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Perfect storm in property market is nearing an end

The exuberance of the last five years is over, says John Burke

The property market has shown enormous growth over the last four to five years, when total returns of 15-17 per cent per annum became the norm.

In those heady days the market treated property as a short-term asset that was highly liquid. But these are not the typical characteristics of property. The painful lesson for many amateur investors is that property is no longer a one-way bet.

In August 2007 everything changed. Returns from property dipped below bonds. Compounded by the American sub-prime mortgage debacle, followed by a credit squeeze and then fears of recession - property found itself in the perfect storm.

Where are property developers now in all this froth?

The volume of investment sales has reduced, possibly by as much as 90 per cent. The consensus among forecasters is that the market has deteriorated at a surprising pace.

It is generally thought that banks lending to the commercial property sector expect debt conditions to deteriorate further this year owing to the effects of the credit crunch.

Prospects for contractors

Is it all gloom? From a developer/contractor’s perspective the answer is ‘no’.

The accepted view is that there has been a severe correction and that the market is close to finding a bottom. Selling continues at the prime end where projects are priced to the market.

The office occupier market remains pretty stable and lettings are proceeding. Occupiers face demographic and environmental challenges and that is where the opportunities lie.

Project finance for speculative development is available, but on more stringent terms, i.e. for selective customers with strong balance sheets.

Some of the more active investors are assembling funds to buy sites that are now available at more realistic prices.

The safest place will be in the prime end of the market focusing on high quality buildings, built to the highest sustainability specifications, in places where there is demand.

The exuberance of the last five years is over. 2008 will be back to the basics of buildings that tenants will want to occupy and remain in, giving investors fair value in the long term.

John Burke is managing director of HBG Properties