabbles to provide a business-friendly environment, the firm adds.
“We see the eurozone crisis as exaggerating previous trends in the market,” Knight Frank says. It has pushed high street retail in towns with high unemployment, already suffering before the crisis, into “deep winter”. By contrast, available property in Mayfair remains in demand and will probably only experience a “quiet period” in the event of a Greek exit.
The firm says that the main effect of this crisis is on the level of demand for lesser-quality secondary property assets. This market had begun to see the return of some tentative buying a year ago, but activity is now restricted to safer locations and is still at low levels. “Critically this means we are back to a market where the buyer has to almost guess the value now there is so little transaction evidence to benchmark against,” Knight Frank warns. This makes property of this type, outside favoured markets such as London, a higher-risk option than it was a year ago.
