New data shows that UK property values have fallen, but lenders are keeping their cool during the summer slowdown
Summers don’t tend to last long in the UK. So when the sun comes out, the pavements outside London’s pubs fill up with thirsty office workers come early evening. At least a few real estate lenders have been among them during the last couple of weeks.
“By 5pm, people are heading to the pub,” one senior banker told me this week. “And why not? No one is answering the phone. It’s the best place to find out what’s going on.”
The serious point that the banker was making is that information is at a premium in UK real estate at the moment. With the traditional summer slowdown coming soon after the shock of the EU referendum, it is difficult, if not impossible, to gauge the true state of the market.
Although there is a definite lull, many insist that business has not ground to a halt and point to several reasons why lending will in fact begin to pick up. Financings have continued to close, many of which were agreed in principle before the June referendum, they say. There are also claims that some lenders are busy issuing terms to visiting foreign investors, which are scoping the London market with a view to taking advantage of the weakened pound.
The great unknown hanging over the market this summer is the extent to which commercial property values will fall as a result of the Brexit vote. But the feeling among lenders is that, come September, enough investors will decide that they cannot simply sit on their hands all year. Those investors will seek a discount, but the hope is that there will be enough demand to stop capital values from plummeting.
Data published this week provided some measure of the market. The latest monthly IPD index, the UK’s widely-tracked commercial property databank, recorded a 2.8 percent drop in capital values during July, the greatest fall seen since March 2009. Central London offices were worst affected, with a 3.6 percent decline in values.
The total return across the index fell from 0.2 percent in June to minus 2.4 percent in July. It didn’t make for happy reading.
“The July [capital value] decline, coupled with the decline of 0.3 percent in June, indicates that the market is formally in recession post-Brexit referendum as weak investor sentiment hits yield pricing,” commented Colm Lauder, vice president of IPD owner MSCI.
IPD figures are one thing, but financiers point to the few prime London deals that have been done in recent weeks as evidence that values are holding up. In the few central London office sales which were sparked by open-ended funds being forced to liquidate assets, observers say investor demand was strong and the discounts to book value were shallower than predicted.
One lender with a clearing bank said that he expects September valuations to reveal that capital values have fallen by only a “few percentage points”, certainly less than 10 percent, from before the summer. Another lender argued that the drop-off in London property values will vary wildly from asset to asset; offices occupied by tenants with an uncertain UK future after Brexit will fall significantly in value, while properties in the thriving student accommodation sector might buck the trend.
Lenders also point out that core London has looked overvalued for some time now, and that lending has continued on a more cautious basis, with senior loan-to-values dialled back to the 50-60 percent range, pricing a little higher and covenants tighter.
A second piece of research published this week might provide some additional summer cheer. BNP Paribas Real Estate reported that Central London office occupational take-up reached 888,551 sq ft in July, the third-highest monthly volume of 2016 and only 11 percent below the monthly average of 1 million sq ft.
An accurate picture of the market will take time to emerge, but lenders seem to be keeping their cool, confident that business will pick up. In the meantime, it’s probably worth having a pint while the sunshine lasts.