Hopes of a bounce hit by reassessment

Published on Monday 26 July 2010 16:17

THIS may come as bad news for anyone concerned about the likely length of time required for commercial property to recover from the recession: the market never wholly got over the previous recession.

According to new research by BNP Paribas Real Estate, moving property values beyond those ahead of values that pertained at the peak of the preceding boom not only took 13 years to happen but the process was also helped by a period of high inflation; in real terms values in 2007 (which was the high-water mark before the current recession) were actually lower than their previous peak.

And this time round - in a worst case scenario in which inflation remains low and low growth keeps rents down - it may be 2025 before values return to what they were in 2007.

The research also considers the opinion of banks surveyed one year ago, looks at how attitudes may have changed and proposes a number of actions that banks might consider taking now in order to work out the 50 billion or so of distressed commercial property debt.

A large proportion of the property debt held by the banks is located outside prime Central London, so what of Scotland, which accounted for 6 per cent (13.7bn) of UK property debt from all sources (228.3bn) at the end of 2009?

Don Young, head of agency in the Edinburgh office of BNP Paribas, sees some welcome signs for a future whereby bank property debt is slowly but sensibly reduced. He said: "The banks have made a start on getting their level of property debt down, a number of them with exit strategies. This is being carried out sensibly, with properties being drip fed on to the market at realistic prices and by avoiding the temptation to go for fire sales."

Most banks had placed their various property portfolios with negative value into three categories, Mr Young continued. He said: "Firstly, those that have been performing well and may be returning to previous values and as a result are being left alone; secondly, those that may be refinanced with parties encouraged to put more money in; and thirdly, those below the waterline which are still achieving respectable prices on resale, as has been indicated by the Kenmore and Kilmartin disposals."

Mr Young suggested that perhaps one reason why the banks had so far been relatively successful in reducing property debt was a much improved emphasis, on their part, on taking professional property advice. He suggested that had such advice been commissioned earlier in the decade, when values were on an apparently never-ending upward curve, many of our financial institutions may now be less indebted than they currently are.

There is also encouraging news from Jones Lang LaSalle, which has reported that, in the second quarter of the year, UK property investment transaction volumes increased by 30 per cent and totalled over 7.53bn in value. The UK represented 40 per cent of investment volumes across Europe, where sentiment remains positive although it has tailed off slightly, partly due to the perception that prices have risen too sharply against the weak economic and occupational backdrop.

As for our own wee bit hill and glen, Kenny Waitt, director in the investment division at Jones Lang LaSalle in Edinburgh, said: "Across all sectorsin Scotland,investors are carefully weighing uplocal occupier dynamics. I anticipate continued widening of the yield gap between prime product and secondary as the year unfolds."

According to the latest quarterly report from the RICS, investment transaction activity in Scotland continued to rise between April and June although at a much slower pace than was seen in the previous quarter.

More than just a pawn in the market

Occasionally the recession has a silver lining for the property sector, as was proved to be the case for one landlord, Peatallen, whose unit in Dalry Road in Edinburgh has been let to Ramsdens, the national firm of pawnbrokers, on a ten-year lease at 18,250 per annum on 1,573sq ft of accommodation.

Will Biggart of Ryden, who acted for the landlord, said: "To secure a national firm with stores throughout the country is an excellent result for Dalry Road and the landlord. This deal continues to show that there is strong demand from multiple retailers for properties located on busy main roads."

Tom Forster at EYCO, agent for the tenant, commented: "This acquisition shows Ramsdens' continued commitment to expanding their portfolio of Scottish branches.

"This is their second store in Edinburgh and they have a requirement for a third in the city by the end of 2010."

• Christmas may be almost five months away but already the Glasgow office of Montagu Evans is looking forward to a feast of Stephens. Managing partner Bill O'Hara has strengthened his west of Scotland business space team by securing the services of Steven McLachlan and Stephen Cahoon from BNP Paribas Real Estate in the city.

Fraser Smith, managing director of the Glasgow-based agency and consultancy Smith Cole Wright, has been hired by Bilsdale Properties to advise on its 500 million portfolio in Scotland. One of his first tasks was to appoint advisors to let the 25,000sq ft Kintyre House on West George Street and the corner townhouse at 26 Blythswood Street; Jones Lang LaSalle and GVA Grimley are now on board.

Susan Nicol, general manager of the St Enoch Centre in Glasgow, has been given an additional role, that of regional director, operations, Europe, for landlord Ivanhoe Cambridge, with responsibility for the company's European portfolio, specifically for Madrid Xanadu, its European flagship. Manager at St Enoch since 2005, Nicol began her career at Cameron Toll, Edinburgh, before becoming general manager of the capital's Gyle centre. She then joined Capital Shopping Centres as general manager and oversaw development plans for the 170m extension of Eldon Square, Newcastle.

Phil Reid Associates, also Glasgow-based, has appointed John Jackson from Space Solutions. The pair had earlier worked together at CBRE.