Who will be crunched by the credit crunch? Sooner or later, nearly everyone; but there could be some upside further down the line.

An economic slowdown is never good news but there may be some positive longer-term outcomes for investment locations, such as a fall in property prices. Overblown commercial and residential property prices in key cities such as London and New York have been skewing the investment calculation for some time.

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In our cover story this issue, we examine the effects on the commercial property market in various regions of the world. At the height of the boom, terms were so bad for corporate lessees that they were retreating further and further from central locations. Good news for second-tier sites, but even some of these were getting overheated as asset price inflation washed through the system.

In the next few months the market is going to get back to reality and, conversely, first-tier locations will find that they benefit from this the fastest. In a property market downturn, as demand drops, owners of properties in central, safe, well-established areas have less to fear. Properties located outside the centre or in run-down, ‘up and coming’ areas – which in the boom times seemed like clever investments – will lose their value first.

Likewise, in a corporate downturn, as demand for overseas investment locations drops, the second-tier locations might have to fight to maintain their relevance.

With less access to credit and less money to spend on international expansions, companies will be savvier and more selective about where they expand. The pain will be felt more severely in these peripheral locations because of reverse economies of scale – the City of London might shed banking jobs but it has more room for error and can absorb the losses easier than smaller financial centres. And few companies in the finance sector will pull out of London altogether even if they scale back operations.

Heads have already started rolling at the major banks but we are not yet to the point of a pullback in corporate activity in sectors beyond financial services. As the fall-out from the US subprime crisis ripples around the global economy, the corporate sector, which is only about midway down the line of dominoes, has not yet taken a fall. For now, it is likely to stay upright: savings ratios are high, corporate balance sheets are stacked, and international expansion activity continues apace.

That means foreign direct investment flows, coming off a storming year in 2007, should remain buoyant for at least the first half of 2008. At some point after that, the crunch could start to bite.

Courtney Fingar