Finance and corporate real estate
Debt is a key issue in the property sector, with values in commercial property plummeting by almost 45% from 2007-2009.
The Banks have had to seek taxpayer funds to cover their losses to the value of £9,000 bn. Lending criteria has tightened with developers needing greater security to secure finance. Despite taxpayer bailouts and Government intervention, criticism remains that bank finance is difficult to obtain.
Changes to the Empty Property Tax have put further pressure on the sector. It has been claimed that the tax will inhibit economic recovery as older, lower rent properties are demolished, removing more affordable properties from the market and putting further pressures on emerging businesses, pivotal to economic recovery.
The UK property market is struggling but opportunities remain, especially in London and the South East.
The Government Spending Review in October outlined the biggest UK spending cuts for decades, totalling £81bn. Individuals and businesses are cautious about where they are investing their money. Property is a major investment sector and historically has been viewed as being relatively secure in the long-term. To put it into context, “The commercial property sector contributes a significant amount to the economy, employing millions of people and contributing over £45bn to the Exchequer.” (6)
The recession is deep, with the possibility of a double dip and with economies across the globe fighting to recover; the outlook remains uncertain. It has been claimed by the Chancellor George Osborne that the UK credit rating was under threat and that cuts had to be deep and immediate.
The jury is out on whether the Government’s strategy will pay off and the cuts will stimulate confidence in the UK as a good place to invest, or will backfire, deepening the recession.
"Debt within the property market is a major issue, JP Morgan analyst Harm Meijer estimates that the loan-to-value ratio of the entire UK commercial property investment market is around 100% - the debt secured on commercial property of £250bn is roughly equivalent to its value.” (20)
Professional bodies, such as the British Property Federation, have lobbied the Government. In the letter dated 3rd June 2010 they stated, “The UK’s commercial property stock is a major factor of production which underpins a significant amount of lending by the financial system and represents an important institutional investment asset class. Our industry’s primary concern is that the primary focus on deficit reduction may undermine enterprise and growth.” (7)
“From mid 2007 until mid 2009, the commercial property market saw an unprecedented fall in capital values of close to 45%. The volume of outstanding loans made directly against UK commercial property is close to £300 bn. It is vital that the unwinding of that position is managed carefully, so as to allow borrowers to deleverage and banks to reduce their exposure to property, without major new shocks to the financial system or the economy.” (7)
“Strong growth has essentially been limited to the City of London, the West End and certain other prime areas, with commercial property values overall still standing 36% below the 2007 peak. Development activity also remains very weak in the wider market because of a weak occupier economy, the scarcity and cost of debt finance and continuing tax regulatory uncertainty.” (7)
