UK commercial property facing challenges as values slow

Commercial property values in the UK rose 0.1% in April, down from 0.3% in March as the market's rebound from the global financial crisis slowed further, putting a greater focus on rental income.

Investment Property Databank said property values were up 17.2% since late 2009, after having slid about 45% during the global financial crisis.

‘On a twelve month rolling annual basis, capital growth has slowed now to just 2.7% as the wave of the recovery came in fourth quarter of 2009 and the first quarter of 2010,’ said Phil Tily, managing director for UK and Ireland.
 
Returns across all commercial property sectors, office, retail, and industrial, totalled 0.7% in April, down from 0.9% in March, and was almost entirely driven by rental income.

‘Flat or negative rental growth across all sectors and an apparent end to the repricing sequence meant that there was very little capital movement in April, and indeed the first four months of the year,’ Tily said.

Total income returns for April was 0.56%, comprising 0.62% from industrials, 0.56% from offices, and 0.53% in retail, IPD said.

Meanwhile, according to the influential UK Commercial Property Lending Market survey by De Montfort University, two thirds of lenders, some 67%, reported a decline in the value of their outstanding loan books in 2010, the first recorded fall in the report's history.

Debt secured against UK commercial property fell from more than £300 billion to about £293 billion in 2010 as lenders rebuilt their balance sheets and began to repair the damage inflicted by excessive lending during the property boom.
 
Lenders' debts held on balance sheet fell from £228.3 billion at the end of 2009 to £206.9 billion at the end of 2010, a reduction of 9.4%. This included about £10 billion of debt that was transferred to Ireland's National Asset Management Agency. Respondents reported that £45.9 billion of loans were due for repayment in 2011, down from £55 billion in 2010.

‘There has been a measured reduction in outstanding debt that has, so far, avoided off loading property assets to the detriment of the market and capital values. The rate of increase in impaired loans appears to be slowing and new loan originations are cautious in nature and based on conservative terms. These actions could be regarded as important first stepping stones on the path to recovery,’ said report author Bill Maxted.

However, the report made clear that conditions for both lenders and the property industry remained extremely challenging. Just £19.9 billion of new loans, not including short term extensions to maturing loans, were made in 2010, up from £15.5 billion in 2009 but totalling less than half of the debt that will need to be repaid this year.

In addition, UK lenders were found to be heavily exposed to non-prime property, accounting for 69% of debt compared with just 45% among their German counterparts. Maxted explained that ‘great uncertainty’ continued to shroud the non-prime market due to the ‘continued weakness of the UK economy and the still difficult to quantify impact of the UK Government's austerity measures’.

Lending on commercial development hit an all time low, with the share of total property loans, accounting for just 4.75% of loan books, compared with 11% in 2007.

And the cost of borrowing hit its highest ever recorded level in 2010, with average interest rate margins predicted to remain flat or climb further in 2011 by 98% of respondents.

Liz Peace, chief executive of the British Property Federation, the leading body representing developers and investors, said the report offered a glimmer of hope. ‘The outlook for the commercial property industry and the banking sector remains extremely challenging. We would urge Government to recognise that while there may be light at the end of the tunnel, this is a fragile recovery, and our industry remains extremely sensitive to further shocks that may be caused by ill judged interventions from policy makers,’ she added.