UK property rebound on unfirm footing: E&Y

Fresh mortgage defaults and the painful withdrawal of economic stimulus will seriously dent Britain’s prospects of a sustained commercial property rebound in 2010 and beyond, an Ernst & Young report showed yesterday.

The financial services firm believes December’s record 3 per cent rise in average values was driven primarily by the Bank of England’s aggressive Quantitative Easing (QE) programme, which is likely to end soon, arresting credit supply once more.

‘Welcome though the bounce of activity has been, its sustainability is far from certain,’ said Dean Hodcroft, EMEIA head of real estate at Ernst & Young.

‘The upturn has largely been based on investors deciding the bottom of the market had been reached,’ Mr Hodcroft explained.

Andrew Goodwin, senior economic advisor to the firm’s Independent Treasury Economic Model Club, which produced the report, said banks were likely to lift volumes of repossessions this year as indebted companies firms struggled to refinance.

This, he said, would further damage banks’ balance sheets and impair their ability to lend.

Ernst & Young said the revival was also compromised by continued weakness in tenant demand and rental value declines, which could lead to more property companies and income-dependent landlords defaulting on their loans this year.

The volume of empty office space has been particularly severe in London, where there is a higher concentration of financial service sector jobs, the report noted.

‘There is the threat of further regulation and a series of tax increases which may potentially damage the competitiveness of the capital and draw business towards other financial centres,’ Mr Goodwin added.

Source : Business Times – 2 Feb 2010