A large hole in a building site at the center of London's square mile -- the prestigious district that houses the Bank of England and other major financial institutions -- is a bleak sign of the economic times in the European commercial property market.
Scheduled to fill the hole is the 47-story "cheese grater" building, just one of several new skyscrapers that are planned to transform the capital's skyline.
But the worldwide credit crunch has brought construction on the $500 million (286 million pound) project to a halt as its developers worry that they won't find buyers for the new office space -- and there are fears that the slump in the British market will worsen conditions throughout Europe.
There are already signs of a significant slowdown in Spain, France and Italy and -- to the other side of Britain -- in Ireland. As is Britain, all of the countries are dealing with deteriorating domestic economies.
A Europe-wide collapse in commercial property values, while not necessarily disastrous for the worldwide economy on the whole, could have a significant effect on credit markets already straining at the seams.
"The signs are not good," said Capital Economics property economist Ed Stansfield. "Probably what's been happening in the U.K. is going to manifest itself in parts of Europe."
"The direct links between commercial property and the wider economy are limited, but there are concerns it will tighten credit availability to the corporate sector even further," Stansfield said.
Evidence of how jittery worldwide investors are about all things real estate came earlier this month when Lehman Brothers made a last-ditch decision to spin off up to $30 billion in commercial real-estate loans and buildings. It failed to find an investor or buyer to rescue it and filed for bankruptcy protection Monday, roiling stock and credit markets.
A downturn in the market could also result in investors turning away from commercial mortgage-backed bonds -- creating a vicious circle by tightening credit.
"What's interesting in Europe, and when we look at the French market in particular, is that the office-property market is financed by Anglo-Saxon banks, in particular U.S. banks," said Philippe Waechter, the head of economic research at Natixis Asset Management. "The worry we could have is that the banks decided to pull their capital out and go home."
Capital Economics said that overall purchase prices for British commercial property are down 20 percent from mid-2007 and could fall another 15 percent in the coming year.
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