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Boost to UK commercial property market will be unsustainable

The recent upturn in the commercial-property market is not based on fundamental improvements and is likely to prove unsustainable, according to research published today.

Although December's 3 per cent price rise was the sharpest monthly increase in more than two decades, the boost signalled only that investors were calling the bottom of the market, and will not translate into a long term recovery, says consultancy Ernst & Young's ITEM Club. "Welcome though the bounce of activity has been, its sustainability is far from certain," Dean Hodcroft, the head of real estate at Ernst & Young, said. "The upturn has largely been based on investors deciding the bottom of the market had been reached, and the massive decline in prices over the past couple of years resulting in attractive buying opportunities."

There are some bright spots: the weakness of the pound, for example, and London's position as a strong international market for trophy assets. But the Bank of England's quantitative easing programme is expected to conclude in at least the short term, so the boost from that quarter will peter out.

And the fragility of the banking sector remains a major threat. Banks are still highly vulnerable to defaults by property companies, and with vacancy rates still on the rise, and rents still falling, such defaults look set to increase. Andrew Goodwin, the senior economic advisor to the group, said: "With demand likely to remain weak across all market segments as the UK economy stutters out of recession and the possibility of the banks' leniency and support for property companies waning, the most significant risks are all on the downside. It is difficult to see how the level of recent activity can be sustained."