Commercial property markets are rebounding as investors seek out higher-yielding assets
But there’s a limit to how far the market can recover while bank lending remains
tight and vacancy rates high. The recovery will be uneven, and prone to setback.
It’s easy to see why bankers and estate agents are talking about a UK commercial
property revival. The recent sale of HSBC’s head office and planned
disposal of half the portfolio owned by Simon Halabi, the Syrian billionaire,
shows investors are buying again. Meanwhile, banks are willing to lend.
Commercial property indexes are showing a 3.2 percent return since August,
while the derivatives market is predicting a flat return for the year.
Yet this revival has less to do with the property market itself than
record low interest rates, which have prompted investors to seek
out higher-yielding assets. This has fuelled demand for prime
properties, such as city offices with long-term leases negotiated
before the crisis. Elsewhere, however, the picture is less rosy.
Even as the economy recovers, rents are still falling: they fell 0.5 percent
in October. Vacancy rates are still at a record high, according to
Investment Property Databank (IPD).
The improvement in funding markets is also patchy.
Many banks are still reluctant to make large loans,
and they will rarely extend credit for more than 60 percent
of a property’s value. Getting loans for weaker properties,
or those with shorter lease terms, is tough.
Meanwhile, the market for commercial mortgage-backed
securities remains broken. This means banks can’t free up
capital committed to the property sector by repackaging loans.
Not all buyers need to borrow — South Korea’s National Pension
Service bought HSBC’s headquarters in London without any debt.
But the constrained bank market means not all overleveraged
borrowers will be able to refinance their loans as they mature.
That means more defaults and distressed asset sales,
which will weigh on prices.
These inherent weaknesses leave the property recovery
looking uneven and vulnerable to a double-dip.
As long as interest rates stay low, cash-rich investors
will push up prices for high-quality properties with locked-in
long-term leases. Lower-quality assets will continue to struggle.
During the last property downturn in the 1990s, prices bounced
back from the trough for a year until the harsh reality of falling
rents sunk in. The result was that the market drifted sideways
and values fell again, eroding returns. It’s too early to
bet against history repeating itself.
But there’s a limit to how far the market can recover while bank lending remains
tight and vacancy rates high. The recovery will be uneven, and prone to setback.
It’s easy to see why bankers and estate agents are talking about a UK commercial
property revival. The recent sale of HSBC’s head office and planned
disposal of half the portfolio owned by Simon Halabi, the Syrian billionaire,
shows investors are buying again. Meanwhile, banks are willing to lend.
Commercial property indexes are showing a 3.2 percent return since August,
while the derivatives market is predicting a flat return for the year.
Yet this revival has less to do with the property market itself than
record low interest rates, which have prompted investors to seek
out higher-yielding assets. This has fuelled demand for prime
properties, such as city offices with long-term leases negotiated
before the crisis. Elsewhere, however, the picture is less rosy.
Even as the economy recovers, rents are still falling: they fell 0.5 percent
in October. Vacancy rates are still at a record high, according to
Investment Property Databank (IPD).
The improvement in funding markets is also patchy.
Many banks are still reluctant to make large loans,
and they will rarely extend credit for more than 60 percent
of a property’s value. Getting loans for weaker properties,
or those with shorter lease terms, is tough.
Meanwhile, the market for commercial mortgage-backed
securities remains broken. This means banks can’t free up
capital committed to the property sector by repackaging loans.
Not all buyers need to borrow — South Korea’s National Pension
Service bought HSBC’s headquarters in London without any debt.
But the constrained bank market means not all overleveraged
borrowers will be able to refinance their loans as they mature.
That means more defaults and distressed asset sales,
which will weigh on prices.
These inherent weaknesses leave the property recovery
looking uneven and vulnerable to a double-dip.
As long as interest rates stay low, cash-rich investors
will push up prices for high-quality properties with locked-in
long-term leases. Lower-quality assets will continue to struggle.
During the last property downturn in the 1990s, prices bounced
back from the trough for a year until the harsh reality of falling
rents sunk in. The result was that the market drifted sideways
and values fell again, eroding returns. It’s too early to
bet against history repeating itself.
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