Recent evidence suggests banks in the UK are already offloading property, reports Jane Roberts
Some 43% of stock now on sale in the central London market is being sold either by banks, because the deals are distressed, or by leveraged owners, who are being encouraged to sell by their lenders, often because of imminent loan maturities.
These figures, from central London specialist Gresham Down Capital Partners, also show that last year, 24% of all central London deals by number and 30.5% by value were distressed, or were completed by borrowers encouraged or forced to sell the assets by their banks.
According to DTZ, it is a similar story for shopping centres. “In the retail investment market, shopping centres are the most toxic sub-sector because of their leverage,” says director Mark Williams. “Last year, 25% of the £2.9bn of sales were encouraged by the banks. But if you take out the £870m prime Westfield deal, which arguably distorts the picture, it was more like 40-45% of the 44 shopping centres sold.”
This picture hardly suggest that banks are sitting on their hands in the UK. It also chimes with investors’ perception that the volume of opportunities to buy as a result of bank-related sales was beginning to increase in the latter part of 2010 – and not just in the UK.
The Emerging Trends in Real Estate Europe report from the Urban Land Institute and PricewaterhouseCoopers underlines a strengthening feeling among investors that this trend will continue and have a bigger impact on capital flows in the next 12-24 months.
Banks become proactive
According to Hans Vrensen, head of global research at DTZ: “Things have changed. The whole debt issue is still around, but banks are more proactive and aggressive with borrowers, as they should be. They have bigger teams, while Ireland’s National Asset Management Agency (NAMA) is also becoming proactive. “It is a good thing and a massive opportunity for investors – they will be keen for banks to squeeze out old equity and sell buildings through restructuring loans.”
So far, the increase has not had an impact on prime UK property values in either the retail or office markets and as long as the stream of overseas investors who bought 60% of London stock last year continues to favour the UK, prime values seem unlikely to suffer. However, the definition of prime remains tight and pricing may be under pressure in other areas.
Gresham Down partner Stephen Down says: “Of the £5.5bn of property sold in the City last year, a lot was bank sales – and there will be more. And we all know about the CMBS time bomb. There have got to be measured disposals, but I think it is acceler-ating and as the banks get profitable, they can take losses.
“We believe yields will move out and prices will fall, with the exception of prime, which will hold its value.” DTZ’s Williams adds: “The banks were major players in the retail market in 2010, either openly, through receiverships such as the Sapphire portfolio, or forcing sales behind the scenes, as in the case of Plymouth,” (see table).
“We expect more influence from the banks as they continue to evaluate their loan books and encourage sales. With many loans due this year, a raft of secondary schemes will come to the market, as borrowers fail to secure new funding.”
Irish investors were significant sellers in central London last year and NAMA has just started to put assets on the market; one example is 1 King William Street, Rothschild’s headquarters, which was bought by private investors four years ago.
Not all sales by Irish investors are distressed: late last year a consortium advised by Kevin Warren sold Goldman Sachs’ River Court building on Fleet Street to Joseph Lau of Chinese Estates. The buyer paid £40m and assumed £240m of securitised debt. The investors had refinanced in 2006 and taken out their original capital.
Shopping centre sales imminent
There were no shopping centre sales last year by Irish investors, but agents believe there are a string of centres, some very prime, which may come onto the market soon, including an interest in the Whitgift Centre in Croydon.
Other sources of sales this year will include German open-ended funds, some of which – including Degi and Union – started selective selling last year (see London sales table below). Michael Haddock, director of EMEA research at CB Richard Ellis, says: “I would expect them to be sellers, because some need to liquidate completely, while others need to improve their liquidity. Even those in good shape are doing some downsizing to protect future liquidity.”
With yields unlikely to compress further, investors that were able to buy in 2008/09 may take profits, while institutions may take advantage of current pricing to rebalance or restructure their portfolios.