Have we lost the plot? What's it all about ???
Anthony Walker is co-author of Building Sustainability in the Balance (published by Estates Gazettte) and founding partner of DLG Architects, Accredited in Building Conservation with a particular interest in the 20th century and conservation management.
Clearly, he is a man who cares deeply about the conservation of the built environment, and he used our lunch on 29th April 2010 to express his concerns that the regulations against which we, in Britain are trying to do the job are not, to use the current phrase, "fit for purpose". The recently-introduced PPS5, Planning and the Historic Environment, has added to his anxiety. The core of the problem, as he sees it, is that the rules, and the guidance issued by English Heritage use words that are highly subjective and capable of extensive interpretation. Whilst this may bring work to consultants and lawyers for years to come, it militates against owners and developers who wish to engage constructively, and is not conducive of consistent outcomes. The result of all this is that local authorities tend to become formulaic in their approach, with great divergence in the lines that they take. The whole process is being driven, in Anthony’s view, by "order" rather than "ideas". In part this reflects, of course, the training of conservation officers, few of whom understand architecture, or design.. They thus feel unable to hear and interpret ideas in the language of architects. There is also a need for all involved in conservation to better understand the economics and commercial realities of property ownership and different uses.
This rather rote-driven approach becomes of particular difficulty with 20th Century buildings. The diversity of architectural language developed and deployed in buildings of that century is particularly impenetrable to a rule-based approach. Anthony gave us the particular example of the Commonwealth Institute building in Kensington. In a sensitive location abutting Holland Park, its most striking external feature is its roofline. However, the building contains extensive detailing in both design and lay-out that reflects its historical genesis. In discussions about its future, these all seemed to get swept away, with only the roof becoming the icon!
In subsequent discussion, comparison was made with Europe, particularly France and Spain. The Spanish, whilst being meticulous in conserving valuable detail, are far more willing to consider modern additions provided that thought is given to how the original architect might have treated the issue; they do not seek pastiche. The French seek to conserve much less, but what they do conserve, they conserve thoroughly and well. This led Anthony to argue that our approach to conservation seems to far too broad-brush, with everything including the kitchen sink being swept in.
As a personal aside, the debate reminded me of the anguish of engaging, in education, with Ofsted; when dealing with intangibles, officialdom has problems. Judging by the furrowed brows, Anthony’s talk gave us some cause to worry, but it is always a pleasure to hear speaker talking with passion on his subject
Michael Mallinson
Tuesday, May 11, 2010
Thursday, March 25, 2010
Lighter, Quicker, Cheaper
‘Lighter, quicker, cheaper – The case for more timely, less capital intensive, more human-scale development,’ a presentation before the LAI London Chapter by Eric Reynolds, Founder of Urban Space Management.
Pow! Straight between the eyes! Eric confronted us, at our lunch on 23rd March 2010, with the idea that, when it comes to development, we all think too big. He has been practising small-scale, low-cost, high-speed development for many years, with considerable financial and productive success; he wonders why most of us get caught up in 'comprehensive' development, always seeking to expand both the envelope of the sites with which we deal, and their conceptual framework.
The answer to that question lies, for him, in the mindset of the professionals involved. Perhaps reflecting one of the fundamental fallacies of professionalism, everything has been made more complicated than it needs to be; whilst he didn’t make the charge, more complication may lead to more fees. Thrusting aside such a base motive, there is a natural tendency amongst intelligent people to make things ever-more complicated. We have fallen for that tendency, with deleterious effects.
In the terms of the development process, it has greatly expanded the timescale for renewing our urban fabric, and increases the risk that, by the time a development is completed, the world will have moved on in some important respect. The larger new structures created may also have shorter productive lives, thus accelerating the cycle of disruptive development. Most existing structures, well-set in their social environment, are surprisingly adaptable, and adaptation may be better, and more profitable, than reaching for the demolition ball and trying to make the figures work by enlarging the enterprise. Whilst 'sustainability' has rightly become a buzz-word, large buildings encourage the restriction of that word to the building itself, rather than building plus environment.
Apart from this, big tends to be less socially conducive -– large tower cranes show a lack of respect for the local society into which they are introduced. Large developments also encourage the developer to think too much of the interior, and too little of the urban context, in social terms, into which the building is being inserted. In my own experience, I recall my dismay at the pot-holed roads and cracked pavements that surrounded some gleaming new creation. I blamed the local authority, but Eric might argue that I should have seen the beam in my own eye.
Having been pushed onto the ropes by Eric, some of us tried to punch on the rebound with examples of where urban renewal had to be thought through on a large scale, and, of course, large space needs for single occupiers. Nevertheless, I sensed that he made some progress in his amusingly presented challenge; maybe we need to plan things in a large framework, but perhaps most occupiers are telling us that 'smaller is beautiful'.
Michael Mallinson
To get a copy of the PowerPoint presentation please go to the link below, which is available through March 31, 2010:
Download presentation here
Pow! Straight between the eyes! Eric confronted us, at our lunch on 23rd March 2010, with the idea that, when it comes to development, we all think too big. He has been practising small-scale, low-cost, high-speed development for many years, with considerable financial and productive success; he wonders why most of us get caught up in 'comprehensive' development, always seeking to expand both the envelope of the sites with which we deal, and their conceptual framework.
The answer to that question lies, for him, in the mindset of the professionals involved. Perhaps reflecting one of the fundamental fallacies of professionalism, everything has been made more complicated than it needs to be; whilst he didn’t make the charge, more complication may lead to more fees. Thrusting aside such a base motive, there is a natural tendency amongst intelligent people to make things ever-more complicated. We have fallen for that tendency, with deleterious effects.
In the terms of the development process, it has greatly expanded the timescale for renewing our urban fabric, and increases the risk that, by the time a development is completed, the world will have moved on in some important respect. The larger new structures created may also have shorter productive lives, thus accelerating the cycle of disruptive development. Most existing structures, well-set in their social environment, are surprisingly adaptable, and adaptation may be better, and more profitable, than reaching for the demolition ball and trying to make the figures work by enlarging the enterprise. Whilst 'sustainability' has rightly become a buzz-word, large buildings encourage the restriction of that word to the building itself, rather than building plus environment.
Apart from this, big tends to be less socially conducive -– large tower cranes show a lack of respect for the local society into which they are introduced. Large developments also encourage the developer to think too much of the interior, and too little of the urban context, in social terms, into which the building is being inserted. In my own experience, I recall my dismay at the pot-holed roads and cracked pavements that surrounded some gleaming new creation. I blamed the local authority, but Eric might argue that I should have seen the beam in my own eye.
Having been pushed onto the ropes by Eric, some of us tried to punch on the rebound with examples of where urban renewal had to be thought through on a large scale, and, of course, large space needs for single occupiers. Nevertheless, I sensed that he made some progress in his amusingly presented challenge; maybe we need to plan things in a large framework, but perhaps most occupiers are telling us that 'smaller is beautiful'.
Michael Mallinson
To get a copy of the PowerPoint presentation please go to the link below, which is available through March 31, 2010:
Download presentation here
Friday, January 22, 2010
Investing in the Recovery
"What is Hot? And What is NOT For 2010 and Beyond?"
a presentation by Dr Tony McGough, Global Head of Forecasting DTZ.
Tony did well in flying around the world in twelve minutes analysing real estate investment opportunities. His talk had several dimensions -– risk and length of investment. Tony felt that investors could handle the big roller coaster rides over the medium term (ten years). However, if one was just looking at the short term (up to five years), then one should go for stability and minimal risk.
For the Asia Pacific region, China fits the roller coaster ride for the medium term whereas Australia was more stable and for the short term. The developing economies were the ones that would see booms and busts in the development cycle as well as suffering from political risk. China has good potential long term growth. The second tier Chinese cities with circa 40m people should be on the radar screen. Retail rents here did not fall.
Continental Europe was a tale of two halves -– the East and the West. Central and Eastern Europe were badly hit in the downturn as secondary property prices were very expensive. For the medium term, places such as Prague and Warsaw were identified as opportunities, not Bulgaria or the Ukraine. Go west if one was looking for stability and if one did not have the stomach for risk.
The UK has recovered with prime product leading the charge. For IPD, all commercial property has seen a 100bps fall in yields, but in reality secondary property was not worth this adjustment. One needed to be mindful that the UK would have a slow economic recovery and would have to pay off all that government debt.
In the Americas, US rents have generally declined, with New York City as the exception. One needed to be mindful about the general lack of planning controls in the US and its impact on supply. South American governments needed to become less corrupt if more property investment was to happen there.
Overlaying all of this was the panorama of world global cities. They were definitely in a class of their own. Tony felt that the historical reason of why they existed was a good enough reason for their continued prosperity. London City rents were much closer aligned to world GDP than domestic UK GDP. London, Paris New York City, Frankfurt (which apparently keeps trying), Hong Kong and Tokyo were the main global cities. Shanghai was an upstart. Dubai was a city which forced itself on you for global attention, but had not really made the grade.
Where to invest and where to avoid was all down to the degree of property development, how it could be controlled, the security of income and the specific country. Investors needed to have their eyes wide open when investing in developing economies. If one has the stomach and the requisite timeline, then there were opportunities on a selective basis as outlined above.
DR. K. A. SIERACKI
a presentation by Dr Tony McGough, Global Head of Forecasting DTZ.
Tony did well in flying around the world in twelve minutes analysing real estate investment opportunities. His talk had several dimensions -– risk and length of investment. Tony felt that investors could handle the big roller coaster rides over the medium term (ten years). However, if one was just looking at the short term (up to five years), then one should go for stability and minimal risk.
For the Asia Pacific region, China fits the roller coaster ride for the medium term whereas Australia was more stable and for the short term. The developing economies were the ones that would see booms and busts in the development cycle as well as suffering from political risk. China has good potential long term growth. The second tier Chinese cities with circa 40m people should be on the radar screen. Retail rents here did not fall.
Continental Europe was a tale of two halves -– the East and the West. Central and Eastern Europe were badly hit in the downturn as secondary property prices were very expensive. For the medium term, places such as Prague and Warsaw were identified as opportunities, not Bulgaria or the Ukraine. Go west if one was looking for stability and if one did not have the stomach for risk.
The UK has recovered with prime product leading the charge. For IPD, all commercial property has seen a 100bps fall in yields, but in reality secondary property was not worth this adjustment. One needed to be mindful that the UK would have a slow economic recovery and would have to pay off all that government debt.
In the Americas, US rents have generally declined, with New York City as the exception. One needed to be mindful about the general lack of planning controls in the US and its impact on supply. South American governments needed to become less corrupt if more property investment was to happen there.
Overlaying all of this was the panorama of world global cities. They were definitely in a class of their own. Tony felt that the historical reason of why they existed was a good enough reason for their continued prosperity. London City rents were much closer aligned to world GDP than domestic UK GDP. London, Paris New York City, Frankfurt (which apparently keeps trying), Hong Kong and Tokyo were the main global cities. Shanghai was an upstart. Dubai was a city which forced itself on you for global attention, but had not really made the grade.
Where to invest and where to avoid was all down to the degree of property development, how it could be controlled, the security of income and the specific country. Investors needed to have their eyes wide open when investing in developing economies. If one has the stomach and the requisite timeline, then there were opportunities on a selective basis as outlined above.
DR. K. A. SIERACKI
Monday, December 14, 2009
The Spanish Property Market
'The Spanish Property Market – is the fiesta over for the time being?'
Imma Vall, Associate at Property Market Analysis (PMA), has been analysing the Spanish Property market for the past 5 years, and she demonstrated to us in her talk at our lunch on 10th December 2009 her mastery of the subject, giving us her ideas with flair and humour – but it was a bit like being a cheer-leader at a wake!
Spain has suffered more than most in the current recession, with unemployment approaching 19%, economy decline of 3.8% and running, and profound Budget deficits – it almost made an Englishman feel he was well off and should be thanking Alastair Darling. Imma had no doubt, therefore, that the fiesta was indeed over; it was now the time of the hangover which she could see lasting for 2 years at least. Addressing commercial property, there was an over-supply of offices and retail, with many prestigious schemes being mothballed whilst part-built – ghosts that may haunt the Spanish skyline for some time to come. For built-out vacant office space, lettings were a triumph for the letting agent, and of only partial value to the landlord as rent levels have tumbled c 20% and rent-free periods of 1 year in a 5 year lease were not uncommon. In retail, the larger Spanish companies were surviving, but their life-support comprised closure of units in Spain and reliance on foreign units; it was not uncommon for new shopping centres to open with 40% occupancy – 60% would be a dream. Consequently developers are in trouble across the board.
Against this depressing back drop at the 'real' level, there was a surprisingly ebullient investment market for anything of quality -- prime site, good tenant. Beyond that, darkness, but, for the farsighted the outline of genuine value. However, if you need finance, no way! Bank lending is effectively unavailable; even for a good client and a bank wishing to help, there is no possibility of syndication, and thus no deal. To those at the lunch, this was something of a surprise, as our impression was that Spanish Banks had come out quite well from the 'credit crunch'.
Looking to the future, Imma reminded us that the Spanish property market has always been more volatile than most. In large part this has arisen from the economic dominance of construction companies – give them money they will build, without much apparent consciousness of market cycles. In answer to a question, she thought that this might continue to be true in the future – a cautionary thought for a putative investor. However, for commercial space, particularly offices, Spain now had a considerable price advantage; present value levels, anyway in good locations, should, in principle, only go in one direction, but the date of going was not in next year’s diary. Nevertheless, we should not forget that Spain is often the point-of-entry of choice for the burgeoning South America economies.
Several questioners raised the problems of the Spanish Residential market. This, Imma agreed, is in greater gloom than commercial property, with a profusion of its own mothballed ghosts. There was little chance of the Government acting as ‘white knight’ because politicians have chosen to demonise residential developers. A 4-year recovery profile seemed the most optimistic possible.
Not the happiest of lunches, then, but in the best of company, and with a talented guide to the body under dissection – No! Not as bad as that! It will come back to life. Really! And perhaps the best time to buy a corpse is just before it revives.
Michael Mallinson
Imma Vall, Associate at Property Market Analysis (PMA), has been analysing the Spanish Property market for the past 5 years, and she demonstrated to us in her talk at our lunch on 10th December 2009 her mastery of the subject, giving us her ideas with flair and humour – but it was a bit like being a cheer-leader at a wake!
Spain has suffered more than most in the current recession, with unemployment approaching 19%, economy decline of 3.8% and running, and profound Budget deficits – it almost made an Englishman feel he was well off and should be thanking Alastair Darling. Imma had no doubt, therefore, that the fiesta was indeed over; it was now the time of the hangover which she could see lasting for 2 years at least. Addressing commercial property, there was an over-supply of offices and retail, with many prestigious schemes being mothballed whilst part-built – ghosts that may haunt the Spanish skyline for some time to come. For built-out vacant office space, lettings were a triumph for the letting agent, and of only partial value to the landlord as rent levels have tumbled c 20% and rent-free periods of 1 year in a 5 year lease were not uncommon. In retail, the larger Spanish companies were surviving, but their life-support comprised closure of units in Spain and reliance on foreign units; it was not uncommon for new shopping centres to open with 40% occupancy – 60% would be a dream. Consequently developers are in trouble across the board.
Against this depressing back drop at the 'real' level, there was a surprisingly ebullient investment market for anything of quality -- prime site, good tenant. Beyond that, darkness, but, for the farsighted the outline of genuine value. However, if you need finance, no way! Bank lending is effectively unavailable; even for a good client and a bank wishing to help, there is no possibility of syndication, and thus no deal. To those at the lunch, this was something of a surprise, as our impression was that Spanish Banks had come out quite well from the 'credit crunch'.
Looking to the future, Imma reminded us that the Spanish property market has always been more volatile than most. In large part this has arisen from the economic dominance of construction companies – give them money they will build, without much apparent consciousness of market cycles. In answer to a question, she thought that this might continue to be true in the future – a cautionary thought for a putative investor. However, for commercial space, particularly offices, Spain now had a considerable price advantage; present value levels, anyway in good locations, should, in principle, only go in one direction, but the date of going was not in next year’s diary. Nevertheless, we should not forget that Spain is often the point-of-entry of choice for the burgeoning South America economies.
Several questioners raised the problems of the Spanish Residential market. This, Imma agreed, is in greater gloom than commercial property, with a profusion of its own mothballed ghosts. There was little chance of the Government acting as ‘white knight’ because politicians have chosen to demonise residential developers. A 4-year recovery profile seemed the most optimistic possible.
Not the happiest of lunches, then, but in the best of company, and with a talented guide to the body under dissection – No! Not as bad as that! It will come back to life. Really! And perhaps the best time to buy a corpse is just before it revives.
Michael Mallinson
Monday, November 16, 2009
Visions of the Future
The Global Property Market in 2030 by Dr Angus McIntosh, Partner & Head of Research King Sturge – International Property Consultants.
Zion
United States of Asia: Mass urbanisation; Social unrest; Piracy of things and intellectual property is rife; only Singapore and Hong Kong lead the sustainable agenda
NORTH AMERICA SCENARIOS
It is one of the great human delusions that we should like to know what the future holds. Thus it was that suitably delusional Members and their entirely sane guests attended our Lunch on 29th October to hear Dr McIntosh lift the curtain on what is in store for us.
Fortunately, perhaps, Angus was wise enough to tease us only with scenarios. He explained that he is participating in a project sponsored by the RICS Foundation that addresses the future under the title of his talk. The project is not yet completed, and he felt unwilling to reveal the precise level of the IPD Property Index on 1st April 2030; rather, he thought it better to discuss some of the key issues that might drive that figure. He identified six such drivers:
Demographics. During the period under consideration, the global population would continue to grow, perhaps nearing a peak of 10 billion. The numbers alone will put enormous strains on the Earth’s resources, particularly of food and, as one questioner made clear, water. The rate of growth would, in itself, be significant, but so also would its distribution; would the areas of high growth also produce the ideas that would help them manage the strains they would feel; there are grounds for pessimism.
Economics. Would governments follow, and would their populations allow them to follow, policies that would reduce economic inequalities? If they did not, there would be increasing risk that excluded peoples would, under the pressures they would experience, revert to various forms of obscurantism, not least religious extremism.
Governance. The principles of governance followed would be a decisive factor. For all its weaknesses, the European Union is, conceptually, highly enlightened, seeking to follow a broadly inclusive ethos; compare that with the ‘gated’ and protectionist ethos in most parts of the World.
Environment & ecology. We are all only too aware of Climate Change. Whether or not governments can bring the issue under control, changes will occur that will be highly disruptive to current patterns of, particularly agriculture. These may or may not increase the tendency towards food shortages, but they will certainly complicate solutions. Under this head, Angus included the effects of pandemics in congested and mobile populations.
Technology. Potentially more positive, the pace of technological change continues to accelerate; by 2030 we shall have at our fingertips technologies that we do not presently dream of – he particularly drew out bio-technology and drugs. Will these inventions be divisive or inclusive?
Information. Information is growing very rapidly; because of the internet, its distribution can be seen as ‘flat’. It can be accessed by anyone from anywhere.
Using these ideas, Angus sketched three scenarios for each of Europe, Asia, America
EUROPEAN SCENARIOS
Bastion: Depression; Oil and resource collapse, social inequality, rising violence – cities like fortresses.
Web: The triumph of global corporations, economic success, but sustainability only a buzz word – urban sprawl, housing inequality, gated communities
ASIAN SCENARIOS
Orient Express: China dominates; Australia and New Zealand sustainable expert; India
Broken promises: Increasing complex social problems in China and India , only Australia and New Zealand
Happy in the dark: Major worry over energy shortages and its repercussions on the whole of American society
Oil & Vinegar: There is a retreat behind borders and buildings. Social inequality & migration a major problem - political tension is rife,
Micro fanaticism: At a local level sustainable leadership dominates society and drives national governments.
GLOBAL SCENARIOS
Free trade and technology
VERSUS
Unrest and unequal societies, hence social tension - perhaps with religious fundamentalism
VERSUS
Knowledge, social values and a high quality of life. A sustainable future.
Because of the profundity of the issues raised by Angus, I have allowed my notes to be more extensive than usual. Whilst many of the points would have been in our consciousness already, to hear them drawn together so coherently was a privilege for us, and gave them perspective.
Michael Mallinson
Friday, September 11, 2009
Investing in the Indian RE Maket
Still too spicy for some?
A presentation by Sharad Gohil, Managing Director of Arpan Real Estate Limited (
The main summary of the talk confirmed that Indian property market is not for an unseasoned investor as local partnerships and legal structures need to be watertight to protect an institution’s interests. Too spicy for some – probably!
General Overall Economic
Sharad confirmed that prior to previous thought; no market was immune to a global crisis that we have just been through. Earlier optimism that
Sharad mentioned the following key statistics:
- Main Indian stock exchange (SENSEX) down 40% from its Jan 09 high
- $6bn of foreign funds had flowed out of
- Indian
- Inflation was negative for the year to the end of June 2009, the first time in 30 odd years.
- 2009 onwards has seen more optimism and the Indian government has seized on this in planning $559 bn of infrastructure upgrades over the next five years of which 70% would be state funded, and the other 30% to be funded by the private sector. I would question whether this will all happen.
2. Due Diligence
3. Knowing your Partner
Sharad discussed each of these in detail.
1. Capital Structure
Joint ventures (JVs) tend to involve a local partner who is already the landowner. It is usually only the land which constitutes his equity contribution to the JV. The historic owner can make huge profits by just entering into the JV from day 1. Local partners are unwilling to dilute their stake or provide more equity in the downturn. In the boom times, pre-sales of residential were the general model. As this dried up and Indians began to lose their jobs, the residential market crashed overnight. Local developers have been adverse to cut prices/rents. The reason is a BIG EGO! They cannot be seen to be the first to slash prices as it is perceived to have a knock on effect on their other developments and their reputation.
A JV should be structured so that both parties put in a mix of capital and land to ensure that the building completes on-time as well as interests being aligned in the upcoming sales period.
2. Due Diligence
Indian Bureaucracy is a minefield. Legal due diligence can be long and protracted and proving title can be very difficult. Much of land has fragmented ownership as well as charges which banks use as collateral. A relic of the feudal system and numerous family disputes!
Foreign investors need a good local lawyer to unravel all the ownerships in an effort to obtain a clean title. The key pitfalls are:
- Floor Space Index (FSI) – This is a local law different by region, which mandates development densities. It must be checked in advance in case your 200,000 sq ft office block you were planning to build can only be a 50,000 sq ft office on the foot print of the land you have just purchased!
- Zoning – This is essentially planning, but many Zones have complex hidden covenants – eg timing and land restrictions that your lawyers need to be aware as part of due diligence.
- Arbitration – It is essential to have an arbitration clause in place with all contracts to settle disputes. It must be in a foreign jurisdiction such as
- Title – It must be held at the local registrar.
Knowing your partner is the key to a successful development and investment. The local partner should have a better grasp of planning issues, neighbouring property disputes and local government liaison (involving brown paper envelopes?)
The local partner is usually the most powerful one. Investors should be under no illusion that they are the lead partner! There is the need to agree ‘tagalong’ and ‘dragalong’ rights so partners can exit together. The local partner should be a large scale developer with a good regional or national track record to greatly minimise the risk.
There is a definite need to further educate Indian partners further about Western business and institutional investment needs such as risk return profiles. Foreign investors were merely perceived to be expensive sources of debt!
Conclusion
There was a definite Indian property bubble (as with the rest of the world) and the weight of money chasing potential 35% pa plus returns added to this.
The Indian property investment market is a difficult market to understand and crack. However, returns are there for investors who want to be educated in dealing locally and are prepared to do proper due diligence and not just rush into deploying capital quickly with another eye looking at launching their next fund!
Property values are likely to still continue to ease across the board for at least another six months. When values improve, it will be on the capital market side first. Occupier demand will continue to remain weak for some time except for certain residential sectors (mass urban/suburban low to middle income housing).
There are good long term prospects for
Shailendra Shah MRICS
Investment Fund Manager
Tuesday, June 23, 2009
Please, Mr Banker, can I have some more?!
Mr. Jonathan Rhodes, Director & Head of Valuation of Capital Markets at G L Hearn – Property Consultants -- gave an outstanding presentation to the LAI London Chapter, entitled: "Lending to commercial property -- 'Please, Mr. Banker, can I have some more?!'"
If I had been Jonathan, I might have said ‘no!’, and sat down to enjoy the rest of our lunch on 18th June. That was, after all, the essence of his message. However, he was also a bit like Elijah (well, despite my age, I don’t actually know what Elijah looked like) and, in an excellent and richly fact-filled talk he chose also to offer some prospects ‘no bigger than a man’s hand’.
The recent history of bank lending is a cautionary tale of over-optimism, lax control and cavalier attitudes to securitised risk. Whilst, in your scribe’s view, this will all have been forgotten by 2019, Jonathan traced out the present emaciated and over-stretched state of the banks; as he noted, Lloyds Banking Group (vice Halifax Bank of Scotland) and Royal Bank of Scotland are, in effect, the largest landlords in the UK. With two thirds of present debt expiring within 4 years, and with the 35-40% fall in values decimating LTV ratios the banks have been forced to take a cautious and phased approach to retrieving their exposure; this has frustrated the hoard of circling vulture funds. The banks’ position has been slightly relieved by low base rates, which has made re-financing a little more reachable. They are also helped by a strengthening investment market for the ‘best’ properties – the Germans being particularly active, but a wider range of Funds are starting to see good property as a ‘least bad’ haven. This has encouraged debt-equity swaps with a 3 to 5 year work-out.
Nevertheless, banks generally are seeking to de-leverage and recapitalise. They are also running scared about the riskiness of their clients and further slippage in values. As a result – ‘no!’ There are only about 10 possible sources of lending, and these are all highly selective and risk-averse: only those with the right property and who can show themselves to be the right borrower with a good track record need apply. If you get over this hurdle, you will get no more than 65% LTV and have to pay 200-250 basis points margin. Any property that can be seen as secondary, carrying undue risk or involving residential is poisoned from the word ‘go’.
Now for the cloud – a good thing because it promises rain! Wholesale money markets are starting to unblock, which will relieve the liquidity of banks’ stock. i.e. money. As the property market improves, the fundamentals of borrowing/lending will look more interesting. Perversely, this may be particularly so in the secondary market once fear of small business insolvencies recedes. Maybe soft rain will start to fall in 2010 at the top end and 2011 at the secondary. However, terms will remain tight, with hedging fees against inflation staying high because of governmental indebtedness; for a long time, banks will look for better terms for less risk. This mildly optimistic outlook carries one underlying assumption: that politically driven calls for ‘better’ regulation cause no material damage to the banking structure.
You will recall that the worshippers of Baal came to a sticky – perhaps investors in property - and banks, need to learn from their example and convert.
Michael Mallinson,
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