Insurance group RSA has published a white paper looking at the immediate and longer-term outlook for Britain’s commercial real estate construction sector. It will make uncomfortable reading for fans of commercial property. Entitled “Castles in the Air” the white paper concludes that for this sector of the market, near-term prospects remain bleak. It suggests that the recovery will be slower than that seen after the downturn of the 1990s, when the value of construction output took nine years to surpass its pre-recession peak.

Some of our Landlord insurance policy holders may be surprised to learn that since the start of the financial crisis £13 billion has been wiped off the value of commercial real estate output in Britain. The peak was 2007 when output was £41billion but this fell to £28 billion in 2011. Over the same period the construction industry laid off 307,000 workers, 13%of the total workforce.

RSA’s research shows that over the last decade there has been a strong correlation between GDP and the value of commercial real estate construction output. With economic growth likely to remain subdued over the next few years this does not bode well for the recovery of the sector. RSA’s analysis forecasts a further 4.2% decline in output this year to £27billion and a sharper fall of 4.6% in 2013.

According to RSA, the commercial real estate sector is unlikely to see any return to growth until 2014, and even then it will be at a very modest rate of 0.3%. By 2017, RSA’s findings show that the value of commercial real estate construction output will still be 33% lower than the pre-recession peak. At this rate there will be no return to pre-crisis levels until 2023.

One bright spot in the commercial property market has been Central London’s retail market. Rents and vacancy rates illustrate that London has been resilient throughout the financial crisis. On the other hand, office rents have been falling even in London.

RSA point out that as vacancy rates have increased during the recession, empty property has become an increasingly pressing issue. As a leading insurer RSA is well placed to warn about the risks involved in owning an empty commercial building. They advise:

• Taking steps to secure sites and buildings with robust hoardings and locks
• Shutting off water supplies
• Removing combustibles and hazardous materials
• Making regular visits to the property or employing a third party company to safeguard sites.

For more information landlord insurance clients should look at “castles in the Air” on the site.