THE commercial property market is facing its worst year since it crashed in the early 1990s, according to forecasters that include CB Richard Ellis, the world’s biggest property consultant.

The firm predicts that returns will plunge to almost zero by the end of this year. The plummeting returns – down from 18.1% last year – follow a steep correction in commercial property that has wiped an estimated £14 billion off the value of the £350 billion investment market between July and October.

It is likely that values will drop further between now and the end of December.

The news will cast a further pall over the sector, which has suffered a rapid shift in sentiment since this summer’s credit crunch.

Forecasters at Capital Economics predict that property values will fall by a further 10% next year, and they warn that more bad news in the financial markets could force values down by double that.

The restriction in the ready availability of debt to fund purchases has dampened investor appetite. Debt that is available is often charged at much higher rates, making property deals unviable.

The economists also caution that rental growth may slow because fewer companies will want to rent space. They forecast that glitzy offices in the City and out-of-town retail warehouses will be the worst affected sectors.

Increasingly, capital flows in commercial property are driven by overseas investors and private small investors. This has left values more sensitive to swings in sentiment than in the past.

Meanwhile, property shares have plummeted since the start of the year, with many of the largest stocks shedding a third of their value. Britain’s biggest property companies, including Land Securities and British Land, are expected to announce their portfolios have fallen further in value by the end of this year. Shares in both companies are trading at huge discounts to the net value of their property assets.

Separately, there are mounting fears over the future of several property funds. Institutional investors in a £750m offshore UK property fund run by M&G have been told they must wait three months to withdraw money from the vehicle as it carries out an emergency sale of property assets.

But New Star Asset Management, which runs a £2.1 billion commercial-property unit trust, says that capital outflows are still matched by inflows and no forced property sales are expected.

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