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Commercial recovery under threat

Fears of public sector spending cuts have dented expectations for the commercial sector recovery.

The Savills Commercial Development Activity Report for May 2010 showed that the sector continued to grow last month.

Rising private sector activity helped offset a collapse in public sector client-led collapse in commercial development, which fell at its fastest pace since January.

However, the net balance of developers expecting an improvement in activity over the next three months dipped to 8.6 per cent from 18.1 per cent in April.

Experts said the fall in confidence was largely due to expectations that measures in next week’s emergency Budget would damage the economy in general, as well as the public sector’s demand for office buildings.

Economics director at the Construction Products Association Noble Francis said: “In recent months, optimism has been unrealistically high due to the momentum of a number of high-profile developments, such as the Walkie Talkie and the Pinnacle.

“Pessimism is now coming as the cuts are expected to create a general slowing of the economy.”

Matt Oakley, head of commercial research at property agents Savills, added: “The public sector, as a commercial client, is going to be much less active in coming months.

“The current level of economic uncertainty is causing developers to seriously consider whether or not now is the right time to push the button on a new project. I think people are waiting for the June Budget and the autumn comprehensive spending review before they make any big decisions.”

Almost 22 per cent of commercial developers reported an increase in total activity in May, compared with just less than 18 per cent that signalled a reduction. Higher levels of total commercial development have now been recorded in three of the past four months.

As a result, the Total Commercial Development Activity Index - a net balance monitoring the overall performance of the UK commercial property sector - registered 4.1 per cent, from 4 per cent in April.

Savills head of building consultancy Michael Pillow said: “The fall in public sector development activity is symptomatic of the austerity to come in that sector.

“It will be down to private sector demand to stimulate both the development sector and the wider economy in coming years.”

Developers remained most optimistic about industrial and warehouse activity. Some respondents said increased enquiry levels had boosted their expectations for activity in the sector, despite clients remaining reluctant to commit to new projects.