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Vultures are gathering

Beware – vultures in international investment funds sense there are rich pickings to be found in the UK commercial property sector, says Julien Holmes, managing director of Crown Mortgage Management

Vultures are hovering over the top end of the UK commercial property sector, in which capital values sank a further 3.1% in February.

Commercial property now represents the best value for many years, having fallen by 39.5% since its peak in June 2007, according to Investment Property Databank.

As the pound continues its slide, opportunistic investors from Europe, the US and further afield are looking at the options presented by capital depreciation and foreign exchange appreciation with an unhealthy degree of relish.

The question for lenders is whether liquidity for their prime commercial portfolios at any price is a good thing or not. They are also wondering whether there are any tactics they can employ that might prevent a fire sale turning into a rout.

With MIPIM, the world’s largest commercial property jamboree, just finished it is worth looking at how the 18,000-odd delegates view the future of the €15trillion international property market.

As Crown owns a bank in Germany and has its head office in the US I’m hoping I can shed a little light on how much of the MIPIM hype was bravado and give you an indication of where the real money is going.

German funds, most of which have had less severe exposure to the global property collapse than those in other countries, are the reigning kings of the predators. And as you might expect, a similar lack of exposure is the key criterion for other countries and in-vestors. For example, Norway’s sovereign wealth fund – with some $20bn to invest in property – has already stated that it is interested in the UK market.

Henderson Global Investors is also reported to be looking to raise at least €500m in funds this year to invest in commercial property and is said to regard central London office space as a strong buy. There is certainly no shortage of opportunities for these funds, as property consultant Ingleby Trice Kennard recently reported. For example, the City of London has the highest level of vacant office space since May 2005. Added to this, many new tenants are being offered generous incentives including two-year rent-free periods.

Naturally, some businesses operate better than others and although the figures show a rising number of liquidations there are an equal number of companies that have business models that are less exposed to the economic downturn.

And something similar goes for property locations. For example, London’s famous Canary Wharf business district, while not yet having tumbleweed blowing down its streets, is beginning to look a little empty.

Compare this with Glasgow’s International Financial Services District – Scotland’s answer to London’s Canary Wharf. This is still expanding, opening new grade A office space. Why? Largely because of cheaper rents, lower employment costs and a holistic regeneration programme.

The corollary of the above is that lenders that also have tertiary exposure to prime developments, whether these are restaurants, hairdressers or fashion boutiques, need to be wary. A recent report by Glasgow’s IFSD showed that of the 16,000 jobs that have been created in the area, more than 1,000 are in support services.

The good news is that many real estate professionals see the UK as being ahead of the curve in terms of repricing, although from a lender’s perspective this presents problems in terms of realising value from distressed sales.

As always, my advice to commercial property landlords is – do everything possible to support your existing tenants. This strategy is even more important if we are at the bottom of the price curve and about to start clambering up the other side, as seems to be the case.

Liquidations will almost certainly continue and second-guessing which of your clients is at risk is as much of an art as a science.

However, helping your customers through the downturn, albeit at a cost, could be more profitable in both the short and longer terms because the vultures will want to start making profits as soon as the market recovers, and there is a danger that this will be at existing lenders’ expense.


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