Since June 2007, the value of the nation's offices, shops and warehouses has fallen by 43pc. Difficulty refinancing billions of pounds of loans this year could make things even worse. A doubling in the share prices of big property companies such as British Land and Land Securities between March and the start of May might suggest otherwise. And the fact that average yields are now around 8pc - double what their low in 2007 - might indicate investors should start getting back in. Property's risk premium over bond yields is usually about 150 basis points but is now 400bps. With GDP likely to fall 4pc this year and 1pc next, unemployment is set to rise and many companies will either be unable to pay their rent or will require much less space. Rents could ultimately fall by a quarter in total, according to Capital Economics. Values will follow. The question of how much further depends on whether property owners can avoid forced sales, given that vast swathes of them will have broken loan-to-value covenants. For the time being, the signs are that lenders are jacking up their arrangement fees on refinancings but are also cutting stuggling borrowers some slack, according to a review of property lenders undertaken by De Montfort University. But with banks on the rack, this leniency may not continue. About 19pc of all outstanding UK property debt - £42bn - has to be refinanced this year, but lenders may only make £20bn available, according to the De Montfort study. Investors will be called upon to pump in more equity. Many will not be able to. That could leave a huge slug of property assets ending up on bank balance sheets. Government support in the shape of an asset insurance scheme for Royal Bank of Scotland and Lloyds Banking Group - the two biggest property lenders - will allow more leeway to prevent fire sales, but plenty will still inevitably occur. The prospect of price falls of well over 55pc - outstripping anything the UK commercial property sector saw in the 1990s and even the 1970s - is very real. Investors should bear that in mind before they go bottom fishing. For more agenda-setting financial insight, visit www.breakingviews.comUK commerical property's horror show could get worse
The UK commercial property horror show could get even more gruesome.
Sunday, 24 May 2009
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