Savills warns of softening in commercial property market

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Shares in Savills took a nosedive after its chief executive warned of softening trading conditions in the UK commercial property market because of the global credit crisis.

Speaking at the high-end estate agents' interim results, Aubrey Adams said: "The UK commercial investment market is at a stage, in August, when not many deals are being done, and the credit crunch is doing two things. It's affecting yields, which are moving out a bit, and the cost of debt has gone up," he said.

"We were saying two years ago that yields could not move down much more than 5.5 per cent for prime London offices, but they have gotten as low as 4 per cent in some cases, and gone lower."

The negative outlook, despite a backdrop of forecasting-busting results, was enough to send Savills shares down 4.7 per cent on the day.

Since early May, when Savills shares reached a high for the year, it has seen more than one third of its value disappear as the equity markets have reacted to a meltdown in the credit markets.

The property market has also begun to show signs of slowing after five interest rate rises.

Savills' business for the first six months of the year was nonetheless strong. The company earned £31m, or 32 per cent better than the same period last year, on £284m in turnover.

"The trouble with these markets is that once sentiment moves in a particular direction investors don't want to hear good news. There is plenty of demand from investors looking to invest in property, but no one is going to buy something now that they think they can buy for 5 per cent less in a month's time," Mr Adams said.

ABN Amro retained its "buy" rating on the stock, though it predicts a 2 per cent decline in year-on-year profits in the second half of the year. In a note, the bank said: "If the current credit problems are resolved soon, these forecasts could prove conservative, but given current uncertainties, we stay cautious for now."

The market for prime residential properties is set to continue to grow at between 10 to 15 per cent next year, Mr Adams said. That is slightly lower than the 20 to 25 per cent rate for the past year.

The group was helped by its continued expansion abroad. Savills opened new locations in Vietnam, Taiwan and America, and doubled transactional profits in its Asia Pacific business.