UK Commercial Property Prices Might Decline Further

The latest Morgan Stanley statement suggests that commercial property values might fall further in the United Kingdom because of the state-backed banks that withdraw money from the sector. The company’s research indicated that a lending average of £15 billion will be withdrawn from the commercial property sector on an annual basis in the course of the next 5 years; meanwhile, the level of supply of commercial property to the market is expected to stay above average. It should be noted that the Morgan Stanley report came just the next day after the one, published by a British property agent – CB Richard Ellis – showing the first increase in commercial property prices in the past 2 years. Statement, which was made public by Morgan Stanley resulted in an end to the property shares rally that was gaining speed lately. The rally ended with British Land – one of the largest British landlords – loosing 3.5% on August 6th after it gained 14% in August 1st-5th. Morgan Stanley highlighted that asset values have decreased by approximately 45% since the beginning of the economic downturn in the summer of 2007, which fact resulted in significant impairments endured by British lenders. Moreover, Morgan Stanley expects British banks to further reduce their presence on the commercial property market. The company’s expectations are backed by statements made last week by chief executives of Lloyds TSB, Mr. Eric Daniels, and of Royal Bank of Scotland (RBS), Mr. Stephen Hester, which suggest that these state-owned banks are planning to scale back. Morgan Stanley report reveals that market unwinding, which is to start upon the completion of the Government’s Asset Protection Scheme, will develop slowly. The supply of commercial properties on the market is yet to continue even though the loan books of UK banks are expected to be reduced by 28% in the next 5 years. Another warning of Morgan Stanley implies that mortgage-backed securities worth £110 billion, which are still outstanding in Europe (approximately 50% of them are allocated in the United Kingdom), could result in a larger number of assets on the market.