Dark Clouds for British Services, Property

New reports show sharp downturns for consumer and business services in Britain, as well as commercial property. Recovery could take years

The severity of the economic slowdown was underlined yesterday by the sharply deteriorating outlook for the services and commercial property sectors. Job losses in the services industry are expected to accelerate after business slumped in the three months to November, a Confederation of British Industry (CBI) report shows. Consumer and business services companies were both hit hard by falls in volumes and profitability as customers reined in their spending.

Employment in services has so far weathered the economic slowdown better than other industries such as financial services. But with companies predicting faster falls in business and profitability, bigger job losses are on the way.

The survey sees companies suffering the twin pressures of the credit crisis and the sharp economic slowdown. Business services such as lawyers and accountants are cutting back investment plans in anticipation of weakening demand, while consumer services said the cost of credit would limit capital expenditure.

Ian McCafferty, the CBI's chief economic adviser, said: "With consumers continuing to tighten their belts, companies operating in consumer services, such as leisure and personal care, are continuing to find trading conditions very challenging. The decline in volumes and profits in business and professional services is expected to accelerate over the months ahead.

"So far, job losses have been relatively small across the whole of the service sector, but with firms predicting faster falls in volumes, values and profitability in the next quarter, we can expect to see significant job losses in the coming months." The gloomy prognosis follows last week's slew of grim economic data, which prompted the Bank of England to slash interest rates to a 37-year low. Closely watched surveys of manufacturing, services and residential property showed the UK economy grinding to a halt.

The commercial property sector faces another two years of plunging capital values that will take the peak-to-trough fall to at least 50 per cent, outstripping the slumps of the 1970s and early 1990s, The Royal Institution of Chartered Surveyors (RICS) predicts. The biggest declines are expected in the office sector, where capital values are forecast to drop by a further 30-35 per cent, taking the total fall to more than 60 per cent. Office rents and values have already been hit hard by the crisis in financial services and with further big job losses forecast for the City and other financial centres, demand for space will be severely reduced.

Retail property will face similar pressures and further falls in values of up to 30 per cent. Woolworths and The Pier were forced into administration last week, with many more retailers expected to fold before the recession ends.

Manufacturing declines will be less steep, dropping up to 20 per cent over the next three years, helped by the weakening pound and a slow global recovery towards 2011, RICS said. Rents for commercial property are predicted to fall for a further three years, putting extra pressure on capital values. The investment market will also be hurt by a dearth of financing due to rising defaults and credit spreads. RICS senior economist Oliver Gilmartin said: "We are only half way through the price correction in the commercial property market, with values set to fall through 2009 and 2010 as rental declines gather pace. Transaction activity is set to rise, however, as more sellers become willing to accept lower bid prices."

The scale of the commercial property slump was highlighted last week when Metrovacesa, the Spanish real estate company, was forced to take a loss of more than £250m on its purchase of HSBC's Canary Wharf HQ. Metrovacesa was unable to refinance an £810m bridging loan from HSBC and sold the tower back to the bank for £838m after buying it last year for £1.09bn.

The grim outlook spells further bad news for banks such as HBOS, whose corporate banking arm built a big book of commercial property lending. Barclays was forced to cut its dividend in 1992 after the banks went on a lending binge to commercial property companies.

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