Commercial Route Blog

With economies around the world cooling in recent months and the squeeze in the British minds, it has been suggested that the Bank of England will not be likely to increase the base rate until the second quarter of next year.

A recent poll carried out by Reuters of 60 economists indicates that the MPC will be more concerned about the overriding effect of the US downturn and the effect it will have across Europe.

Although Britain’s economy did expand in Q2 by 1.2% , its fastest pace for nine years, analysts expect this to shrink to 0.3-0.5% in each quarter through to the end of next year. Retail sales and consumer confidence figures over the last month have been buoyant, but business surveys of the private sector support expectations for a slowdown.

In July inflation still remained at 3.1% way above the 2% target, but again this will be less of a concern than the slowdown itself. The £200bn quantitative easing programme, it is suggested will remain as is and the poll suggested analysts believed that this would not increase.

Lending

With lending still available, it is still a task to satisfy the “New World” of stringent underwriting and although there are many that would sail through, there are the increasing numbers hitting a brick wall.

Commercial property prices and rental yields have decreased to what pundits believe will be the low point. Any business currently looking to rent space would find they are in a great position to tie down a long term deal according to 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

A restrictive covenant is something designed to restrict or control the usage of property, if you like it’s a promise to do, or not do, a particular thing with a particular piece of land.  Any commercial lease worth its salt will include a litany of restrictive covenants designed to protect the landlord and to ensure that the burden of maintaining the property falls squarely at the door of the tenant.  So what can you do, as a tenant, to ensure that you don’t end up paying out at the end of the lease for items and things that you could have avoided had the lease been amended more fairly in your favour?

The common types of restrictive covenant are those relating to repair and maintenance of the premises, for example:-

•    To pain the internal walls once every two years with a good quality paint, the colour of which should be agreed in writing beforehand with the landlord
•    To the reasonable satisfaction of the Lessor’s Surveyor well and substantially to repair re-build and keep in good condition and properly decorated inside and out the demised premises and every part thereof

From the tenant’s perspective these covenants are really quite onerous, it means that once every two years you would have to go through the expense and upheaval of repainting the entire premises and you would have to first obtain the Landlord’s consent to the colour and type of paint you would have to use. To have to “repair re-build and keep in good condition” the premises could mean that at the end of the lease you would have to give the property back to the Landlord in a “good condition” which again could mean spending out a substantial sum of money for which you would see no return or no value to your business.

Other restrictive covenants commonly seen in leases are those that prohibit the tenant from sub-leasing the premises, this can cause problems, particularly in cases where you may wish to hold the lease over the whole premises but only occupy part of it.  You need to ensure that you check carefully as to whether you can then sub-let the part of the premises you are not using.

If you fail to comply with these covenants then you will be in breach of your lease and the Landlord may have the right to terminate your lease or levy charges against you.

It is crucially important therefore that you ensure that you understand the restrictive covenants that you are entering into and that you get good legal advice on the implications of signing your lease before you sign it.

Written by: Samantha Fenton (Commercial & Residential Property Solicitor) – Douglas Wemyss Solicitors

The UK may have seen a rise in commercial property investment values, but this does not mean that the assets are overvalued, it is claimed.

It has been claimed that commercial properties in the UK are not being over-valued, despite a rise in property investment values.

An economic research consultant said that the recent rises in asset values do not overvalue UK commercial property. The unlisted UK commercial property market is most attractive to global investors, according to HSBC. A recent report by the investor has suggested that the strong valuations will result in the market outlook remaining strong, despite the lower growth in the UK rental market.

Ed Stansfield of Capital Economics stated that the strong recovery seen in the UK commercial property market is just a positive reaction to the market crash seen during the global downturn.

“Nevertheless, I still think that the bottom line is that there is not a lot of evidence to suggest that the UK market has become overvalued as a result of the upswing,” Mr Stansfield concluded.

The Ignis Asset Management’s UK Commercial Property Trust (UKCPT) was hoping to acquire the Foreign and Colonial Commercial Property Trust (FCPT), which would have created the sixth largest property company in the UK, worth an estimated £1.6bn.

The planned merger was cancelled however, after Independent shareholders narrowly against the merger of two of the country’s largest investment funds.

In June, Commercial Route reported that the potential merger was under threat due to F&C Reit threatening to block proposals.

This prediction now appears to have become fulfilled as shareholders accounting for 50.07% of the trust’s investors declined the deal, even though it had already been approved by both companies’ independent boards two months ago.

According to a new report from Savills, last month saw an increase in commercial property development activity.

Savills’ Total Commercial Development Activity Index, showed that for July 2010, there was a rise in activity, following a slight reduction in the previous month, although the expansion rate was minimal.

“A general collapse in expectations for the UK economy on the back of public sector austerity has clearly washed over into the development market.  We expect to see further caution about the future until the full details of the spending review are announced in October,” stated Michael Pillow, head of building consultancy at Savills.

Higher levels of activity in the private sector drove growth, while public sector development saw continued sharp falls. While 19% of those respondents surveyed reported an increase in their market activity, 18% reported lower activity for July.

If you want to occupy your new commercial property yourself, you need to know the planning laws will let you do business there. If they won’t, you could lose thousands.

Is your sale or purchase conditional on planning permission for a new development? You need tight conditions in the contract to make sure nobody can wriggle.

If you intend to let it out to a business tenant, you’ll need a good modern lease to cover all your needs. You must take the right steps to exclude security of tenure, if that’s what you want.

If you’re buying an existing business, freehold or leasehold, you need to get the goodwill, fixtures and fittings and stock in trade with it.

Selling flats on new long leases? Even shared ownership? There are detailed statutory rules about management and service charges, as well as “right to buy” and occupiers’ management.

Buying an investment property? Are the existing leases or tenancy agreements in good form? Will they protect you against any tenants’ default?

Letting to residential tenants? Can their Assured Shorthold Tenancies be ended properly? Have the right notices been given? To get the tenants out, you must follow complicated court procedures. Did you know you will probably be sent to prison if you try to evict a residential tenant without getting a court order and using the county Court bailiffs?

Good solicitors can deal with all of those issues. Contact Preuveneers LLP for advice and help.

The Henderson International Property Fund portfolio, including Australian assets, will be managed by Aviva Investors from 2nd August.

Henderson Global Investors confirmed in a press statement that Aviva will take over management of the $315 property portfolio, following a review which concluded that the fund needed increase in size so that it can grow faster.

Henderson stated that the fund was not likely to achieve this kind of growth “organically” at the current rate, and that necessary measures would need to be taken, in order to take advantage of the improved market conditions.

The fund will be merged with Aviva’s $383m already held in existing European and Asia pacific real estate funds, enabling clients to benefit from greater ‘diversification and scale’.

“The resulting funds will provide an excellent platform for investment exposure to the Asian and continental European commercial property markets, ” said John Cougherty, Chief Executive of Aviva Investors UK Funds.

Invista Foundation Property Trust has reported pre-tax profits of £36m for the year to the end of March, which puts them in the black for the first time since their last reported loss of £184m.

Total property assets stood at £300m, which while this was £4.6m lower than 2009, the net asset value rose by 19.6% up to 52.4p for each share.

“The strong recovery in UK commercial property values, together with our pro-active asset management strategy have contributed to a positive NAV total return over the last year,” said Duncan Owen, Chief executive of the company’s investment manager.

“The company is on a sounder footing and now better placed to generate strong performance and greatly increased dividend cover over the next few years.  Whilst macroeconomic risks remain evident, the company is now well positioned and will have opportunities to utilise its cash resources to acquire fundamentally well-placed properties and actively manage existing assets to generate strong rental income growth,” he concluded.

RBS is currently looking into ‘pioneering’ methods to sell off commercial property assets which were acquired before the recession, which includes sales of commercial property loans worth £2bn to £3bn.

Non-core funded assets which are worth an estimated £194bn are set to be reduced, with the bank’s strategy seen as key for the UK property market going forward as around 26% of the bank’s portfolio is related to commercial property.

With many assets distressed after a 45% fall in the commercial property values over the last three years, RBS are said to be looking at many different options to reduce the assets. This could see a large scale sale of loans to many private equity groups and property companies.

Lazard are working with RBS to sell the loans, which will be mostly from the UK although it is not clear how stressed these will be.  In addition to this, RBS has been speaking with investors regarding non-core assets and have been said to be aiming for property sales of around £15bn per year.

According to figures released by the Investment Property Databank, the retail sector of commercial property has grown quite significantly when compared other markets.

In the last ten months positive capital growth within of retail premises has risen by 17.2%, compared with a 12% growth for the office sector and 10.1% growth of the industrial sector.

This growth has come even though there has been a ten-month low in capital appreciation in the commercial property market, with negative rental growth doubling from 0.1% to 0.2% between the final month of Q1 and first month of Q2 2010.

Thus far in the recession, the rental decline has matched the downturn of the 1990s, where rental levels fell over a two year period by 13.2%, and continued a steady decline for another three years, yet the UK market overall has seen a positive capital growth of 14%, which has been boosted by the performance of retail premises in the market.