The Lloyds Bank Commercial Property Confidence Monitor for January 2012 recently revealed the extent to which concerns over the eurozone crisis and domestic economic difficulties have had an impact on the UK's commercial real estate sector. According to the research, the index has fallen further than the historic low recorded in November 2010, with fund managers being the most pessimistic about the outlook for the country's property market.
One finding from the report that stands out is that confidence among medium to large businesses in London slid during the final quarter of 2011, bringing them more in-line with their regional counterparts. However, the financial institution pointed out firms in the capital "remain more bullish" than those based elsewhere in the UK.
Head of forecasting at Jones Lang LaSalle Andrew Burrell stressed this dip in confidence is not restricted to London and the UK, though. "It is a global, certainly nationwide [issue]. Confidence [has been] hit on the occupier side and also on the investor side," he stated, adding one of the reasons why it is more noticeable in the capital, and particularly with London offices, is because this sector is "serving an international market rather than a national one". Such assets are "very much more outward-looking and very much more connected with what is going on in the globe", Mr Burrell explained.
This links back to the eurozone crisis, which Mr Burrell claims is the main reason for the diminished optimism about commercial property investment in the UK. He pointed out the situation on the continent will change and it is the uncertainty over what may happen that is holding back the real estate industry. "People are not prepared to do things that they would in a more confident market," Mr Burrell asserted. He believes the situation will begin to improve in the second half of 2012, especially when a resolution to the sovereign debt issues in Europe is set out.
While he is keen to highlight that the situation is not as bad as it was in 2008, the real estate expert acknowledged there is little appetite to enter into large-scale deals in the present climate. "Unfortunately, it will take some kind of recognition that we are at the bottom and [then] things will pick up to get the market moving again," Mr Burrell said.
Although it may not be in the government's power to intervene in Europe, are there steps parliament could take to improve the picture for businesses not only in London, but also elsewhere in the UK? According to the respondents to the Lloyds Bank survey, there are several measures that may help get the market moving again. One of the most-cited suggestions was to ease credit conditions, while reducing property taxes, boosting investment in the country's infrastructure and relaxing planning restrictions were other options put forward by those questioned.
Cushman & Wakefield recently published a European Commercial Property Investment report, which pointed to continued difficulties for investors who need to raise finance to fund transactions. According to the firm, "getting hold of affordable debt will be an issue for all except the top tier of borrowers with the best asset backing", as steps to deleverage the banks are expected to move up a notch this year.
Last month, research published by CB Richard Ellis (CBRE) found insurance companies were providing the "most competitive real estate debt terms" in the UK, so commercial property investors may want to consider making use of this source of finance. Natale Giostra, head of UK and Europe, the Middle East and Africa debt advisory at the firm, commented: "So far, most of their [insurers] loans are larger in size than the market average, issued against best-quality real estate, in terms of both location and covenant strength." CBRE noted insurance organisations now make up 14 per cent of all commercial property lenders open to new business in the UK and the company went on to predict that this proportion will increase to 20 per cent in the future.
- Monday 30 January 2012