Commercial property values declined for the second consecutive quarter during the first three months of 2012 (by -0.7%), marking the onset of a double dip and a return to negative growth after the deepest decline of property values on record.
Values remain 31% below 2007 levels, which will pile further pressure on those looking to refinance loans now in negative equity. Nearly £300 billion of debt is secured against UK commercial property and of this, £114 billion cannot be re-financed on current terms, according to the influential 2011 De Montfort Survey of bank lending. It adds that over 40% of loans are at loan to value (LTV) of 80% or more.
The situation is twice as severe as in the previous property downturn. After five years, the same time period it has been in the current cycle, values had recovered to within 15 per cent of pre-crash levels by June 1993.
The IPD UK Quarterly Property Index shows that outside of central London, where strong international investor competition has protected values, the situation is bleak. Some regions and sectors have barely seen any recovery.
Under performing sectors
North West Offices – 46.3% from 2007 peak, 5.7% recovery Welsh industrials – 46.3% from 2007 peak, 6.5% recovery
South West Offices – 45.2% from 2007 peak, 6.6% recovery
Performing sectors (within London)
West End retail – 3.7% above 2007 peak
West End offices – 15.8% from 2007 peak, 43.1% recovery
City offices – 26.5% from 2007 peak, 35.0% recovery
Performing sectors (outside London)
Scottish Industrials – 27.4% from 2007 peak, 8.7% recovery
South East Retail – 29.2% from 2007 peak, 25.8% recovery
Malcolm Frodsham, Director of Research at IPD said “The UK has fallen back into a technical recession largely due to a lack of business demand and a construction slump. As property values continue to decline, investors are unlikely to want to develop, which will lead to further pain.
“Regulators need to avoid any actions that will amplify the cycle further. Increasing bank and insurance company capital requirements at this point in the cycle for example will only further depress prices, which in turn creates adverse outcomes for other institutions holding real estate assets and further contraction in economic activity in the sector.”
The division between London and the rest of the UK means that, when London is taken out of the dataset, values have now been declining for three consecutive quarters, by a cumulative total of -1.8%.
A similar situation can be seen in the division between prime and secondary asset values. Secondary properties, which make up considerable portions of bad debt loan books, have seen values fall for the last six consecutive quarters, by -6.1%, as investors are still unwilling to enter the sector due to wider economic uncertainty, and an inability to anchor secure tenants. The gap between prime and secondary values is now at its greatest since the early 1990’s.
This has significant implications for lenders. Hypothetically, an 80% LTV loan signed on a secondary property in 2007 is now at a ratio of 143%.
Source: Investment Property Databank (IPD)