Forced Sales Loom Over UK Real Estate Scene

Source : The Business Times, July 17, 2008

Wave of commercial property sales may cause 1990s-style market crash

(LONDON) Britain's economic slowdown heralds a wave of forced commercial property sales that could yet tip a downturn in real estate markets into a 1990s-style property crash.

Hardest hit: The biggest casualties in the UK to date have been mid-sized and regional residential property developers such as City Lofts and Chase Midland

Some new buildings could be left empty, while others could be taken over by creditors, causing the all too familiar drag effect that haunted the industry for more than a decade last time around.

It took almost 13 years for UK commercial property values to regain their 1989 highs, according to Investment Property Databank.

Far fewer new offices are going up in London than was the case almost 20 years ago, and creditor banks have learned that foreclosure can make a bad property situation worse, but property derivative traders sense trouble ahead as occupier demand begins to wilt.

Much like UK housing index derivatives, commercial property index derivatives have priced in expectations of a total drop in values of about 35 per cent from last summer peaks to 2010/11.

Insolvency analysts are also gearing up for an expected surge in commercial property-related business, even though any debt-related distress has so far been limited to overstretched buy-to-let speculators and regional residential developers.

'Many borrowers are reliant on income from tenants to meet interest commitments to their debt providers,' said Jon Gershinson, who heads the insolvency team at property services firm Allsop. 'As the economy continues to weaken, this carries the inherent risk of tenant default and therefore those borrowers having difficulty meeting interest payments.'

The speed of the correction in property prices since the market peaked a year ago has been far faster than the last property crash nearly 20 years ago, with commercial real estate values down by a fifth and house prices almost 10 per cent down.

Soon after the 1989 property price peak the UK economy was in deep recession - recording five straight quarters of negative growth in 1991-92. With growth weakening, mortgage lending is being reined in.

Job losses are mounting and consumer spending power is being eroded. The Bank of England is unable to cut interest rates for fear of stoking inflation, so that 'r' word is again on some economists' lips in 2008.

UK economic growth decelerated to 0.3 per cent quarter-on-quarter in the first three months on 2008 and is expected to have ticked lower again in the second quarter.

The ensuing damage has been manageable to date, partly due to the lessons learned during Britain's last property crash.

Tighter regulation and changed attitudes mean UK banks are less aggressive than they used to be when it comes to clamping down on problem home loans.

'Lenders have learned a lot from the last crisis,' said Sarah Robson of the Council of Mortgage Lenders. 'It is not in their interest to take possession of properties . . . It is far better for them to work to find a repayment arrangement with the borrower and keep them in the property, repaying the loan.' News last week that British housebuilder Barratt Developments had secured easier terms on a £400 million pounds (S$1.08 billion) loan also showed indebted housebuilders had some wiggle room, even as land values and new home sales sank.

The biggest casualties to date have been mid-sized and regional residential property developers such as City Lofts and Chase Midland, who called in administrators earlier this month.

Property developers have also been more disciplined than in the early 1990s, leading to a greater balance between supply and demand that reduced the potential for a massive overhang of new buildings that might take years to work off.

There is no mega-commercial project to compare with the emergence 20 years ago of a new financial district at Canary Wharf, notwithstanding London's 2012 Olympics site.

About 29 million square feet of new office space was built in central London in 1989-1991 - a little less than double what is expected in 2008-2010, according to Peter Damesick, head of UK research at property services firm CB Richard Ellis . -- Reuters