Property Sector 'Can Ride out Credit Turmoil' FINANCE MARKETS the Turmoil in the Global Finance Markets Has Unsettled Property Investors and Developers. Julian Shellard, Chairman of Regional Business at Property Advisers CB Richard Ellis, Examines the Implications for the Commercial Property Sector

The Birmingham Post (England), October 18, 2007 | Go to article overview

Property Sector 'Can Ride out Credit Turmoil' FINANCE MARKETS the Turmoil in the Global Finance Markets Has Unsettled Property Investors and Developers. Julian Shellard, Chairman of Regional Business at Property Advisers CB Richard Ellis, Examines the Implications for the Commercial Property Sector


Byline: Julian Shellard

The emerging credit crisis is the latest - and hopefully last - in a series of events which have stifled activity in the property investment market during the course of this year.

In 2004 to 2006, the performance of UK property investment exceeded all forecasters' expectations. This was fuelled by the explosive growth in cheap debt, with property showing a positive yield differential over borrowing costs.

Many investors also switched from equities to diversify their portfolios.

By the first quarter of this year higher interest rates began to bite. Investment became more focused on central London offices, the only sector showing substantial rental growth, and as domestic demand weakened, the market became more dependent upon overseas buyers.

The quoted UK property sector, including the newly created REITs, experienced a decline in share prices from December 2006 levels, with a cumulative fall of 30 per cent by early August.

This was partly a correction to the excessive rises the sector enjoyed in 2004 to 2006, when returns reached more than 40 per cent, but was also a sign that capital growth was likely to be harder to achieve. Enter the credit squeeze.

The fall-out from the US sub-prime mortgage fiasco continues, resulting in uncertainty and loss of confidence. Loan portfolios, and their associated risks, are being reassessed and highly leveraged deals are becoming like the proverbial dodo.

So what are the implications for the property sector going forward?

It is difficult - and probably unwise - to attempt any definitive view on how the financial market turmoil will impact on the property investment market. It is unclear how long the volatile conditions will continue or if they will worsen.

What's more, previous experience of financial market crises in 1987 and 1998 suggests it is not inevitable that adverse effects will be transmitted to the commercial property market.

What is clear is that the tighter credit market means the era of cheap and plentiful debt to fund property investment is passed.

According to the Bank of England, there is pounds 175 billion outstanding in real estate bank loans. Any shift in policy could lead to refinancing problems in relation to this debt mountain.

The most likely first round effects of this environment is to curtail highly-leveraged investment deal activity.

Some evidence of this has already emerged and will extend to corporate transactions in which property figures prominently.

Those transactions likely to be affected include those involving supermarkets, hotels, large central London offices and portfolios of secondary properties.

Reduced liquidity in the debt market will impact on investment activity generally, but it will not necessarily produce forced sales or put off unleveraged investors.

Institutional and other funds will welcome less competition from debt-financed investors.

Volatility in equity markets may continue to encourage investors into real estate as a relatively stable "safe haven".

Tighter credit controls could also impact on the availability of finance for development projects, thereby affecting the supply pipeline.

On the other hand, the reduced risk of over supply would support rental growth prospects.

Before the latest bout of capital market volatility our expectations for property yields were a gradual outward movement and an increase in the spread between prime and secondary property. …

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Property Sector 'Can Ride out Credit Turmoil' FINANCE MARKETS the Turmoil in the Global Finance Markets Has Unsettled Property Investors and Developers. Julian Shellard, Chairman of Regional Business at Property Advisers CB Richard Ellis, Examines the Implications for the Commercial Property Sector
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