By Daniel Hunter

Despite latest GDP figures confirming that the UK is officially out of recession, the country’s construction industry still faces a challenging trading climate.

A major new study published today (Tuesday) has revealed that Britain’s commercial real estate market will not return to pre-crisis levels until 2023, having experienced a staggering £13 billion drop in output values since 2007.

The Castles in the Air report, released by RSA, the UK’s largest commercial insurer, and the Centre for Economics and Business Research (Cebr), is a unique study of the future of UK commercial real estate (CRE) construction. It shows that the recession has led to a peak-to-trough decline of 42 per cent in CRE construction output, which closely follows GDP.

In fact, between 2007 and 2011 the value of CRE construction activity fell by as much as 32 per cent from £41 billion to £28 billion. Looking forward, this figure is predicted to drop again in 2012 to £27 billion and is not expected to return to positive growth until 2014, when only a modest 0.3 per cent rise is anticipated — far below the rate of growth currently reported on a national level.

The decline seen at a national level is echoed across the UK regions, although a North-South divide is clear. Scotland and the North West have been hardest hit by the downturn, experiencing sharp 51 per cent and 49 per cent drops respectively. At the same time, London and the South East have shown more resilience, with smaller falls of 16 per cent and 24 per cent, respectively.

“The commercial real estate sector has been hit hard by the recession, and with CRE construction growth so closely tied to GDP, it’s not surprising that we’ve seen such a sharp decline in output values since 2007," Paul Greensmith, RSA’s Director of Risk Managed Business, Global Specialty Lines, said.

"While a return to the pre-recession highs of 2007 may not be wholly realistic, what’s important now is that developers approach new investment opportunities sensibly and with sustainable growth in mind.”

The study also reveals that demand for new projects has stalled across the UK. Over the past five years, the value of CRE construction output has declined across most sectors, with warehouses and offices seeing the largest declines at 62 per cent and 51 per cent respectively.

Retail has also seen a significant drop in output at 27 per cent, at a time when demand for retail space remains subdued and vacancy rates are climbing. Of the eight cities examined in this report, only Central London1 saw an increase in retail rents between 2007 and 2011, where average rents rose by seven per cent. At the same time, retail vacancy rates have eclipsed pre-crisis levels, rising from almost eight per cent in the second quarter of 2007 to over 10 per cent in the same quarter of 2012, suggesting a sizeable over-supply of retail property.

Similarly, in the office sector, rents have fallen by an average 16 per cent across the UK. With vacancy rates in the first quarter of 2012 standing at 12.6 per cent2 and employment in financial and business services predicted to fall3, demand for new prime office real estate is likely to remain weak for some time.

“High vacancy rates are set to become a huge issue for the commercial real estate and construction industries as recovery remains elusive, threatening profits and presenting new risks associated with empty sites and buildings," Greensmith added.

"Adequate security and regular checks are recommended for property owners in this situation to mitigate the increased risks of burglary, arson and water damage.

“However, despite vacancy issues and the growing trend of ‘mothballing’ developments to save ongoing costs, there is still an appetite for the right kind of development. The City skyline is a prime example of that, with builds such as The Shard in London demonstrating that certain projects, particularly mixed use developments, are still going ahead.”

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