Commercial banks believe credit crunch will worsen
Almost two-thirds of commercial banks that lend to the commercial property sector expect debt conditions to deteriorate further this year owing to the effects of the credit crunch, according to a survey by agents GVA Grimley.
The survey said that banks have already tightened lending criteria on commercial property, with most charging higher interest rates and exacting tougher terms on loans to investors and developers.
The commercial property industry has been hit by the shortage of available credit. The sector’s transactions are largely debt-financed, with equity forming as little as 10% of finance for new purchases.
“There is much more caution out there”, said Tim Crossley-Smith, director of GVA Grimley. “Swap rates are back to where they were last year but banks are still putting up rates.”
Meanwhile, banks are demanding that investors finance more of the purchase price with their own equity. Loan-to-value (LTV) has been reduced in the past six months by about 8%, and the average LTV ratio now stands at about 75%.
The survey concluded: ‘There appears to be a high degree of uncertainty over how the overall financial situation will change over the next three months, although on balance, lenders believe that conditions will get a little worse. A rapid return to 'normal' is certainly not expected.’
UK housing stock is worth £4 trillion
According to Halifax, the value of the UK’s private housing stock rose by an estimated 9% in 2007 to reach £4 trillion.
That figure has trebled over the last decade, rising by 208% from £1.3 trillion recorded in 1997. In contrast, the headline rate of inflation (RPI) has increased by over 31% over the same period. Despite fears about slowing UK property prices, the bank said that housing stock is worth more than three times the country’s outstanding mortgage debt. It said housing assets have grown by more than mortgage debt levels in every year since 1995.
At the same time, the amount of equity held by homeowners - the value of housing assets minus outstanding mortgage balances - has also risen sharply, with an average annual increase of £185bn over the past five years.
Halifax calculated that booming house prices meant overall household wealth has more than doubled in the last decade, rising from £3.3 trillion in 1997 to £6.7 trillion in 2007.
The country house market remains firm
According to Knight Frank’s Country House Market Index Q4 2007, the country house market remained relatively firm as prices fell by a marginal -0.04% in the quarter, although this is the first price decline recorded since June 2003. Overall, prices for country properties rose by 7.9% over 2007.
Prices for manor houses were unchanged in the final quarter, although over 2007 as a whole they saw growth of 10.5%. Farmhouses experienced a small increase in value in the final quarter (0.6%) and ended the year with an 8.4% price increase.
Country cottages had the weakest performance with values falling -0.7% in the final three months of 2007, although they showed modest growth of 4.9% over the year as a whole.
Liam Bailey, Knight Frank’s head of residential research, said: “Following the credit crunch in August, it was likely that the end of 2007 would see a noticeable slowing in all residential markets including the prime markets. The country house market was no different and the final quarter of the year saw prices fall back, albeit marginally. We would note that in each of the last 12 years the final quarter has always been the weakest in terms of price growth and we shouldn’t be overly despondent about a fall of -0.04%.
“As with the top of the London market, prices of the most expensive country houses grew most strongly. Those properties in the +£4m price range recorded growth of 15.1% for the year. Lower down the price bands, properties under £1m didn’t perform quite as well achieving only 8.1% growth on an annual basis.”
As might be expected, with the credit crunch bearing most on the City and financial services sector, the regional market tended to be stronger further away from London.
This was evidenced by Scotland and Yorkshire & Humberside, both of which saw price rises of 1% during the final quarter. With the exception of the West Midlands, which saw prices fall by 1%, prices in the other UK regions remained largely static despite anecdotal signs of increased activity.
Warning for auction novices
Too many bidders are playing Russian roulette by buying property at auction without doing their research, according to Auction Finance Limited.
The company said that around 75% of its buyers don’t get a valuation carried out before they make a bid.
Irene Thomas, operations manager at Auction Finance Ltd, said: “Seasoned developers with a lot of experience in property and large portfolios often don’t bother getting a survey. Many of these buyers use their existing knowledge about property to approximate its value and spot any potential problems.
“However, auction novices should not follow their example and we always recommend getting a survey carried out before buying. It may cost more but the amount of money, time and hassle it could save in the future by highlighting any major flaws is worth the added expense. Buyers must be aware if they make a successful bid they are committed to going ahead with the sale.”
When buying at auction, novice buyers should get an auction catalogue a few weeks in advance and have a survey carried out on properties they are intending to bid on.
Building assets for the future
Over half of landlords believe that investing in the buy-to-let market is a way to build assets for the future, according to new research from Alliance and Leicester Mortgages.
The research revealed that most landlords invest in property for a long-term investment such as retirement or paying for their children’s university fees.
About 87% of landlords regarded their investment as a money-making past-time and only 4% saw it as a full-time profession, despite one in ten landlords saying they earned half or more of their monthly income from their investment.
Stephen Leonard, director of mortgages at Alliance and Leicester, said: “It is encouraging to see landlords taking a measured, long-term approach to their buy-to-let investments.
“Releasing the equity build up in a rental property over a number of years could provide a crucial lump sum to cover future needs like university fees, helping their children onto the property ladder or even acting as an alternative pension pot.”
The study also revealed that 31% of landlords are over 55 and nearly 64% plan to continue to rent out their property for an average of 18 years.
Lowest total returns in commercial market since 1986
UK commercial real estate returns fell by a record amount in December, according to Investment Property Databank’s (IPD) Monthly Index.
The total return on investments, which combines rental income and changes in property values, fell 3.7% in December. This makes it the worst performance since the index began in December 1986.
Annual all-property total returns fell to -5.5% which was the lowest since July 1991. This followed three years of returns of at least 18% as demand for commercial real estate drove building values higher. Retail properties were the worst performers and incurred a loss of about 7.6% last year.
Offices in London’s West End district were the only profitable investments in Britain’s commercial property market last year, returning 2.8% although offices throughout the rest of the UK were the worst-performing segment in December, delivering a loss of 4.7%.
In November and December, the biggest declines in property values were for office buildings in the City of London which fell more than 4% in each month. Industrial properties such as logistics centers and plants returned a negative 3% last month.
REITs could contribute to UK’s housing shortage
The Property Industry Alliance’s (PIA) latest report has called on the Government to take action to encourage new Real Estate Investment Trusts (REITS) to emerge, to increase the likelihood of the development of a residential REIT sector and to allow unlisted REITs.
It believes that REITs would help the creation of a large, corporate rental sector which the industry thinks could contribute to easing the housing crisis.
The report from the PIA analysed the REITs’ market one year after they were introduced and set out possible changes. PIA is concerned that the market will stagnate unless the Government reduces the barriers preventing the creation of new REITs. Of the 18 REITs that currently exist, 16 are existing companies that converted to REITs and only two were created from scratch.
Gareth Lewis, director of finance and investment at the British Property Federation (BPF), a member of the PIA, said: “REITs could play a major role in the provision of high quality rented homes for those who can’t afford to buy their own and don’t qualify for social housing. This professional rented sector is very large in the USA and on the continent but is less of a dominant force in this country.
“However, to encourage more companies and institutional investors to invest in the professional rented sector, we think the Government should proactively look to lower the barriers to entry so that new REITs emerge that invest in homes as well as in offices, retail and industrial property.”
Most firms expect to expand commercial property space
Despite signs that the economy is slowing, occupiers of commercial property expect to expand their property portfolios on the back of continuing growth in output and employment over the next six months, according to the Confederation of British Industry (CBI) and GVA Grimley Corporate Real Estate Survey.
The twice-yearly conducted survey revealed 43% of firms expect to expand their amount of property space in the next six months, while 22% plan to reduce it.
In addition, most firms (82%) believe that changes to the empty rate relief being introduced in April will have a negative impact. The Government will scrap the 50% relief on business rates from which all non-industrial firms currently benefit three months after a property has become empty.
Whether or not the change has the desired effect of encouraging landlords to make more efficient use of empty properties, the cost to business is estimated to be nearly £1bn a year and the decision could have other negative consequences.
Karen Dee, the CBI’s head of infrastructure, said: “The higher cost of owning an empty building could make regeneration less viable and demolitions are likely to increase. Businesses can also get caught in leases, which make them liable for empty rates even when the property is no longer suitable and they cannot pass the property on.”
Buy-to-let purchases increased by 24% in 2007
Hamptons Mortgages’ data has showed that the proportion of borrowers taking out residential mortgages in December 2007 decreased by almost 23% since December 2006, while buy-to-let purchases increased by almost 24% over the same period.
The proportion of borrowers taking out residential mortgages fell by 17.1% between November and December 2007. During the same period, the number of people that remortgaged their home increased by nearly 7%.
The data also revealed that the proportion of borrowers that opted for two-year fixed-rate mortgages over the past year dropped by 30.6% and take up of two-year variable-rate mortgages increased by 29.3% over the same period.
Jonathan Cornell, managing director at Hamptons International Mortgages, said: “This review of 2007 mortgage trends highlighted a clear swap in popularity between residential and buy-to-let mortgages. Interestingly the trends reversed by roughly the same amount over the course of a year, as have trends for fixed and variable rate mortgages.”
Easier access for tenants and landlords to settle disputes
Tenants and landlords of properties across the UK will now benefit from a new partnership between the Ombudsman for Estate Agents (OEA) and National Approved Letting Scheme (NALS) allowing them easier access to settle disputes and seek early resolution to issues.
The new agreement with the OEA will give relief for both tenants and landlords and provide the lettings sector with a potentially faster service for a small annual fee. The procedure is based on seeking early agreement by all parties through a more informal decision process. Where this is not possible OEA will carry out a full review of the complaint.
Caroline Pickering, NALS’ chairperson, said: “It is our on-going aim to raise standards, add value and endorse best practice in the private lettings sector. And, of key importance is to support our accredited firms by securing the utmost credibility for them in their dealings with tenants and landlords. It makes total sense that adjudication should be open to both tenant and landlord in the unfortunate event that an intractable problem arises with a letting agent and here we have a solution that is cost-effective and straightforward for all parties – by recognising that early agreement is beneficial on all sides.”
