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Stay cool on the high street

Julien Holmes, managing director of Crown Mortgage Management, looks at what is happening on the high street and says the demise of some well known brands is no cause for general alarm

One of the most memorable quotes of the last recession came from former chancellor Norman Lamont who, in 1991, said he could see “the green shoots of economic spring”.

Many commentators have chastised one of Prime Minister Gordon Brown’s most important economic advisers Baroness Vadera for her similar recent gaffe stating that she was “seeing a few green shoots”.

Set against a backdrop of high profile business closures and redundancies, I’m not sure I’d state that spring is on the way in the commercial sector.

However, I am seeing businesses across the board taking a more realistic view of their situation and then taking the appropriate action to remedy any impending problems.

With gross domestic product figures getting worse, what does this mean for commercial lenders and how should they change their business practices, especially now the government is turning the screws on them to do so?

Will – and more importantly should – indemnifying lenders with the offer of insurance against expected bad debts change lending criteria?

Furthermore, should the offer of up to £50bn worth of government money to companies in all sectors of the economy change lenders’ approach to the question of asset management?

The good news is that in our experience many businesses are now adopting a more realistic stance – albeit not uniformly. There is a sense of objectivity about the areas in which they are operating which has often seemed lacking in the past, especially among many of the more established brands.

While I am not expert enough to comment on the details of high street names such as Woolworths, Zavvi, Whittards and Viyella, my understanding of their sectors is sufficient to know that they were vulnerable to ongoing commercial pressures anyway, and that any significant market downturn would have a grave effect.

For ages, I have been advocating that lenders and their asset managers should be looking at the long-term fundamentals of businesses. For many years, Woolworths had been described as a retailer without direction, Zavvi was in a sector in terminal decline – music downloading will be internet-based in the future and PRS, one of the leading music experts, says CD sales are continuing to fall. Meanwhile, Whittards was niche and vulnerable to the increased supermarket dominance, and Viyella was in that most cyclical of businesses – fashion.

What is apparent through the unemployment statistics is that it is not only primary and secondary employers that are being affected. UK unemployment rose by 137,000 to 1.86 million in the three months to October 2008 – the highest level since 1997. It is therefore clear that thousands of tertiary employers are now being hit by the less dramatic but no less devastating shock waves of the recession tsunami.

To this end, it is worth asking if the businesses you look after have credit insurance and solid business continuity plans in place – especially ones that detail supply chain issues.

Business continuity planning expert Crisis Survivor recently warned that more than 12,000 businesses had had their credit insurance withdrawn. This clearly indicates that insurers are taking a hard look at the financial risks in this area.

My concern for commercial lenders is that while most businesses are taking a more realistic business approach, some are listening to the media noise and using the castigation of lenders as an opportunity to go cap in hand for a credit line rather than to sort out fundamental issues. To this end, a business that is borderline but has already cut its costs may be appropriate for further funding. But it would need to show preventative action was being taken prior to additional money being made available.

Lenders must continue to take a robust approach with businesses that would ultimately fail and for whom providing extra funding would be merely delaying the inevitable. However, what I would say is – look at assisted sales in this scenario because a commercial property will generate upwards of 15% more than one that is boarded up.

Depending on circumstances, assisted sales should also cover legal fees, removals costs and help with the business wind-up should this be necessary.

Geography may well be an important factor too, as it looks as though progressive councils will step in to help local commercial communities.

Glasgow City Council, which is home to what it calls an International Financial Services District, plans to invest £3.7m to ensure its commercial property sector is not hit by the havoc recessions can wreak.


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