Reasons for cheer amid turmoil

That is pretty brutal for people brought up on the notion that property only goes up. Shares have fallen more than the underlying capital values, but on that latter basis it is still pretty brutal even for those who remember the previous property recession of 1991.

Thus far, the shift in yields indicates that commercial property values have fallen by 20% over the past 12 months. Back in 1991, they dropped 17%, which is broadly similar, given the flakiness of property statistics. The trouble is that we are by no means through the worst yet. But the reason for the pain may be about to change.

The fate of the property market is invariably closely tied in with the general direction of the economy. Thus, for the past year, the major impact on property prices has been the banking crisis, the credit squeeze and the sudden-drying-up of finance. Property markets exist on borrowings, and when the money is suddenly withdrawn or just becomes harder to get, it has an immediate affect on people's ability to buy.

The bulk of the fall we have seen so far has been a result of de-leverage, the drying up of finance. That may have further to go - certainly there is no sign yet that the banks are recovering their appetite to lend - but there are those in the industry who believe the worst of this shock has passed and that, other things being equal, the market looks much more sensibly priced at these lower levels.

Unfortunately, other things seldom are equal. Property is normally priced at a premium to Government bond yields. These have been rising sharply, and that means property is only good value if its yields also rise - meaning capital values continue to fall.

There was a time a few weeks ago when it was possible to see stability returning to the market, but the inflation fears that have pushed up interest rates in recent days have knocked that on the head, at least for the moment.

Just as the first and worst squalls of de-leveraging are dying away, the commercial property sector has also to brace itself for the second shock - which is the impact from the coming economic slowdown. As the credit crunch makes itself felt in the wider economy, it will reduce economic activity. Some existing companies need less space as they shed jobs, others demand a reduction in rent to help them stay afloat, others simply sink.

More buildings are unoccupied, and the rental income from those that still have paying tenants comes under pressure. Thus the extent that the economy deteriorates - the amount to which other sectors suffer the fate of finance and retail - will determine how much worse things get in property.

The hopeful sign here is that outside the obviously troubled areas of finance and retail, the wider economy is in good shape. Companies are flush with cash going into this slowdown, which leaves them much better equipped to cope with it.

Most also report that order books and business have been holding up well, albeit the continual talk about recession is beginning to sap their customers' confidence. That could be bad; it is certainly not going to be comfortable, and it will probably last for a long time.

A second reason not to be suicidal is that there is no vast evidence of oversupply. There may be a few too many new buildings nearing completion in the City but in most sectors there has not been overbuilding, and there is no massive overhang of empty space. There has been nothing like the scale of speculative buildingwe saw before previous property downturns, so there is less need for fundamental readjustment on that score.

There is one more glimmer of hope. It is a given that the London market has been underpinned for years by overseas buyers. Not only have these not gone away, but they will also have noticed the fall in the value of the pound. This is particularly marked against the euro where it is down almost 20% in a year.

The result for buyers in that currency is that London property is massively cheaper than a year ago - a drop of 20% in capital values and a further fall of 20% because of the currency. So if they thought London bricks and mortar, concrete and steel were a good investment a year ago, how much more attractive should it be now when it is 40% cheaper?

There must surely be some sovereign wealth funds tempted by this - they would find it a lot easier that trying to buy Sainsbury's.