The report provides an assessment of the consequences of the credit crunch for property finance in London and the implications for policy. It demonstrates that:

• The credit crunch is having a far-reaching impact on investment, development and occupational markets.
• Given the effect of the credit crunch on the wider economy is still unfolding, the result for property markets and, especially occupational demand, is uncertain.
• Downward pricing adjustments and significant falls in transaction levels have already occurred in office, residential and retail markets. However, in all markets there are many reasons to believe the current environment is more favourable than at a similar stage in previous downturns.
• With its heavy reliance on the financial and business service sector, the Central London office market is more exposed than other sectors to the implications of the credit crunch.
• The deterioration in London’s property markets makes meeting policy objectives regarding affordable housing provisions and commercial offices more challenging although the impact on transport-related schemes is likely to be relatively light.

Property investment in the UK was extremely strong over the period from 2004 to the early part of 2007. This was driven by:

• Explosive growth in cheap debt.
• A strong flow of money from private investors diversifying from other asset classes.

The collapse of the US sub-prime mortgage market in mid-2007 caused widespread contamination in world financial markets, with effects felt across a wide range of banks and investors with exposure to what proved to be highly opaque and risky securities debt.   In the UK, the aftershocks of the sub-prime mortgage crisis have hit financial sector activity, so far particularly in structured credit and leveraged buy-out activity. The equity markets have weakened and the general outlook for the financial services sector has deteriorated rapidly. Whilst there have been job cuts in banking and finance, the losses as yet have been fairly limited.  The full impact of the credit crunch on property markets will be felt through the inter-related effects that it is having on investment, development and occupational demand.  The effects in the property investment market were among the first to appear and have already resulted in sharp changes in investment activity and pricing.  The impact on development will become more apparent going forward in the amount of new construction activity.  Impacts on occupational demand will be a consequence of the effect that the credit crunch, alongside other economic influences, has on real economic variables including business investment, employment, consumer spending and retail sales.  These in turn will feed through to occupational demand for commercial property, interacting with property supply to determine rental levels.  The demand/supply balance in the market and resulting rental trends will in turn feed-back to pricing and decisions in both the development and investment markets…

Read the full CBRE article below…

Credit Crunch and the property finance market PDF

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