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We can be high street heroes

Headline-grabbing government initiatives to revive high streets will achieve little whereas lenders can play an important role, says Julien Holmes, managing director of Crown Mortgage Management

With the grim effects of the recession blighting high streets the length and breadth of the land, many towns now bear a marked resemblance to a blasted Gotham City.

The good news for the commercial market is that the government has sent its own caped crusaders in the form of community secretary Hazel Blears and culture secretary Andy Burnham – you decide who is Batman and who is Robin.

In a recent visit to Stockport in Manchester the dynamic duo announced their intention to inject £3m to make it easier for local groups in England to convert derelict shops and commercial premises into what they call community resources, such as galleries and advice centres.

To ensure the necessary level of spin at this photo opportunity the two were accompanied by Feargal Sharkey, the former lead singer of pop group The Undertones, who now heads the government body UK Music and also works with the body that licences businesses to play music.

So will a £3m injection of capital to convert premises as part of a proposed faster planning procedure make much of a difference? Could councils having powers to take over premises via so-called special planning application waivers and turn them into cultural, community or learning centres cause lenders problems in the future?

And what should lenders do if they have portfolios of high street properties that are empty and likely to remain that way? My view is that this is a political gesture that will do little to solve the problem, especially when you consider that Experian has predicted retail vacancy rates could increase to 15% by the end of this year – equivalent to some 139,500 empty shops.

According to the independent Investment Property Databank there was a 9.6% vacancy rate in February, the highest since records began in 1994. This was up from 8.6% in December and 6.7% in the same month a year before.

From an asset management perspective lenders need to be working with their borrowers to find temporary measures to keep them trading.

As all lenders know, properties without tenants mean no income but ongoing costs such as business rates or less predictable costs associated with security and vandalism.

By now, most landlords have woken up to the fact that the boom years are behind them. Indeed, figures released by the IPD indicate that rental prices are falling by the month.

In March, the British Retail Consortium warned that rental payments for Q1 2009 would be the toughest for at least 18 years and urged landlords to show more flexibility on retail rents.

Rents being paid in the retail sector dropped 0.56% in January alone, and landlords say they are having to offer increasingly attractive incentives to entice retailers to sign up to new shops.

There is also a problem for landlords who own bulky goods retail warehouses. They have struggled as their traditional tenants in the electrical and furniture sectors have suffered on the back of the housing downturn. But some retailers are taking more floorspace and shops offering discounted goods seem recession-proof.

Blears is not alone in wanting to save the high street. Birmingham City Council recently announced a scheme offering financial assistance and advice to independent retailers. The government has also delayed part of the 5% business rate increase that was due in April but the full amount still has to be paid over the next two years and another big rates hike is in the pipeline for April 2010.

The most important issue for lenders is to ensure that their asset managers are keeping abreast of the multitude of schemes on offer. Experience teaches me that when businesses are in trouble they can become blinkered and it is often their lenders or asset managers that can best advise them on the sort of assistance that is available.

How commercial lenders are staying ahead of the game

By Paul Walshe

Commercial lenders have seen the resale values of retail premises falling since before the wider residential property price decreases became evident to all. As a result, some have been ahead of the game in developing strategies to minimise losses.

Many commercial lenders are appointing Landlord Protection Agency receivers to let properties on licences or long-term leases to generate rental income to meet mortgage payments.

Another option is to arrange for insolvency practitioners to look at business rescue schemes. Many businesses fail because of short-term cash flow difficulties and not necessarily because the business is unsound. Insolvency practitioners can help restructure finances, improve cash flow and look at ways to diversify businesses and increase income streams.

Yet another option is for lenders and business owners to agree partial sales of security to clear arrears and reduce mortgage balances, helping affordability.

A further method being adopted by commercial lenders is granting payment holidays and arrears capitalisation on development projects to allow projects to complete and properties to be sold at their maximum value.

The final option is to pursue planning applications for change of use or further development to increase the value of properties.

Paul Walshe is head of lender services at law firm Moore Blatch

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