Commercial Route Blog

Lord Aidan Turner, the chairman of the Financial Services Authority called for tighter restrictions on lending in the commercial property sector. This followed the near-collapse of Edinburgh-based HBOS.

80% of credit in the UK is made up from residential and commercial real estate related borrowing, and an increase in loan rates or restricting borrowing terms is required said Mr Turner.

“A quite startling percentage of UK credit extension to the non-financial corporate sector in the last 20 years has been to commercial real estate. Although some of that, new urban development, new office development, new retail development is part of the value- creative process of society, some of it is not to do with new investment but is simply leveraging of assets to take advantage of the tax deductibility of interest payments,” said Mr Turner.

HBOS was used an example, when the loans made by the Bank of Scotland Corporate arm is still costing Lloyds Banking group billions of pounds after they took over ownership. In evidence to the House of Commons Treasury Committee, Mr Turner said that HBOS was “not involved in fancy proprietary trading, it was a bank involved in a classic problem of over-exuberant banking to commercial real estate.”

Mr Turner explained that it was highly unlikely that any changes would be made to UK tax law, considering that many other economies have the same rules that allow interest to be deducted from corporate taxes.  Lord Turner went on to say though that policymakers now have to consider whether all categories of credit are equally useful, and also that in contrast to property ,there are sectors such as manufacturing that accounted for as much in deposits to UK banks as they took out in loans.

It was also noted by Mr Turner that the restrictions on real estate lending that already exist in territories such as Canada and said that we should be ‘open to these ideas in a way we have not been for 30 or 40 years’.

Property investors and developers will be aware that, whilst there has been activity in the commercial property auction rooms as some investors with cash return to the commercial property market seeking yields that are more attractive than many other current investment returns, there remains understandable nervousness about acquiring development land.

However, those in the business of residential or commercial development will at some time need to return to the market, unless they leave the sector altogether.  The recent slowdown in development activity has led to a lack of supply of land with planning permission for development, or that is about to obtain planning permission for development.  This could in the short term increase the value of developable land, especially with the unknown quantities of a general election and community infrastructure levy around the corner.

The key elements in any development project are to undertake a thorough viability assessment and ascertain that the numbers work through.  Funding from certain commercial lenders is starting to become available in principle – but in general only to established developers who can meet lenders’ revised criteria.  These hurdles have less to do with loan to value calculations, and more to do with stress-testing the borrower’s ability to service the debt, and its current business acumen.  If funding is available, it might be on the basis of a phased development, and will be more tightly controlled than before, to include regular site visits by the lender or its agents.

We may see pockets of activity in the country whilst there is a lack of supply, such as Olympic or other need specific schemes, but until funding becomes more readily available there is unlikely to be a significant increase in development land market activity in the short term.

By James Griffiths - Partner and Head of Business Law Group

For more information, you can email James - lawyers@ashtongraham.co.uk
or visit www.ashtongraham.co.uk

Ashton Graham is one the largest law firms in East Anglia with substantial commercial, private client and personal injury departments. Ashton Graham offers specialist legal services in: agriculture, commercial property, employment, dispute resolution, family, personal injury, residential property and French legal services.   Ashton Graham’s legal specialists and teams are friendly and approachable and their enthusiasm and commitment ensure they provide the best possible service to clients. 19 Partners and just under 150 members of staff work from strategically placed offices in Ipswich, Bury St Edmunds and Felixstowe.

Ashton Graham is authorised and regulated by the Financial Services Authority. Ashton Graham solicitors are regulated by, the Solicitors Regulation Authority No. 50075.

With lending going back to where we were 30 years ago, how are lenders behaving?
The saying ‘a bank is an institute that will lend you money if you can prove you don’t need it’ has never been so true.

The rollercoaster of lending over the last decade could finally have had a more permanent effect. With the last 18 months of volatile lending, global banks have looked at the importance of simplicity and a back to basics approach for risk and liquidity management. For 2010 banks are looking to implement this new cautious approach globally to drive the stem of growth back into the economy, while still competing with the new banks such as Metro Bank.

With the new liquidity regime introduced by the FSA late last year, banks will also need to keep their ‘house in order’. However, with the departure of their Chief Executive, they still await to see what compliance awaits them. With this, liquidity for banks and lending institutes will still be of high priority over the coming year.

The FSA Chairman, Lord Turner, had recently called for a crack-down on commercial property lending in the wake of the nearly collapsed HBOS. Turner said 80% of UK Credit is either residential housing or commercial real estate. He stressed on policymakers to consider ways of increasing loan rates or tightening borrowing terms to ensure money flows into more useful sectors.

With the tightening of liquidity and the “hand” of compliance coming down, it is still difficult to say when the UK economy will see growth in the commercial sector. With a 1% decrease in average house prices February to February, according to Nationwide’s House Price Index, but a 1.4% increase in London commercial prices according to Reuters, uncertainty is still in the air. As the proverb goes “there is nothing certain but the uncertain”

by Mo Chishti, Managing Director of The Mortgage Merchant

To find out if The Mortgage Merchant can help you, your clients or anybody else you know, call them on 0845 456 1980 or email them at info@themortgagemerchant.co.uk

London and Stamford has sold the office space at 1 Whitehall Riverside in Leeds to NFU Mutual Insurance for £51.3m. This sale comes just nine months after the property was bought for £36.7m.

The 130,000 sq ft prestigious office building, located in Leeds’ 5 Star West End business district, is already let to seven tenants including Grant Thornton and Cobbett’s.

Set up by property entrepreneurs Raymond Mould and Patrick Vaughan, the listed company bought the building from Henderson New Star last year.

It is widely assumed that London & Stamford has sold at this point in time in order to take advantage of the jump in prices following a surge in property investment in the UK.

NFU Mutual Insurance was advised by Savills.

A sudden influx of money into the commercial property sector is set to see more than £1bn of shopping centres bought over the next month or so as investment activity increases.

The biggest deal will see the private equity real estate fund manager Meyer Bergman agree to buy a 50% share in Surrey’s Bentall shopping centre from Aviva for approximately £130m. The company is also set to buy an additional centre in Ilford for around £70m.

The Bentall centre price reflects a yield of less than 6%, which is almost at around the same levels that were being asked in the ‘boom’ years, which shows the pressure that is being placed on pricing property given the number of investors with capital looking for quality property within the UK.

According to Briant Champion Long, in total there are around 12 shopping centre deals expected to be completed in the next month, totalling around 1.1 billion pounds. This is much higher than the average and a significant indicator that the commercial property market is starting to turn the corner. A partner for the firm, James Watson, stated that most of the sales were being made to UK fund and property companies.

The chief executive of Meyer Bergman, Markus Meijer said that it was a ‘rare opportunity to own a prime retail asset in one of the most affluent suburbs of London, and one where there were asset management opportunities.’

More secondary centres which offer higher yields are being sought by others, which is potentially more risky given the pressure on retail rents, especially as investors have been forced further afield due to the lack of stock in prime markets.

Some investors are also said to be ‘flipping’ property bought less than a year before in order to make a quick profit, rather than waiting for the market to fully recover. Some other investors are looking to take profits, such as the Topland group who have a £200 million property portfolio on the market to cash in on the surge in investment.

Palmer capital are also selling some properties where there is no additional value to create, and chief executive Alex Price said, “Now is a good time to sell as the secondary market could well go down in the next one to three years, given the surplus property held by banks.”

British Land recently reported property values increasing by 8.2% in the final quarter of 2009, as the UK commercial property market shows more signs of strengthening. British Land went on to say that its net asset value had risen by 18% on September.

The reported results show that the commercial property market has picked up in the last six months. This comes after the falls last year when investors avoided the sector due to the recession.
“Our third-quarter performance saw a continued recovery with strong valuation growth right across the portfolio,” stated British Land chief executive Chris Grigg.

The reported rise in values of property in the commercial sector will be good news for the banks that are supported by the taxpayer, as they continue to fight to cut property devaluation following the 45% drop in values between the end of Q2 2007 and August last year.

While the valuation increase is good news, the commercial property sector is still seen as being quite delicate. At the Super Return conference in Berlin, Leon Black the founder of Apollo Management said that there could be many distress sales on the horizon.
“I think a lot of the traditional holders of this real estate are going to be forced to sell as things are marked down,” he said.  He then went on to state that those with capital would be able to take advantage and that commercial real estate would be a ‘bonanza’.

Britain’s £2 billion property advisory market has seen one of its oldest surveying firms Drivers Jonas acquired by the accountancy firm Deloitte.

The deal highlights the recent news that the British commercial property market is starting to pick up again, having seen average commercial property values fall close to 45% in Q3 2009.

Established over 280 years ago, Drivers Jonas will next month move their employees over to the real estate team at Deloitte.

A Deloitte spokesman stated that there would be no job losses with the merger taking place and that there would not be any capital changing hands.

The new business shall trade as Drivers Jonas Deloitte and will now have current Drivers Jonas managing partner Nick Shepherd as managing partner of the enlarged real estate group, with around 700 staff and around £100 million in annual revenues.

The news also comes at a time when in January, as buyer demand passed number of properties available for purchase, the UK commercial property market saw prices rise by 3% which is the highest monthly rise for 23 years.

A Bank of England rate-setter has said that the UK should avoid a dreaded “double-dip” recession but warned that fears over inflation remain.

Andrew Sentance of the Monetary Policy Committee (MPC) stated that the current world economic climate coupled with the weak pound should offset the impact of the struggling banking sector and the impending action to approach the deficit of the UK budget.

“As long as the international economy continues to grow healthily, I believe we should avoid the feared “double-dip” recession,” stated Mr Sentance, one of the MPC’s rate “hawks”, only a day after the confirmation of a weak return to growth.

He went on to add that the recovery rate would remain uncertain, and that early action would be necessary to hike rates from the record lows, in order to keep inflation under control. This is important to note given that inflation has been above the Bank’s target of 2% for the most part of the past three years.

Mr Sentance went on to say that due to the recent fall in the value of the pound, the UK cannot be reliant on cheap imported goods to hold down prices.  Despite the fall in output, the rising cost of imports is keeping the inflation above target. There could also be less slack in the labour market to bring down prices, as unemployment is lower than was expected.

He also said that due to the ease on lenders, there was plenty of room for recovery in house prices over the next few years, which has been at a historical low level.

The Royal Institution of Chartered Surveyors recently reported on their latest Global Commercial Property Survey that investment transactions grew in 70% of global markets in the final quarter of 2009. Although there are many factors deemed to have contributed, this has mainly been attributed to the increased confidence in the global outlook.

While developing economies in Latin America and China saw a particular resurgence, London also saw a revival in fortune.

Reported expectations of an increase in rental values and subsequent demand for commercial property, highlighted the confident outlook for emerging economies. In the final quarter, Brazilian surveyors reported a rise in transactions from 29% to 61%. Similarly, Chinese surveyors reported a rise from 47% to 58%.

“The strength of the results contained in the survey for Latin America and Asia are a reflection of the unfolding economic recovery with many of the more developed markets likely to be hampered by the challenges resulting from the ballooning of public sector debt and need of the authorities to gradually exit from emergency monetary conditions,” stated Simon Rubinsohn, the RICS chief economist.

When the financial crisis hit, the value of commercial property suffered with values falling sharply. Yields available on acquisitions are now however increasingly appearing attractive while there are low interest rates.

The weak pound has also boosted the UK market and it is attracting overseas investors to the distressed property prices. A total of 41% of commercial property buyers in the UK for 2009 were from overseas investors. This statistic is only bettered by Germany, who had 58% from overseas investors.

According to a study at De Montfort University, the amount of UK based commercial property debt in default has more than doubled in the first half of 2009,which is clear evidence of the impact of the global financial crisis upon the UK property market.

The study stated that loans that were in breach of agreements in the first half of 2009 reached in excess of £30 billion, which is the equivalent of the entire South Africa commercial property market. This amount is more than double the £13.8 billion which was reported at the end of 2008.

Bill Maxted and Trudi Porter of the De Montfort University’s Department of strategy and Management said that “the prospects for a swift recovery in activity in the commercial property lending market seem unrealistic. A slow, prolonged and perhaps, painful, improvement based on the performance of the U.K. economy appears in prospect.”

“The primary reason given for loans to be declared in breach of financial covenant and for loans to eventually default, was the dramatic loss in capital value of the property securing the loan and, in instances of default, this combined with the loss of cash flow,” the paper said.

The outstanding debt retained on balance sheets of lenders has fallen slightly to £224.1 billion in mid 2009, compared with £225.5 billion at the end of 2008, according to the report. The report went on to state that “this is the first decline in value recorded by this research and indicates the extent to which the lending market had come to a standstill.”