Commercial property boom is nearly over, warns British Land

British Land warned yesterday that the commercial property boom, that has resulted in price tags upwards of £600m for London office blocks in recent weeks, was nearing its end.

However, the property group's chief executive Stephen Hester indicated that price growth would slow rather than head into a steep decline.

"The fundamental of real estate remains strong with rental growth available to boost returns," Mr Hester said. "Solid asset backing and long-term dependable cash flows support property yields. This compares favourably to bonds and equities."

He said that commercial property had previously been undervalued and the runaway prices of recent years were simply a correction.

"It will continue at a more normal pace," Mr Hester added. "It is slowing but it will not go down. The property market in recent years has obviously enjoyed supernormal returns. We believe that this process has run its course."

He said it was difficult to predict how sentiment and money flows would affect rental growths and demand from customers.

Last week, the City of London's iconic "Gherkin" skyscraper was sold by Swiss Re for an eye-catching £600m while CityPoint, in Moorgate, has been put up for sale by its owner Tishman Speyer for £650m. Meanwhile, HSBC is hoping for a sale and leaseback deal for its headquarters in Canary Wharf - the property, designed by Norman Foster, could be worth £1bn.

However, data released yesterday by the consultancy Investment Property Forum (IPF), which surveyed 34 property experts, backed up Mr Hester's comments, suggesting these dramatic figures are at the top of the cycle.

According to the IPF, the consensus view is that "commercial property will experience a soft landing, with capital values stabilising rather than falling from 2008 onwards".

Kelvin Davidson, property economist at the economic think-tank Capital Economics, said the slowdown is partly attributable to low rental yields.

"Interest rates are above the yield you can get on commercial property," he said. "By the end of the year you can expect to see clearer signs of yields rising which will lead to weaker capital values."

Robin Priest, real estate partner at Deloitte, said commercial property in London is "still extremely hot". "There is still a huge amount of capital seeking exposure to real estate and insufficient supply for quality products," he said.

Medium-term interest rate rises will have an effect on prices but there is still huge demand for real estate assets, he said.

"As there is a benign outlook for the economy and for long-term interest rates we may be at a plateau rather than a decline," Mr Priest said.

In the early 90s, property prices fell due to high interest rates and people stopped building, he said. Now there is an under-supply of property which has pushed prices up but volatility is less than it used to be, he said. A slowdown will not be "catastrophic", he added.

Mr Hester's comments came as British Land, Europe's second largest property manager, posted a 12 per cent rise in underlying pre-tax profits to £194m during the nine months to 31 December and said the business continued to make good progress. The short-term rise in interest rates was a good thing rather than a bad as it brings inflation under control, Mr Hester said.

"This will allow long-term interest rates to stay relatively low," he said.

British Land became a Real Estate Investment Trust in January and has been able to eliminate £1.6bn in deferred tax under the new regime. It made £338m in Reit provisions last quarter. Reits operate as listed companies which own property directly, thus cutting costs. They are exempt from corporation tax.

British Land added that like-for-like rental value rose by 1.7 per cent during the quarter and 4.4 per cent over the nine months, ahead of the industry's 3.3 per cent.