Welcome to 2011. A happy new year? It depends where you are and what market you are in. The divisions that emerged in 2010 will widen in 2011.
The gap between prime and secondary will grow. The health of London will further improve. The public sector – and those businesses that rely on it – will contract. And as Angus McIntosh writes in today’s Estates Gazette (p35): “The economic bounce is over.” In his wider forecast for the year, he says: “2011 will be a year of a divided economy and a divided property market.”
Those are the headlines. Below the surface, further structural change is underway. Snow-disrupted pre-Christmas trading is bringing forward retailers’ rethinking of their business models. While many non-food retail chains wince at their returns, there is evidence of improving health among independent retailers.
It may be no exaggeration to say that we are seeing the death of the traditional shopping centre model.
Geographically, strong regional markets that don’t rely on the public sector will have a better year than most. Others with too much secondary office space that isn’t economical to refurbish will be blighted.
Nevertheless, in an EG poll of the industry’s great and good this week, we found many more bulls than bears. Opportunities abound. And by any measure, property remains a strong investment class.
In a candid and wide-ranging interview last year, Grosvenor’s Britain & Ireland chief executive Peter Vernon admitted that the company had paid too much for the landmark Liverpool One development. “We gave a cost guarantee based on a cost that turned out to be too low. In a nutshell, that’s what it was about,” he said at the Estates Gazette/Profile Network event.
But Vernon also insisted that the scheme was already performing “extremely well as an investment”.
Having secured a £385m refinancing, it’s clear his enthusiasm is shared. The five-year deal, done by Royal Bank of Scotland, Eurohypo, Dekabank and Credit Agricole, replaces the original £450m funding put in place six years ago and, with a loan-to-value ratio of about 60%, values the two-year-old scheme at £640m.
Good news for Grosvenor. But don’t think for a moment that bankers’ purse strings will be looser in 2011. The latest De Montfort study shows that fewer banks are willing to lend in the UK as we enter a five-year period during which £161bn, or 71%, of outstanding bank debt falls due for repayment.
A willingness to back strong assets remains, of course: Liverpool One is 98% let, retail turnover is up 18% and footfall is up 5.8%. But those asset-holders that cannot demonstrate such a strong case will struggle to retain financial support, let alone attract new backers.
In the run-up to Christmas, the non-domestic rates branch of the Communities and Local Government department wrote to councils telling them that an important empty rates concession would come to an end. Empty rates are currently not payable on properties with a rateable value of under £18,000. From 1 April 2011 that threshold will fall to £2,600.
A handful of MPs had kicked up a stink in an earlier Commons debate, but the government is to push ahead regardless.
One owner of a small property company writes in EG this week that a 10% vacancy rate and a rising tax bill will force him to think hard about his business: “The inevitable long-term implications will be the lack of investment.” The upshot? As the economy recovers, small businesses may not be able to find the premises they need.
Traditionally it is entrepreneurs running small companies that lead us out of recession. That makes this measure an obstacle to economic recovery.
