Read Part 1 of The Times credit crunch series

Read Part 2 of The Times credit crunch series

It was a commentary on the Thatcher years: for its supporters, a vision of the future, a grand design of regeneration, investment and capitalism breeding bigger, better business; for its critics, it was a huge, ugly, half-empty symbol of the greed-is-good Eighties.

And both sides had a point. Canary Wharf was indeed born at the height of Margaret Thatcher’s reign in Downing Street and it rose from the derelict London Docklands like a phoenix from the ashes. But it was brought down to earth with a monstrous bump by a property slump in the early Nineties that forced its then owner Olympia & York to file for bankruptcy.

Oh damn. We got just what we wished for

Foreigners complained that America was presiding over an era of too-easy credit. Complain no more

Background

• Economist says US could plunge into recession

• City faces tough times as recession threat grows and era of easy money comes to an end

• Middle America will continue to feel the pinch

• Wall Street braces itself for more sub-prime misery

• Squeeze on Middle America worst since 1950s

Rocked by an event that nobody foresaw

David Smith reviews the economic year and looks at how the sub-prime crisis changed everything in the financial markets

Related Links

• Aberdeen eyes ailing commercial property market

• Sailing into a property storm

Now it is on the front line of yet another economic watershed. Fifteen years after the last huge tremor shook the commercial property market and after a spell of almost unbroken revival and growth, shudders are being felt once again in the old West India Docks. Not only there, but across the national market, where the prices of shops and offices have fallen at an even faster rate than in 1990-92, tumbling by about 30 per cent since the summer alone.

Yet on this occasion there are grounds if not for optimism, then for a belief that prices can roughly stabilise at existing levels. According to George Iacobescu, chief executive of Canary Wharf Group: “This time round landlords are being much smarter. There is not a huge amount of speculative development. Development can match the economy. Those doing speculative development, like British Land, are well capitalised and have the power to stay.”

Today Canary Wharf is thriving. The East London site is 99.6 per cent let and such high and likely continuing demand will underpin rental income here and across Britain.

So, too, will a decline in the cost of borrowing. The cost of five-year debt has fallen over the past month to about 5.75 per cent – a percentage point lower than the dark days of August - and could fall further again if interest-rate cuts come as fast as City analysts expect.

In the London office market, developers have learnt their lessons from the last property recession and have not flooded the market. Voids for London offices sit at about 5 per cent of available space, according to DTZ, the agency. That compares with voids of nearly 19 per cent in 1991.

There has been some fall in demand, of course. Pressure from banks for large, new buildings, may have gone on hold since the onset of the credit crunch and King Sturge, the agents, believes that City rents may fall in 2009 if banks do not reactivate their search for new space. Prices for City offices, therefore, may have further to fall.

Yet lease lengths remain long at many key developments. “We have 19-year average lease lengths and British Land has similar levels,” Mr Iacobescu said of Canary Wharf. “That will separate the men from the boys.”

Inevitably in such uncertain times, not all signs are positive. Cushman & Wakefield, the property agency, estimates that the average yield on top-quality City offices has widened from 4.25 per cent to 5.25 per cent. At constant rates, that implies a price fall of 23 per cent. To put that in context, the Swiss Re Tower at 30 St Mary Axe – the Gherkin, to most of us – was sold in the spring for £600 million on a yield of 4.25 per cent. Based on Cushman’s valuations, a would-be Gherkin buyer today would be willing to pay £500 million, or less.

Fortunately, a shortage of supply should prevent a repeat of the early Nineties, when a drop in rental demand meant that it took several years for the market to find a bottom for capital values. King Sturge forecasts office rental growth in 2008 in Bristol, Leeds, Liverpool, Manchester, Glasgow and Edinburgh. Such positive feeling has helped a handful of large office deals to complete over recent few weeks. Just before Christmas, for example, Royal Bank of Scotland sold a portfolio of 63 offices and banks for £800 million to a consortium of William Pears, the private family-run group, and Prudential, the insurer. It may have been £100 million off the asking price sought in the summer, but the fact that deals are being done indicates that at least some believe that prices are close to bottoming out.

There are probably fewer thinking the same about retail property. The total available floorspace for shopping centres is expected to rise by about 10 per cent this year, just as fears grow of a prolonged slump in consumer spending, which in turn, therefore, could hit demand for space.

Barely a week ago Westfield Group, owner of the White City shopping centre, said that it had been forced to shelve plans to sell a third stake in its £530 million UK shopping fund with exposure to four large regional malls. The first two thirds of the fund were sold off on yields of about 4.3 per cent. New investors may be looking to buy in at about 5.5 per cent, suggesting price falls of about 25 per cent, before they part with their money.

British Land is likely to wipe up to another £150 million from the value of its vast Meadowhall shopping centre in Sheffield when it updates the market in February, but that figure represents a more modest fall of 9 per cent over three months to the end of December.

Such sums of money are not insignificant, but on the available evidence the market is in the midst of a correction, not on the brink of a precipice. Large, unused buildings are often the most tangible sign of economic failure; for a nervous Prime Minister, the underlying demand for property at Canary Wharf and elsewhere is a sign that 2008 will be tough, but not as painful as it might have been.

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