COMMENT As we all know, the last two years or so have been pretty tough going for the real estate market, with a sharp rise in inflation, caused by macroeconomic and political events. This has resulted in knock-on effects on interest rates, leading to a spike in the cost of borrowing and refinance costs, and a drop in values in many sectors.
To date, however, a significant surge in defaults and forced property sales has been avoided as lenders have largely chosen to work with borrowers to find solutions to financing issues, preferring to buy both parties some time until the markets fully recover and to avoid calling in debts and crystalising losses. After all, lenders are in the finance business, not in the asset management one.
As we head into H2, the Bank of England has been slower to lower interest rates than some anticipated and some borrowers will be unable to continue to play the long game. Consequently, the end of the road may be reached more often, and the number of properties we see entering receivership is likely to rise.
End-of-the-road options
When this happens, a borrower can still explore alternative equity/refinance opportunities, particularly if the lender is prepared to commit to a longer term asset management strategy. But if this isn’t the case, the best thing that can happen is for as much of the asset value to be recovered as quickly as possible. Just as the property markets have changed in the last few years, lenders’ approaches to recovering capital and their options have also evolved. Routes to a recovery, under a Fixed Charge or Law of Property Act 1925 Receivership, may include refinancing, loan sales, or corporate sales, not just direct property sales.
Before a decision of what path to follow is taken, a receiver should take the time to fully understand the property and the lender’s situation, discussing objectives, timescales and potential issues, as they are duty bound to obtain the best price for the asset.
A well-considered and strategic receivership process can bring benefits. These may include the certainty of a sale for potential buyers, meaning that they are more prepared to invest time and resource on due diligence and bidding; correct pricing and agent selection to maximise interest and recovery; and preparing the asset for sale properly, including the creation of detailed vendor due diligence which can minimise deal execution time and opportunities for price adjustments.
In instances where marketing the property as widely as possible is required, and if it is of low- or mid-value, this may come through an auction process. Auctioning is becoming increasingly popular for disposing of properties from a broader range of sectors, and buyers are increasingly confident in using it as a means to acquire assets. In April, for instance, we sold via auction a mixed-use commercial asset that was going through a receivership process for £4.9m, and a freehold student investment opportunity fully let for the 2023/24 academic year sold prior to auction near its guide of £4.7m.
Auctions provide clarity
The benefits of using an auction during a receivership is that it is effective in delivering time certainty and a firm deadline on a sale with a binding contract on the fall of the hammer, and gives transparency that an asset was sold at the best value on that day in the open market, although it is unlikely to be appropriate for more high value or complex properties.
An enforced recovery can sometimes be a turbulent experience, and unfortunately we are likely to see the numbers increase before the year is out, but charting the right course through the options available can make all the difference to the eventual outcome and may help ease the stresses that some borrowers have been labouring under for some time.
Richard Rees is managing director of Savills UK
