Secondary commercial property should be taken seriously by investors – that is the message coming from global real estate provider Savills. Those able to are advised to see 2011/12 as an opportunity to invest in secondary and tertiary commercial property which, according to research, make up £250bn of the £350bn debt that exists in the UK commercial property market.
While prime is regarded as correctly priced with a respectable yield gap in the majority of markets, secondary is heralded as offering ‘scope for rental growth, opportunities to add value’ and ‘reduced investor competition’. As a new group of lenders emerge post-credit crunch, a further distinction in the commercial property market is expected.
During its annual property financing presentations, Savills reported loan-to-value breaches and loan book issues still remain in the sector – more than £100m of commercial mortgage debt is believed to be tied up in low-quality investments, with the rest in assets of refinancing potential. Banks have spent the period after the 2008 property crash evaluating commercial property liabilities and ingesting a dose of rationality and acceptance in their market outlook; this is according to analysts, whose findings show loans being extended by an average of 2.2 years, rather than forcing borrower repayment or default. Loan-to-value ratios are therefore anticipated to hover around the 60–65% mark, reflecting lender caution.
This prudence, it is claimed, has left UK institutions, sovereign funds and opportunity funds requiring higher equity levels for commercial property investment, akin to the financial model employed in the 1950s, 1960s and 1970s. Backers are told to expect deleveraging opportunities, by up to 30% of the total loan book. The reported top sixteen lenders are: Aareal, Aviva, Barclays Bank, Bayern LB, Deka Bank, Deutsche Bank, Deutsche Hypo, Deutsche Pfandbrief, Eurohypo, Heleba, ING REF, Landesbank Berlin, Met Life, Royal Bank of Scotland, Santander and Société Générále.
