The state of real estate

Although 2011 was slow and steady in the real estate sector, confidence in the market seems to be wavering again with the escalation of the Eurozone sovereign debt crisis. Here, Claire Nelson, Real Estate Partner at Rosenblatt, looks into her crystal ball at the key issues facing the UK property market in 2012.

We saw a lot of refinancing in 2011 but rather than being due to new deals in the market, it has been clients extending their facilities as their existing finance comes to an end. Generally this has been with the same debt providers – with the limited availability of finance generally, the borrower has lacked a choice. But actually, neither party has had any real options – if the borrower can’t afford it, the lender won’t obtain repayment of the loan, and doesn’t wish to foreclose anyway, as they will be left with a property which is probably not worth the value of the loan.

In any event, no bank wishes to be seen to be foreclosing in this market, and we haven’t seen the predicted volume of distressed sales. Deals are still being struck, but probably not on the terms that could be found previously. Typically loan to value ratios have dropped significantly and the amount of security required by the bank has increased. But when terms are agreed, the deals are completed quickly as both parties wish to secure terms before the market changes yet again.

There is also still the problem of a short supply of prime commercial properties within London. Investors that know the UK property market well will not pay more than a property is worth in real terms, yet they are competing with overseas investors willing to pay top rates for London properties, simply as they perceive it to be a stable market place, and often they have a real need to extract cash from their own dwindling economy.

In addition according to the RICS Commercial Market Survey, occupier demand fell for the first time in a year in the third quarter of 2011. This caused an increase in the availability of space, resulting in landlords offering greater inducements, which has had a negative effect on overall rental expectations. As would be expected, the London market remained more stable than elsewhere in the country.

On the positive side, according to Savills, six new lenders entered the market in the first half of the year including fund manager, Legal & General and insurer, AIG. These lenders are providing an alternative source of finance as some are launching specific funds aimed at providing debt. Only time will tell whether they will prove to be actually active.

Unfortunately however it does not look like the overall position is going to improve vastly anytime soon. The lack of real finance and the over-inflated prices will continue to frustrate investors for the foreseeable future. As we near the close of 2011, we are unlikely to see confidence return to the market until the uncertainly of the Eurozone issue is dealt with – at least to the satisfaction of Western Europe.

Disappointingly therefore, our prediction for early 2012 is ‘more of the same’. Confidence is low and it will take some time to rebuild it.

Contact Claire Nelson, Partner, Real Estate on 020 7955 1436 or clairen@rosenblatt-law.co.uk

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