Market instability could hit commercial property

The current global market instabilities could affect the standing of commercial property as an investment, warns property group Hammerson.

The European Reit's half year results show net rental income rose 26.5 per cent in the six months to the end of June and in the first half of the year it has invested some £389 million in property and sold two major assets to raise over £500 million.

However, Hammerson now predicts that market turbulence could result in commercial property rental yield growth coming to an end.

John Nelson, Hammerson chairman, said on the release of the results: "In relation to the office markets, with vacancy rates at their lowest level for five years and limited availability in both markets, the fundamentals are positive.

"Nevertheless, recent weakness in global financial markets may affect demand for office space, with the impact in the City of London likely to be greater than in Paris. With regard to investment markets, higher borrowing costs and concerns about risk are likely to have a greater effect on the values of secondary property than on prime property of the type owned by Hammerson."

He added: "Against a background of greater uncertainty in financial markets, we are maintaining our strategy of creating value through asset management, development activity and capital recycling in key property markets in the UK and France."

Over the first half of the year Hammerson, which converted to Reit status in January, stated that demand for office space in London was strong, with vacancy rates at their lowest levels for five years, as the City cemented its status as a international financial centre.

Besides the London office sector being affected recent instabilities, Hammerson predicts that a general slowdown in the economy could result in "challenging" conditions for shops and so the retail property sector.

Despite concerns over property, Hammerson is still going ahead with a £650 million project in the City. Planning permission for the Bishops Place project, to include a 35-storey office block, a 50-storey apartment block and a hotel, is to be submitted shortly, although Mr Nelson told the Times that "it is very unlikely we will pursue the office element without a pre-let".