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 ?? provides a bleak sign of the economic times in the European commercial property market.

Slated to fill the hole is the 47-story "cheese grater" building, just one of several new skyscrapers that are planned to transform the British capital's skyline.

But the global credit crunch has brought construction on the US$500 million project to a halt as its developers worry they won't find purchasers 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, Italy and Ireland. Like Britain, all the countries are dealing with deteriorating domestic economies.

A Europe-wide collapse in commercial property values, while not necessarily disastrous for the global economy on the whole, could have a significant effect on credit markets already straining at the seams.

"The signs are not good," said London-based Capital Economics property economist Ed Stansfield. "Probably what's been happening in the UK 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."

Evidence of how jittery worldwide investors are about all things real estate came last week when Lehman Brothers made a last-ditch decision to spin off up to US$30 billion in commercial real estate loans and buildings.

The US bank failed to find an investor or buyer to rescue it and filed for bankruptcy protection on Monday, roiling stock and credit markets worldwide.

A downturn in the market could also result in investors turning away from commercial mortgage backed bonds, creating a vicious circle by tightening credit.

Capital flight?

"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 US banks," said Philippe Waechter, 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."

The British commercial property market has been particularly hard hit because of the domestic economic downturn. Analysts are expecting the country to slide into recession by the start of next year, which has reduced demand for retail and office real estate in the capital.

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.

British Land, the developer behind the "cheese grater," nicknamed for its distinctive shape, said that it is "reviewing timing of construction and target completion in order to optimize cost and occupational demand."