The full force of the credit crunch is now being felt by the European commercial property market, according to new research by Cushman & Wakefield.
It said investment volumes in the first three months of the year fell 37 per cent on the same period in 2007, while yields rose at their fastest since 1992. In the UK, volumes fell 52 per cent over the same period.
And, with confidence shaken and uncertainty over pricing impacting almost as much as the lack of affordable debt, the market is ready for more woe to come.
To date, however, the occupational side of the market has held firm, with prime rents rising 11 per cent in the year to March. As a result, total returns have remained in positive territory, with an all-sector prime average of 7.1 per cent for Western Europe.
The question, says C&W, is whether such performance can be sustained once the eco-nomic impacts of the financial market turmoil start to show in job cuts, tighter borrowing and increased risk-aversion.
"We currently expect rental growth to ease to around 3-4 per cent at best this year," commented David Hutchings, head of European research.
"Deals are taking longer and the due-dili-gence process is more protracted. Where fund-ing is required, the extra scrutiny put in place by the banks is adding further to the delay and un-certainty of transactions actually completing."
Nevertheless, Cushman & Wakefield suggests that the economic situation is not, so far at least, as bad as some seem to think. While performance is polarising, taken overall, Europe still looks set to ride out the current global slowdown and avoid recession.
"On balance, the market will see further pain in the months ahead but in the latter part of the year, a firming in economic confidence allied to an increased supply of opportunities, should be the catalyst for a steady recovery in activity," said Mr Hutchings.
Meanwhile, an overwhelming majority (86 per cent) of property professionals expect default levels on commercial property to increase over the next 12 months, according to Investec Private Bank. Of these, nearly a third (31 per cent) believe that they will increase signifi-cantly, while the remaining two thirds (69 per cent) say the rise will be marginal.
Paul Stevens, of Investec, commented: "This reflects our view that while we are undeniably operating in tougher market conditions today, we are optimistic that strong lending opportunities remain. We are continuing to work on a number of highly promising deals with both new and existing clients. The key to obtaining finance in the current environment is to have a successful track record and the ability to add value."
When questioned on whether they thought that the UK economy will move into a reces-sion over the course of the next year, nearly a quarter (23 per cent) of property professionals said it was unlikely, while just under half (44 per cent) remain undecided. Just over a third (36 per cent) believed a recession was either likely or very likely.
When asked to predict where the lending base rate would be by the end of 2008, a third expect a further reduction of 0.50 points to 4.5 per cent and a fifth forecast it will be 4.75 per cent.