Life & Culture

'Property prices could fall by 50 per cent'

The bank of England’s interest rate cut to a record low is unlikely to do much to halt the collapse of the commercial property market.


The bank of England’s interest rate cut to a record low is unlikely to do much to halt the collapse of the commercial property market, warns industry expert Ian Marcus.

Mr Marcus, 50, says that the reduction will be more than compensated for by the increase in margins and fees now demanded by those few banks willing to lend at all.

Chairman of Credit Suisse’s European Real Estate Investment Banking division, Mr Marcus has been in banking for almost 30 years. He says that the market has yet to feel the full impact of the recession. He says: “Property has a delayed response. There is a spectrum: the capital markets, the real economy and then property. And property hasn’t been fully impacted yet as the occupational markets have still to feel the full force of the downturn. Real estate is cyclical and there tend to be two cycles. One is two years down and then one year flat, and the other is two years up.” Mr Marcus says we are about halfway into the down and won’t witness any positive movement until early 2010.

“The other cycle you see is that when the financial markets correct — which would have been in the middle of 2007 — it takes a year or so for the real economy to be hurt. That is what we are beginning to see now. But the property markets don’t feel the severe impact until six to 12 months after that.” He notes: “The equity market turned down in 1987 but the property markets didn’t hit the wall until 1990.”

What will happen when the crisis really hits property? “Values have further to fall — maybe another 10 to 15 per cent, and thus a peak-to-trough property value fall of 50 per cent.”

The biggest issue facing the property market at the moment, he says, is the reaction of UK banks to the turmoil. “We have to watch how Eric Daniels gets on in charge of HBOS and Steven Hester at RBS. What they do will have very big implications for the market because of their combined exposure — HBOS, Lloyds TSB and RBS have between them over 50 per cent of the total lending on commercial property. We will watch with great interest how they decide to act.”

According to Mr Marcus, much of the turmoil in the market is due to fear and a lack of confidence. “If you are a property owner, this is a time for cash conservation, rolling up your sleeves and managing your real estate very closely. This is about making sure your cash flow is looked after. You know that your occupiers are going to come under pressure. You need to manage them as customers. You need to manage your cash flow. You need to be conservative.”

And how has he been affected? “Bankers tend to be fairly resolute but, not surprisingly, we are not doing too many IPOs [Initial Public Offerings] at the moment. Different clients have different needs at different times of the cycle. We have been having a lot of conversations about re-capitalisations of both listed and private companies and mergers and acquisitions activity. There is a lot of fundraising going on. Every bank is under pressure to de-leverage but we have to make sure we are positioning our bank as best as possible. I am not panicking. I am concerned and there is a lot to think about: for my clients — many chief executives are very concerned about what’s going on; for my own team, who are nervous; and for the Credit Suisse shareholders.”

Mr Marcus, who lives in Stanmore, Middlesex, started in the financial world in 1981. He was at NatWest during the 1990s recession, where he was involved in putting a series of companies into receivership. It was different then. We had very high interest rates and huge over-supply of property but the debt markets were not closed and people began to take advantage.

“Many of today’s substantial players began in the early 1990s. At the moment, even if you wanted to buy there is very limited debt available. There is even pressure on sources of equity. This is all about access to capital. Those with it are trying to keep their powder dry to make sure they can take advantage of the market. Providing you have capital, this will at some point be the best buying opportunity for a generation. But no one quite knows where that point is, and therefore people are very reluctant to pull the trigger until they have some real sense that the market has bottomed out. There is no sense of that at the moment.” He adds: “This is a fascinating market. There will be lots of business-school case studies written about this.”

He acknowledges that many of the banking groups are cutting jobs. For those concerned, he advises the best thing to do is keep your head down, do your job and prove you’re adding value. “If you’re looking over your shoulder, it means you’re not doing your job well enough.”

Mr Marcus is also chairman of the Bank of England Property Forum and the Prince’s Regeneration Trust, which focuses on heritage-led regeneration.

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