By Algy Hall, 28 May 2008
Two surveys in the last week have played to commercial property investors' deepest fears. Concerns are growing that and forced selling by investors could lead to a further severe drop in commercial property prices following their recent downward re-valuation. In turn, this could prompt a fresh exodus from real estate funds and more forced sales.
The CBI/GVA Grimley spring survey of senior management team's views on property requirements added to concerns on rents. The report found clear signs of a change in requirements with firms looking for less space as confidence deteriorates. Sectors where sentiment was particularly hit were financial services and retail. But the situation is yet to get really grim and, according to the report, the current trend represents a steady easing in requirements rather than a more severe adjustment. Landlords may also take some comfort from the fact that only a minority of tenants are using the tougher conditions as an opportunity to obtain lease concessions at present.
Meanwhile, the De Montfort bank lending survey added fuel to the Bank of England’s recent suggestion in its Financial Stability Report that banks could face £5bn worth of property defaults. It confirmed the Bank's view that the level of commercial property debt held by banks had jumped in the second half of 2007 due to an inability to sell loans on as mortgage backed securities. The consequent indigestion has, according to the De Montfort survey, led to soaring lending costs and increased difficulties for those needing to refinance loans. That's particularly pertinent because £34bn of loans, out of a total of £200bn, will need refinancing this year and £22bn next. Again, there are some grounds for optimism, as actual default rates have remained very low so far, but the potential for something nastier is certainly there.
IC VIEW:
Falling rents and forced selling by heavily-indebted buyers looks increasingly likely, but the severity of the situation is not yet clear. Given these conditions, we are increasingly wary of companies with large speculative development projects - especially in the vulnerable City office market - and high debt. British Land, fairly priced at 814p, and Minerva, high enough at 98p, both fit that bill.
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