Commercial property values hit by 50pc fall

Adam Chester, the head of UK macroeconomics at Lloyds Banking Group, claimed that commercial property “offers exceptionally good value at the moment”.

He added that the lender is “cautiously optimistic” that values have bottomed out.

The sector has been hit by the credit crunch with developers struggling to secure finance.

But Mr Chester said the pace of deleveraging by banks is beginning to slow.

“The decline in capital values in commercial property is beginning to slow as well,” he added.

Banks retrenched from the sector after binging on commercial property lending in the boom years and have had to write off loans worth billions of pounds.

Mr Chester made the comments during a briefing to 180 commercial property investors and advisers hosted by law firm Gordons at Leeds City Museum on Thursday. He said: “Over the last four or five years we have gone through a major adjustment.

“Commercial property values have fallen sharply. Capital values are down about 50 per cent since 2007.

“The broader economy has suffered from a very wide-reaching credit crunch. That credit crunch is clearly still with us.”

Commercial property values are stagnating or flat, in line with the wider economy, although there are areas of growth, he said.

“Prime is massively outperforming, London is massively outperforming, the regions less so, secondary less so,” he added.

Rents are still declining but again the pace of decline is slowing, said Mr Chester.

He claimed that the current downturn is the most protracted on record and warned that the UK economy would not recover 2008 levels of output until 2015.

“We are only really halfway through this economic adjustment,” he said.

Mr Chester said confidence is the single biggest factor holding back the economic recovery. Nevertheless, Lloyds expects GDP to grow by 1.2 per cent next year.

“There has been an unprecedented amount of monetary stimulus that’s been poured into the economy,” he said.

“Some of that monetary stimulus in time will begin to impact on spending and business investment.”

The Bank of England has pumped £375bn into the economy via its quantitative easing programme of asset purchases and has held interest rates at a record low since the beginning of 2009.

Mr Chester said the majority of growth next year is expected to come from domestic demand – in consumer spending and businesses unlocking investment.

But he forecast that UK exports will continue to struggle next year because of the ongoing turmoil in Europe, the UK’s main trading partner.

“Even though we think Europe will muddle through, Greece will probably leave the eurozone, we think Spain will stay in and ultimately a deal will be reached to keep the project together, the uncertainty that weighs over the eurozone is going to last for some time,” said Mr Chester.

One factor that has puzzled economists is the UK’s employment level, which is at a record high in spite of falling output.

Mr Chester said: “It doesn’t feel quite like a recession. If you look at the recession in the early 1990s, it saw very sharp spikes in unemployment.

“The recession is a more benign one because more people are still in work.”

After his briefing, he joined a panel debate with Barbara Rollin, head of Gordons’ commercial property department, and Guy Gilfillan, head of Yorkshire at the Lambert Smith Hampton consultancy.

Ms Rollin said Yorkshire’s commercial property market is “a lot busier” with refinancing work and some new development projects.

Mr Gilfillan voiced concerns that some borrowers will be unable to refinance loans in the so-called “wall of debt”.

First-hand account

ADAM Chester saw at close hand the expansion in commercial property lending during the boom years.

He was chief economist at Halifax and then Halifax Bank of Scotland (HBOS) from the late 90s.

HBOS accumulated enormous exposures to commercial real estate – it had issued loans of £68.1bn by the end of 2008.

The subsequent collapse in asset values helped force the bank into a merger with Lloyds Banking Group.

“It was an interesting time to work for HBOS during the boom years between 1997 and 2007 as the commercial property market really took off,” said Mr Chester, who is now head of UK macroeconomics at taxpayer-backed Lloyds.