The laws of gravity affecting New York’s once-soaring real estate market are holding true across the Atlantic, too. Commercial and residential markets that climbed for years in London are now heading sharply downward.
Like New York, its rival and sister city, London depends heavily on the financial sector, and its economy is also being pummeled by the banking and stock market crises.
There’s little sign so far of banks or other companies dumping office space onto the market, although real estate experts say they may do so as they grapple with the fallout of the recent financial panic. But building prices that had soared when billions in investments flooded the commercial property market are now sliding fast — and sales have ground almost to a halt.
“‘Strangled’ is the word I use,” said Bill Tyser, head of the financial district investment team at Cushman & Wakefield’s British arm. According to the company, there was $2.04 billion worth of transactions in the third quarter — just 20 percent of the volume in the same period last year. (Figures were converted from British pounds based on the exchange rate late last month.)
From 2003 through 2006, commercial building sales boomed as retail investment funds, international buyers, debt-backed individuals and consortia bid up prices in a market they saw as an easy source of profit. Prices flattened late in 2006 and started falling in 2007.
After the credit crunch hit, sales volume dropped off dramatically. Now, said Mat Oakley, head of commercial research for the real estate agency Savills, there are so few transactions that no one knows just how far the market has fallen. He estimated prices were 20 percent off their peak.
“The correction that we were expecting at the beginning of 2007 has now happened, and the question going forward is, ‘How much over-correction are we going to see?'” he said. With debt tight and those with cash still waiting for further falls, that over-correction “will probably be quite significant,” he said.
Potential buyers — particularly German investment funds and sovereign wealth funds from regions like the Middle East — are waiting for prices to slide further if banks begin forcing sales and investors pull money out of property, said Oakley. In 2009, he predicted, “there will be some amazing bargains on the market.”
New development has slowed dramatically, too, with most projects that hadn’t broken ground when the credit crunch hit now shelved indefinitely. The big ones still in the works — the Renzo Piano-designed Shard of Glass, which will be the tallest building in Britain, and the Pinnacle — are backed by Middle Eastern wealth.
Jobs down, vacancies up
The picture is less bleak on the office leasing side.
While investors were driving up building prices, occupancy rates (and rents) remained steady. They’re sagging but not crashing now, and some analysts say they’re likely to bounce back strongly after 2011, when they forecast a space shortage because the debt crisis will have forced the cancellation of so many building projects.
Vacancy rates in the City, London’s financial district that includes the East End skyscrapers of Canary Wharf, are now 5.5 percent and are likely to climb to 12 percent as banks and the industries that serve them lay off staff, said Julian Stocks, head of investments at the London office of Jones Lang LaSalle.
In the pricier West End, home to hedge fund and private equity firms as well as media companies, vacancies are now 3.9 percent and are likely to get close to 7 percent, Stocks said.
Unlike during the dot-com boom, when banks and others planning big expansions leased lots of space and off-loaded it as soon as their prospects dimmed, analysts say that this time, businesses have filled every inch of their space before renting more. Consequently, there’s now less overhang space that tenants need to sublet quickly.
Still, with the Centre for Economics and Business Research predicting 62,000 financial job losses here in 2008 and 2009, office space is bound to free up.
The now-defunct Lehman Brothers, for example, had 4,500 workers in London. Some 2,500 of them were saved when Japan’s Nomura Bank took over some of the company’s European operations, but the rest have either lost their jobs, or will soon, as accountants wind the business down.
UBS, Citigroup, HSBC and the Royal Bank of Scotland are among other financial institutions that have already started shedding London workers. Those job cuts should bring rents down as well.
In the financial district, rents peaked above $115 a square foot last year; Cushman & Wakefield’s Tyser said they were in the high $70s now, adding that landlords have gone from offering one year rent-free on a 15-year lease at the start of 2008 to offering three years free. He predicted that landlords will have to start cutting rents more soon.
In recent years in the West End, a number of hedge funds signed leases above $200 a square foot, with a few close to $240. Tyser said top prices are now around $195 a square foot, and would likely fall to between $145 and $160.
Residential ‘gazundering’
Home prices in some parts of London nearly tripled in the boom years from the mid-1990s through 2007, but now, residential numbers are heading down, too.
The Nationwide Building Society, one of Britain’s biggest lenders, said that by the end of September, the most recent data on record, London prices had fallen 9.4 percent from a year earlier, to an average of $465,315. It predicted further falls in the fourth quarter.
Many others think the picture is even worse.
The residential brokerage Kinleigh Folkard & Hayward said London prices are now down more than 20 percent from their peak last year. Managing director Lee Watts predicted they’d lose another 5 percent before leveling out.
The brokerage Knight Frank, meanwhile, predicted that residential real estate in London as a whole would see a 25 percent drop in values by next year, with prime central areas down 20 percent.
Watts said sales volumes at Kinleigh Folkard had dropped by half over the year, with third-quarter numbers off 70 percent from the same period in 2007. Properties now sit on the market for an average of 90 days, up from between 28 and 42 days, he said.
When the bottom will come is anyone’s guess. While Britain didn’t experience the overbuilding seen in the United States, unemployment is rising, and mortgages are hard to come by. The Bank of England noted that mortgage lending collapsed by 95 percent from July to August.
Savills said neighborhoods like Kensington, a popular destination for financial workers, have been particularly hard hit, with prices dropping 16 percent so far this year. In the neighborhoods of Knightsbridge, Mayfair and Belgravia, where international demand is strong and old money predominates, the falls have been about 7 percent.
Although rents have remained relatively stable, the so-called “buy-to-let” sector — highly mortgaged, amateur landlords who once helped fuel the buying boom — is now hurting. So, too, is the middle of the market, where high prices have fallen sharply, said Alan Clarke, U.K. economist at BNP Paribas Bank.
In a city where real estate was for years a favorite topic of dinner conversation, one telling indicator is the return of a term used in previous busts. During the fat years, buyers complained about “gazumping,” when a third party torpedoed a deal with a higher offer after a sale price had already been agreed upon. Now, its opposite is more common: “gazundering.”
That’s what happens when a buyer backs away from a promised price once a sale is in the works, offering a lower amount.
Beth Gardiner is a freelance reporter based in London.