THE commercial property market in Scotland will see zero growth this year, casting further doubt on the future of property-linked funds.
The latest analysis from consultants Drivers Jonas shows the market has done a U-turn since January 2007, with supply now outstripping demand.
Whereas 12 months ago there were 10 buyers for every one property on the market, 10 sellers now exist f
or every purchaser.
This, combined with the continuing effects of the credit crunch, will make it extremely difficult for developers, funds and other investors to extract positive returns this year, Drivers Jonas argues.
The figures, from the company's annual forecast, confirm suspicions that 10 years of commercial property growth has now come to an end.
After a decade of accelerated growth, experts are warning that the market has reached its peak and is currently in a downwards spiral that is set to continue over the next 12 months.
"Anyone who is playing in the market right now will know there's completely negative turnaround," said Andrew Kubski, partner in the investment team at Drivers Jonas.
The slowdown, triggered by the US sub-prime crisis, has already precipitated a considerable drop in prices.
In one of the most recent commercial property deals Blenheim Place, a property located at the end of Edinburgh's Royal Terrace, went for £2.95m below its valuation price of £13.25m.
At the end of last year, Princes Square, the upmarket shopping mall in Glasgow, also sold for £15m short of its £122m asking price.
According to Anthony Duggan, head of research at Drivers Jonas, the sub-prime crisis "slammed the brakes on the UK property market". He said: "We expect a 0% total return for 2009."
The forecast will come as troubling news to life companies which have recently been forced to impose restrictions on withdrawals from commercial property-linked life and pension funds.
Investors have been rushing to salvage their money as returns fell from double digit gains into negative territory at the end of last year, triggering liquidity problems.
Axa became the latest company last week to impose a freeze as it reported a "significant increase" in withdrawals. It slapped a six-month ban on withdrawals from its £2.1bn portfolio, mimicking earlier moves by Scottish Widows and Aegon-owned Scottish Equitable, which introduced deferment periods of up to six and 12 months respectively.
However, the Drivers Jonas research does provide some comfort for investors as the firm predicts that this year's slowdown won't reach the same crisis levels as the early 1990s, when the sector was heavily affected by recession.
Duggan said: "This is a very different market. Yes, demand is going to weaken but we expect rents to remain under control. People haven't run away from UK real estate, they are just pausing for breath at the moment. The fundamentals are still there. We're not expecting an early Nineties-style recession. We will see a weaker economy but not a fundamentally unstable economy."
Kubski said: "The occupational market is pretty good, let's not lose sight of that. Let's not lose sight that property yield is still good compared to other asset classes."
The company also predicts that a new breed of opportunistic cash-rich investors will take advantage of the dip in prices, and fuel some activity this year.
UK investment trust Land Securities has already set up a £500m "opportunity fund" to exploit the current conditions, while there is also talk of Australian players entering the UK market.
"For now cash-backed investors are replacing highly geared investors," Kubski said.
The full article contains 601 words and appears in Scotland On Sunday newspaper.
