CBRE says credit fallout to hit London office building

LONDON (Reuters) - The equivalent of two to four skyscrapers per year are now unlikely to be built in London in 2009 to 2011 due to fallout from the U.S. subprime crisis, property services firm CB Richard Ellis (CBRE) said on Monday.

CBRE said it expected 2.5 million square feet (232,300 sq metres) of new office space per year to be built in central London in 2009 through 2011, instead of a previously forecast 4.5 million square feet.

But that could help to extend London's commercial property cycle by reducing the risk of too many new offices going up in the crane-dotted capital, Peter Damesick, head of UK research at CBRE, told Reuters.

He said the decision to slash his estimate for London's development programme by 44 percent was the result of higher funding and construction costs and because financial market turbulence had cast a pall over the capital's jobs outlook, potentially holding back rental growth.

"Funding for office developments has become harder to obtain and got more expensive," Damesick told Reuters, citing anecdotal evidence which showed lending margins doubling in some cases to 175 basis points over benchmark interest rates.

"There is also a feeling that the strength of (occupier) demand in the short-term will be less than was expected six months ago due to the impact of potential financial dislocation on London's financial services," he said.

In addition, the regeneration of a large area of London before the 2012 Olympics was likely to push up construction costs even further, he said.

But a degree of self-regulation now would benefit the property industry going into the next decade, even though the supply of office space was near a record low in central London, with an average vacancy rate of 3.3 percent at the end of August, according to CBRE data.

"It will reduce the risk, which was beginning to appear in the pipeline, of medium-term oversupply and enhances the prospects for rental stability," Damesick said. "So we'll probably see slower rental growth in the short-term but less risk of a rental downturn in the medium term."