EG asked key players – from agents, developers, fund managers, administrators and the private investor community – to share their views on 2010 (pp39-42). The road is looking clearer, but they predict plenty of twists and turns yet. The results of our online survey also suggest caution (p43)
With PricewaterhouseCoopers unravelling a growing number of failed businesses, EG asked partner Barry Gilbertson what will happen in 2010
1. Do you expect banks to take more assets back from borrowers?
2. Do you expect property business failures to rise, fall or stay the same?
3. How will 2010 differ from 2009 for the property industry?
ADMINISTRATOR
PriceWaterhouseCoopers
Barry Gilbertson, Partner
1 There will be more foreclosures, as banks take control over the assets of defaulting borrowers. In order to crystallise their positions, and move on, the banks may be persuaded to sell the assets, even though the extra supply may depress values further, causing even more loan-to-value defaults. Inevitably, unless the banks also increase the availability of debt, the purchasers will be bidders who are cash-rich, which usually leads to lower prices.
2 Until it is clear whether we’re in a market-pricing bubble (and that bubble bursts) or that the market is set for growth, the current market and economic uncertainty will cause more business failures. There are no economic fundamentals driving the current growth in capital values and, perversely, rents are still falling in many sectors and locations.
There are vast swathes of mid-range and secondary properties where tenants remain under financial pressure and, if the tenants fail, landlords will be hit by a double-whammy of rental voids together with the need to pay empty rates, service charges and insurance. These factors will damage cash-flow, and that alone could trigger more business failures.
Further, holding property is becoming a more difficult financial exercise than previously. With a lengthy recovery period before commercial property prices return to pre-recession levels one must factor in the time value of money to the calculation. Accordingly, the prospects for a positive capital value outcome become more remote, leading to administrators, receivers, banks and even property companies considering a switch away from a “hold” strategy to a strategy which brings the properties to the market sooner rather than later.
3 In 2010, we should see a less pessimistic attitude – one bubble may lead to another bubble, and that may lead to a more sustainable recovery, spreading confidence in the lending and borrowing communities.
But there will be more tenant failures, particularly in retail (caused by the economy, consumer concerns about the effects of the election outcome and the growth of internet retailing), which could increase pressures on landlords, causing high streets to have even more vacant units. Over time, those high streets will become more concentrated in their core, with secondary or tertiary property at the edges being converted to other uses, such as housing.
There must be the prospect of a new international banking accord (perhaps Basel III) to determine a revised assessment of risk management for property lending throughout the world’s developed nations. Without that, it is hard to see how the property markets in the UK and internationally can return to their traditional levels of profitability.
AGENTS
We asked a handful of the top agents:
1. Where do you see opportunities for growth (which business areas/markets)?
2. How will 2010 differ from 2009 for the property industry, and where do you expect to see the most significant differences?
DTZ
John Forrester, Head of UK
1 Property management will be a key growth area, along with corporate services, investment and asset management, the public sector, rating, and banking workouts.
2 In 2010, we expect the property sector to benefit from greater fiscal certainty and the reawakening of speculative development.
Jones Lang LaSalle
Andrew Gould, Chief executive of the English business
1 Key growth areas for us will include value recovery and bank workouts. We also intend to really drive our market share in corporate solutions in England.
And there will also be opportunities to handle work for the government and public institutions: whatever colour of government we see, the £175bn budget deficit means the government will have to work its assets.
2 In 2010, there will be less fear and greater optimism – the industry is fed-up with being fed-up. The banks will work through their loan books far more seriously. And there will be increased occupier activity, stimulated by the realisation that options for office relocations are going to get scarcer in a supply-constrained market.
Knight Frank
Alistair Elliott, Head of commercial division
1 As economic growth resumes, we expect to see a gradual but important improvement in leasing activity, especially during the second half of the year.
Other opportunity areas should be investment and asset management, including the very broadest corporate recovery areas. I sense there will be much more activity from spring onwards. Public sector work should also be important. Whatever happens, there will have to be a range of disposals (land and buildings ) and reorganisations.
2 The year ahead should show a marginal but important improvement in leasing activity, and, during the year, there will be greater clarity as to what the future holds for the property market in contrast with this year’s uncertainty. Finally, it has to be said, we WILL be busier!!
Drivers Jonas
Nick Shepherd, Managing partner
1 We see opportunities for growth in investment and development transactions and infrastructure. The financial pressure on local authorities should generate opportunities, as will the rationalisation of the public sector estate.
2 Some firms will drive fees even lower – unsustainably so. We shall not be doing that. We’ll see staff leaving their existing jobs and heading for entrepreneurial and successful environments in both large firms like us and in niche practices.
There will be a further blurring of boundaries between the work done by surveyors, investment banks, fund managers, accountants, quantity surveyors, engineers and project managers.
Cushman & WakefieldBryan Laxton, UK CEO
1 We see opportunities for growth in capital markets, the public sector, lease regearing and asset management.
2 There shouldn’t be further major redundancies but there will still be an overall contraction in the number of people employed by the industry. There will be greater optimism, which will encourage activity, and more sales enforced by banks.
Savills
Mark Ridley, Commercial chairman and chief executive
1 Key growth areas for us include corporate finance, including recoveries and special servicing, as well as consultancy services with a focus on valuation, management, sustainability and housing consultancy.
2 The market will remain challenging, not least because of the looming general election and public sector cuts becoming more savage. We will remain focused on client service, and staff retention and recruitment, with the objective of increasing revenue.
DEVELOPERS AND REGENERATION BODIES
What does 2010 have in store?
London and Continental Railways
Stephen Jordan, Director
The dynamic between landlord and tenant has shifted but there are occupiers who still need to move so we’re achieving a new balance. Unfortunately, I don’t think we’ve got to the bottom of just how much grey space will be left empty, and speculative office development will not return in earnest for 3-5 years.
Speculative residential development is returning. Overall, I’m impressed with how we’ve been able to weather unprecedented conditions.
2010 will be difficult and funding infrastructure will remain challenging but for those who can develop flexible models and be nimble, it will be possible to maintain momentum.
London Thames Gateway Development Corporation
Peter Andrews, Chief executive
A lot of comment on the economy has been on public debt, but in focusing on the growth side of the equation there is the almost chilling recognition that the period up to 2008 may well be considered as a golden era – especially for regeneration Treasury forecasts in the Pre-Budget Report show it will take until 2012 before the UK economy regains its 2008 level of activity.
The challenge for 2010 is how we can deliver regeneration against the backdrop of a smaller economy, low growth and a squeeze on public sector spending. In any event LTGDC’s purpose it to deal with market failure and prepare the right environment that will secure private investment. I am confident that we have the right approach and mindset to meet the challenge.
Lend Lease
Dan Labbad, Chief executive, Europe
The UK market is still in a state of some distress; its recovery will depend, among other things, on credit returning. It is difficult to predict when this will be because the banks are still working through legacy positions and risk aversion will shape the market for the short to medium term. So I would be surprised to see significant credit-funded speculative development in 2010.
Our top priorities will be to work with our partners and clients in all our areas of business, including the Athletes Village, Greenwich Peninsula, Elephant & Castle, across our retail portfolio, our residential platform including Crosby Lend Lease, funds management, as well as our PPP programme across the UK.
Argent
Roger Madelin, Chief Executive
I’m cautiously optimistic about 2010, which I think will be a year of options.
At the £2bn King’s Cross Central project in central London, I’m confident that at least one or two of the organisations we have been in talks with to let space across 10 buildings will make a decision to come to the site.
We are in the fortunate position of not needing debt next year after finalising a £250m investment package in 2009 with our partners and the University of Arts London. But banks are still phoning me up and saying, “Hello, we are very excited about King’s Cross.”
FUND MANAGERS
We asked two of the biggest fund managers:
1. In 2010, how will investment activity compare with Q4 2009?
2. What about values against Q4?
3. What level of occupier demand do you expect?
4. Will it be a year of inflows or outflows?
5. Will you be buying or selling?
Legal & General
Bill Hughes, MD of property
1 2010 is going to be the year when the investment market unlocks in earnest. We will see much higher turnover, reflecting not just the new equity coming in, alongside the investors who have been increasing their exposure throughout the downturn (overseas buyers in particular), but also the sellers who were reluctant to divest at firesale prices and who are now looking to manage down their exposure. Furthermore, the banks will initiate significant deleveraging. Investors should not expect the current imbalance, marked by strong demand and weak supply, to persist undiminished throughout 2010.
2 We predict that there will be some marked ebbs and flows in investor sentiment over the next 12 months, driven in particular by external events, both on the upside and downside, that will fundamentally affect the prevailing economic and financial backdrop. That is likely to reignite a degree of volatility in overall market values, with much greater dispersion between properties (and asset classes/sectors) than has been the case for much of the past two years.
3 We expect a relatively weak GDP recovery compared to previous recessions, marked by soft consumer spending and restricted corporate investment, which implies a tough outlook for 2010. That said, there is likely to be an increasing divergence in the occupier markets by quality of asset. With the development cycle now winding down, there will be emerging shortages of grade A space, and with economic conditions at least stabilising, we expect firms to move to secure high quality space at low rents. For secondary and tertiary property, void rates are likely to remain elevated.
4 A range of investors are continuing to look at the sector, with varying objectives and requirements, which looks likely to lead to net inflows of equity into the sector in 2010. But we live in an uncertain world and one of the lessons of the past few years is that, even when markets are moving positively, managers have to keep a strong focus on maintaining liquidity in the widest sense, be it through allocations to cash, quasi-property (REITs/equities/derivatives) and liquid direct property assets.
5 LGP is likely to be a substantial net investor in 2010, though we will continue to sell assets where we find buyers willing to pay above worth. We, of course, have a number of favoured sectors and, equally, areas that we will avoid. But more broadly, we recognise that there is an opportunity to capitalise on the shifts in sentiment we expect to occur, capturing illiquidity premia and seizing on bouts of risk aversion that will punish fundamentally strong assets with shorter leases or more tenant risk.
Above all, stock selection is going to be critical, because with more assets coming to the market and occupier markets remaining tough, a focus on property fundamentals will be the key to outperformance.
Our purchasing strategy has focused less on low-risk assets (which have been in demand) but more on those that are defensive in the short term but which through lease/tenant profile or building and location dynamics will also be able to benefit from improving occupier markets.
Henderson
Michael Keogh, Senior economic and investment analyst
1 Given that the appetite for UK property is showing no signs of abating, Henderson would expect continued strong investor demand for at least the first half of 2010. Whether this will transcend into a significant pick-up in transactions is another question though, given the limited amount of “quality” stock being released to the market. The economic backdrop and how far investors are tempted up the risk curve will determine wider market demand in the latter stages of 2010.
2 Fund managers are under pressure to acquire opportunistic assets, and so the rally in market pricing is likely to persist for the near term. The weight of overseas equity buoyed by sterling’s weakness, and domestic capital from the institutions and retail funds now bidding aggressively to re-enter the market will push values up sharply in 2010. However, underlying economic question marks would suggest the current rebound in pricing is unsustainable throughout 2010.
3 Occupier conditions have held up surprisingly well given the magnitude of the recession, and the bulk of rental falls across prime assets has already taken place. In contrast, IPD-assessed portfolio rents are likely to remain under stress and modest medium term rental projections mirror below-trend economic projections instigated by the tight fiscal squeeze post-election. With a recovery in economic conditions in 2010 far from convincing, rising vacancy rates in secondary stock pose a substantial threat to income. Henderson does not expect to see real improvement in occupier demand until 2011.
4 Barring a further massive economic shock to the financial system, 2010 should be a year of inflows as investors respond quickly to the upturn in market conditions.
5 Henderson is keen to take advantage of current pricing, so the company wil be equally a seller and buyer of commercial property in 2010.
PRIVATE INVESTORS
The questions we asked private investors were:
1. In 2010, will you be able to find stock?
2. Do you expect banks to take more assets back from borrowers, leading to more investment opportunities?
3. What type of property will you be targeting?
4. What will be the lowest yield achieved for a well let building?
5. Do you expect occupier demand to improve/decline/stay about the same as in Q4 2009?
6. What will be the top rent achieved for offices/retail/and/or industrial?
7. How will 2010 differ from 2009?
Richard Hayward, Richard Hayward Properties
Based in South Wales
1 Banks and other people want to offload property, so quite a lot will be coming to the market.
2 Yes, banks will take more action.
3 Industrial, town centre retail and leisure.
4 We are talking about secondary industrial and retail, not prime, and the lowest we are looking for is 9%, bearing in mind that last year we bought stock at 12%. Some let secondary industrial or retail seems to be going for yields of up to 15%.
5 We have let a lot of property in the past 12 months; demand has been there. It’s slow but steady. We are in talks to let almost 200,000 sq ft of space to a brand-new manufacturer in South Wales. If you had asked me six months ago if we’d be letting big units to manufacturers I’d have said no, so it’s encouraging. I think there’ll be a slight improvement in tenant demand throughout the year, especially for small industrial units.
6 In South Wales, offices will make around £22 per sq ft, industrial will be lucky to get £5 per sq ft on a 20,000 sq ft unit. Retail will remain fairly flat. Leisure will remain flat this year but will rise towards the end of the year and recover the following year, I think.
7 Banks will start to take positions on their property assets, people will start losing assets so there will be a change in market position. Funds will continue to spend considerable sums, and (mostly foreign) money that has been sitting around will be more active. There’ll be more opportunistic buying in 2010 which will probably have an effect on the middle market, keeping yields moving out, but prime yields could get quite sharp.
Jeffrey Azouz, AR & V investments
Based in London
1 There’ll be stock because the market will be low. We’ll be looking for residential in and around London but not as much as we did last year. We’ll be able to find realistically priced commercial stock because the market is weak.
2 The banks have not been able to do much with assets when they have taken them back. The banks do not want to get too aggressive, but they may be a bit more aggressive with some people.
3 We’re targeting residential. We’ve bought newly completed flats, sometimes vacant and sometimes lettable. In some areas, where we can hold them for a year or two we are buying them en masse. We look carefully at the tenant situation for retail and it has to be in good locations. We’d be very careful on industrial. And the office sector? Forget it, to a large extent.
4 I’d be willing to pay 5.5% for well located, well tenanted stock.
5 I’m mildly optimistic about occupier demand.
7 Residential will improve in and around London and possibly the major cities, in good areas. Industrial will be the same or worse. Office buildings, depending on their location, are low down on the scale and may get worse. Retail may improve slightly in good areas, assuming the economy picks up a bit.
James Burchell, Faircroft
Based in London
1 We will find stock, but it will be challenging. It will depend on the weight of money and bankers’ views.
2 I believe the banks will take more assets back from borrowers, but I think they will hold them and work with a lot of specialist asset managers in large institutions, rather than selling.
3 We will continue to target smaller lot sizes, but in quality locations.
5 Occupier demand will be patchy so occupiers will hold the whiphand in lease negotiations for at least the first half.
7 In contrast to Q1 2009 when nobody knew where we were, now at least we have some sense of the economy. There is no longer the fear that banks could go bust, and activity is taking place, though on a limited basis. We are now able to see where rents have settled and in the main where to set rents, which enables business to be done. There are people who have raised money or who have money and who want to spend it.
