Opportunities ahead With sellers reluctant to sell and banks unwilling to lend, buyers can but wait until values hit bottom. Nadia Elghamry reports
What is the definition of an optimist? A banker who irons five shirts on a Sunday. The joke may make investment agents grimace rather than snigger, as it sums up all their present woes. Money, or lack of it, is causing investment markets to slow to a crawl, and that is as relevant in Wales as it is on Wall Street.
Banks still do not trust each other. Although LIBOR is moderating, this is happening slowly. With stock markets still recording falls reminiscent of the 1940s, the malaise looks set to last.
As one prominent Welsh investor says: “A few months ago, the banks were telling us they were lending to people they had relationships with – but they weren’t really. It’s got worse now. Now they tell us they simply aren’t lending.”
Peter Graham, managing director at Cardiff-based agent Stephenson & Alexander, says that some investors who are keen to progress with a transaction are making an offer and finding they cannot go ahead with it.
“The banks won’t let them pay under a 7.5% yield as they are very cautious. They might let you go to 7%, but they will not support you on anything below that,” he says. He believes it will probably be the summer before the financial crisis ends.
It seems obvious to say this is holding back the market but, while rhetoric has been boosting sentiment so far, reality is now beginning to bite. Banks are refusing to lend, sellers are reluctant to drop prices and those with cash are waiting for prices to plummet further.
Graham says that research into investor sentiment conducted by the firm, published exclusively in EG, shows that many are thinking of buying early next year. Yet many remain to be convinced of commercial property’s performance compared with other asset classes (see box).
As a result, yields in South Wales are already easing, and stock that would have commanded 5.25-5.5% now achieves 7.5-8.5%.
Graham says: “That is not on account of the underlying commercial property factors, although it has to be said that values were overstating the true worth of property investments.”
For example, “absolute top prime” retail stock on Queen Street in Cardiff is now achieving 5.25%, from a peak of 4%. “We’ve never heard of yields at that level,” says Graham.
That is providing an opportunity for some. Ross Griffin, head of investment at Savills’ Cardiff office, claims there are deals out there to be done. Savills is a new face in the Welsh capital, and Griffin helped to open the office in March this year.
Many mused that it was utter madness to open what will be a purely investment operation until the start of next year in the eye of the credit crunch storm. “It is not easy out there and there is no point lying about it,” says Griffin, but adds that, having come from other local practices, “we know the market well enough”.
He says the practice has recently got four properties under offer, ranging from £3.5m to £12m. He points to one property on Queen Street. “We’ve bought it at 6.5%. Above it, there are some offices, and we’ve effectively got them for free. When we let them, we’ll be getting the client 7.5% on those.”
Griffin believes that there are further opportunities on the way “There’s a lag in where the quarterly valuations are at, and I don’t think they’ve caught up with the market. The pension funds especially are finding it difficult to part from the value they’ve got in their books, and it will take the December valuations for things to start moving.”
Overseas trusts
But where are the buyers? Cash-rich overseas investors regard Wales as attractive, says Graham, but as yet they appear reticent to commit. The pension funds are not buying, despite holding a lot of money, and only a handful of overseas trusts and wealthy private investors have been able to push sellers on yield.
Richard Hayward, chief executive of Hawtin, holds a portfolio of almost £50m in Wales, including the high-profile Millennium Plaza in Cardiff.
Hayward says that Hawtin has £27.5m to commit, but cautions: “I have to be absolutely certain that, if I buy something for £1 today, it is not worth 50p tomorrow. It’s not like most people think. You don’t have to spend money and guess if the market is at the bottom. You can spend it when it’s just on the way up. That way, you nearly hit the bottom and it’s safer.”
He adds: “We would love to buy in Wales, but we think it will be a good deal cheaper next year if businesses stagnate.”
Hayward says that the market has been changing in the past few weeks. “We are seeing industrial properties creeping onto the market at 10%,” he says. “That has got to represent good value, and it is the sort of kit we would not have been able to buy at 6% in a good market. There are a number of vacant properties where occupiers have gone into receivership and left the banks in trouble. Properties that in the boom would have been £6m are now £3m.”
Industrial tenant demand is reasonably strong, he says. He believes that rents will go up over the next three to six months, rising from £2 per sq ft to £2.50 per sq ft.
But Hayward adds that this is not true across the board, and that landlords are having to be realistic about deals. “By the first quarter, we’ll see more people paying monthly, and the banks are either not in the mood or simply can’t help. Landlords have to look at costs with rates and insurance, and it is always best to have a tenant and we’ll look at monthly rents.”
Hayward says that listed property companies are suffering. Hawtin announced a pretax loss of £5.53m in the year ended December 2007, compared with an albeit modest profit of £399,000 in the previous year.
He says this was caused by massive net asset writedowns, and admits that the company’s share price is “about as bad as it can get”. Hayward adds, however, that the feedback from shareholders is that they are not too worried as “there is pretty much only one way it can go now”.
He tips Q3 or Q4 2010 for a recovery. Development may pick up before this to deliver the newer and safer product that buyers will begin to demand. But what if it doesn’t?
“We’ll start talking to the equity people,” says Hayward. “There is a lot of foreign money out there. We’ve never used them before because we’ve never had to but, if the banks are not doing deals, we’ll find alternative funding and start talking to the Qataris, Russians and Chinese.”
For the time being, developers are battening down the hatches. It seems that Wales, like many other UK regions, is set for a period of stagnation as buyers sit on the fence awaiting further falls and sellers sit it out hoping for an improvement.
How do buyers feel?
Cardiff-based agent Stephenson & Alexander asked 100 property players across the UK how they felt about investment. The findings, exclusive to EG, are shown below
• Compared with 2005, the average maximum lot size is now up from £13.89m to £20m, posing problems for the Welsh market, which tends to have smaller lot sizes
• The most popular lot size for the Welsh and M4 locations is £2m-£20m per property purchase, with a third of respondents now seeking investments of £2.5m or less
• Average lowest net initial yield was 6.16-6.36% in 2005. Now it is 6.5-7%
• Those buying are concentrating investments mainly in Cardiff
• More than 50% of UK investors wish to acquire now, whilea third wish to acquire in the second half of 2009
• Interest is spread across sectors and equally between South Wales, the M4 and central London
• Typical yields sought are: 7.5-8% for offices and 6.7-.5% for unit shopping, despite prime still being at or around 5%. Retail warehousing is popular at yields of 6.75-7.5%, as is industrial generally at 8-9% yields.
• Most investors have a debt-to- property value ratio of 60-70%
• Short leases are out, with many investors seeking a minimum return requirement as wide as6.5-9%, and longer leases of 14-15 years and more
