The Changing Values Facing Businesses; Hugo Wildblood, Associate Director in DTZ's Birmingham-Based Valuation Team, Looks at Current Trends in Property Finance
Byline: Hugo Wildblood
For many years businesses have used the value of the equity in their property to release capital for growth, either for physical expansion, to acquire other companies, or invest in more efficient processes. However with the economic downturn and fall in commercial property capital values previously cautious or at least market-driven loan-to-value (LTV) ratios have increased, leading to the breaking of loan covenants and even negative equity.
When this has occurred in the past, lenders have tried to recover whatever they can from a difficult position, foreclosing on loans or else forcing a sale of the property but this has not happened to the same extent during the recent crisis. However, just as with residential mortgages, lending against commercial property has reduced to a minimum, with the knock-on effect of preventing any investment activity by businesses, even when seemingly sound opportunities have arisen. Small enterprises have felt the effects of the credit squeeze alongside the large corporate.
According to DTZ's flagship research report, Money into Property 2010, the value of equity in the UK continued to erode throughout last year, with private equity now 23 per cent below its 2007 level and public equity more than 50 per cent below the 2007 level. With the corresponding increase to 68 per cent, the UK now has one of the world's highest LTV ratios - higher than both the global and European averages, although leverage levels are still lower than in the US.
LTV ratios are not expected to improve dramatically from current levels. In fact, DTZ's research indicates that more lenders expect LTV ratios to increase, rather than contract, compared to last year's anticipation of little change.
However, and on a more positive note, double the number of lenders in this year's survey compared to last year's expect an improvement in loan performance with defaults falling and losses reducing through this year into next.
There is growing evidence that a number of corporate businesses are beginning to put their property portfolio to use in order to release funds for expansion. …