NovaLoca Blog

CB Richard Ellis has poached Neville Moss from Jones Lang LaSalle to become its new head of retail research for the Europe, Middle East and Africa (EMEA) region.

Moss formerly held the same role at JLL. CBRE says he has more than 20 years’ experience in research and consultancy for retailers and retail property companies.

Nick Axford, senior managing director of global research at CBRE, said: “We are delighted to have attracted such a high-calibre retail specialist.”

“Neville is highly regarded within the retail property sector and will undoubtedly make a substantial contribution to CB Richard Ellis,” he added.

The best time in two generations to invest in investment-grade Central London commercial property? That’s what the managers of the new Rudolf Wolff Central London Commercial Property fund think, according to Investment Week.

The new fund aims to produce net annual income of between 5% and 7% and total returns of 15%-20%, investing in London properties with strong anchor tenants. The target maturity of the portfolio is 5-7 years.

The fund is being run by  Robert Hacking-Brian, Ian Besley and Anthony Farrant, previously of Dawnay Day. They say Rudolf Wolff has deliberately waited until after the recent Budget to launch – they are confident that “recession-proof” commercial properties in Central London will continue to attract foreign investors, safeguarding stability.

“During 2008 and 2009 the Central London market was oversold in anticipation of the high vacancy rates seen in the 1990s recession,” Farrant said. “This overhang has not happened as there were far fewer speculative developments underway at the top of the market. This means we are beginning to see a sharp rebound in both rental and capital values, and seek to capitalise on this trend.”

While fund managers’ confidence has been shaken in recent months by the economic downturn, major businesses still appear optimistic – particularly regarding their own prospects. These are among the findings of the latest quarterly Lloyds Banking Group’s Commercial Property Confidence Monitor.

The survey, conducted during May, came ahead of last month’s Emergency Budget and took place during the worst of the worries about the Greek economic crisis. This is bound to have had some effect on the results and perhaps explains the reduced confidence among fund managers compared with the other property professionals surveyed.

Brian Darling, real estate director at Lloyds Banking Group, said: “The market has reacted well to a period of uncertainty. Although confidence has taken a hit, property professionals remain largely optimistic about the second half of the year.”

With regard to property values, businesses are still on balance expecting increases in the next three months, but principals at medium/large businesses and fund managers have both slightly reduced their net positive position. Looking at sectors, most groups surveyed said they expected housebuilding to show the best performance during the next 3-6 months, although fund managers expect offices to be the major success area.

Last week’s upbeat comments from Scottish Widows Investment Partnership regarding the prospects for commercial property have been challenged by Jason Butler from Bloomsbury Financial Planning.

Butler says in an interview with FT Adviser that SWIP’s prediction of total returns of 8.5% per year until 2015 is “overly optimistic”, and does not take the consequences of the recent Budget into account. He added: “With such a volatile backdrop I do not know how the commercial property market is going to thrive. I think investors should keep their exposure to property the same as it was three years ago and not increase it.”

At Citywire James Smith is highlighting the split in opinion among property professionals as to the outlook for the commercial property market in general, with those who like the yields to be had from property investment pitted against those who are worried about the sector’s debt burden.

If you are feeling charitable while you ponder property’s prospects, why not take a look at the latest event from King Sturge in its charitable efforts to celebrate its 250th year. Pianist (and principal property auctioneer) Felix Rigg has recorded a CD of classical music (which can also be downloaded as an MP3) to raise funds for the male cancer charity Orchid.

North West property experts Place North West have interviewed a number of property professionals in the region to look back over the first half of 2010 and give their views on prospects for the rest of the year.

The scale of public-sector cuts to come means that public bodies are going to have to consider how best to use their property assets. Phillip Woolley, partner at Grant Thornton, says the public sector will need to think about asset sales, joint ventures to cut costs and deals such as sale-and-leaseback or moving services and departments to share buildings. John Holmes, head of planning at Hill Dickinson, says we have to wait for the Localism Bill due nearer the end of 2010 to find out more about how the government plans to fill the gap created by getting rid of regional special strategy bodies.

John Jones, partner and head of corporate finance at Beever and Struthers, points out that the market for office space in the North West is quite different from that in London. There is an oversupply of offices in the Manchester area and little or no development activity is likely until demand returns, he warns. Many property companies are carrying huge debt burdens and the lack of demand means there are no easy solutions for their funders, he adds.

At Hill Dickinson, head of retail property Pam Jones says there have been fewer failures in the retail sector in the North West than expected, but it has not been an easy ride so far this year. In Bolton, Iain Mowat at the Vinden Partnership agrees that retail has been suffering from the credit crunch and warns that with spending set to be squeezed further, the situation is unlikely to improve soon. He adds that industrial has been one of the better-performing sectors so far this year as oversupply is diminishing and businesses are taking the opportunity to acquire high-quality industrial space that might not have been available a couple of years ago.

The Bank of England has indicated today that it is keeping a close eye on the UK commercial property market and watching for signs that banks are becoming less prepared to accommodate borrowers’ difficulties in repaying debt.

In the BoE’s latest Financial Stability Report, which aims to identify key risks to UK financial stability, the bank has warned that commercial real estate companies are particularly indebted relative to their turnover, compared with other sectors of UK business, It also notes that there are recent signs of faltering demand for commercial property.

While commercial property values in the UK have risen by around 10% over the past six months, partly reflecting strong inflows into commercial property funds, the bank has noted that recent demand for UK investment in commercial property “has been focused on prime properties, with reportedly little appetite for lower-quality investments.”

Looking at the market for UK commercial property in general, the bank notes that values remain more than a third below the peak of June 2007, and “market contacts suggest that LTV ratios for many UK commercial property companies are significantly above levels at which banks would usually be willing to extend further credit.”

If banks become less willing or able to put up with borrowers breaching the covenants on their debt, this could lead to an increase in corporate liquidations, a greater supply of foreclosed property – and in turn a renewed fall in prices.

The Emergency Budget numbers have been crunched, the results are in, and the verdict is…well, we all knew it was going to hurt, and it is indeed going to be painful.

For those masochists among you who would like to dwell on the finer points, here’s what CB Richard Ellis thinks: “The squeeze on consumption will create a tougher trading environment.” Head of research Peter Damesick says retailers are likely to scale back their expansion plans. He adds: “Slower retail sales growth is likely to feed through to the logistics market, potentially affecting overall demand but also pushing retailers to achieve greater efficiencies in the supply chain.”

The “assault” on departmental spending will affect demand for office space to let and for sale, particularly in markets where the public sector is significant, including some UK regional centres, Damesick continues. He notes that around 65% of GDP in NE England and Wales is accounted for by public spending at present, compared with 36% in London.

At Jones Lang LaSalle, head of retail Guy Grainger says the impact of the VAT increase might not be so bad after all – he believes that shoppers are already being more cautious and “consumption patterns are already one of general austerity.” However, Stephen Stringham at King Sturge is more gloomy, saying “next year will see the rug pulled out from underneath a retail market that is only just starting to re-find its feet.”

The British Property Federation says the VAT increase is not good news for retailers and, by extension, for landlords of retail properties. “With 12.6% of shops already standing empty, we could see more damage done to the high street,” it notes. However, the BPF approves of the delay until January as it may give retailers time to “get their houses in order” ahead of the increase.

The BPF also notes that there was no news on relief from empty property rates in the Emergency Budget, and says it expects the temporary relief for low-value empty properties “at least to be revisited in the Pre-Budget Report”.

At Knight Frank, head of ratings Keith Cooney declared: “How can it be right that the tax collected from non-domestic rates has soared from £18 billion to £24.3 billion since the loss of empty rate relief only two years ago? The property industry is a key driver for this economy and this punitive tax on empty properties is restricting regeneration and resulting in the demolition of valuable commercial stock. We would call upon the Chancellor to use the existing legislation which enables him to enact an immediate 50% rate relief on vacant properties.”

Fund manager Scottish Widows Investment Partnership (SWIP) says that the prospects for the UK commercial property market remain “encouraging” for the long term. Its latest research, covering the outlook for the next five years, includes a forecast of an 8.5% total return per year and the prediction that commercial property investments are set to outperform equities and bonds over this period.

Dr Ed Trevillion, head of property research at SWIP, says there has been an improving trend during the first half of 2010 as rents become less negative and the expectations for capital value growth become stronger.

“That said, returns in 2011 are forecast to remain weak for the UK commercial property market as the UK economy remains fragile and testing times continue in Europe. Against this economic backdrop, investors remain wary and activity has moderated over the first quarter this year,” he added.

But there are certainly bright pockets of activity – SWIP forecasts that Central London office space to let will see the most rapid rental growth, driven by lack of supply, which will drive total returns over the next 3-5 years.

The group believes that the market for office space overall will deliver total returns of 9.4% per year over the five-year forecast period, compared with returns of 8.6% per year from industrial property and 8.0% per year from retail premises.

The office market in central London has seen a fall in vacancy rates during the first quarter of 2010, but occupier requirements also fell during the quarter, adding to concerns about take-up rates in future.

Dr Trevillion added: “Although concerns remain over the shorter term for investors in the UK commercial property market, property remains attractive relative to other asset classes. Property investment is a long-term game and its diversification attributes and ability to offer investors attractive yields remain encouraging reasons for any investor to consider the asset class as part of a balanced portfolio.”

In further reaction to today’s Emergency Budget (see below), the British Retail Consortium has said the Chancellor was right to use public spending cuts as the main means for addressing the deficit, but argues that the VAT increase to 20% is “disappointing”. 

The BRC says that increasing the VAT rate will hit jobs, consumer spending and economic growth. However, the retailers’ organisation accepts that the Chancellor has had “tough choices” to make. “With retailers now clear that they face a 20% VAT rise from 4 January, the approach to implementation is their key concern,” it added.

The Telegraph notes that, contrary to the appearance given in the Budget statement, many basic-rate income taxpayers will be caught out by the rise in Capital Gains Tax to 28% from midnight. If a property owner makes a big disposal then they might find they are no longer a basic-rate taxpayer but have become liable at the higher rate.

The paper quotes David Brooks from BDO as saying: “If you are a basic-rate taxpayer who makes a substantial gain from, say, selling a second home or buy-to-let property, then that is likely to push you into the higher rate tax bracket and mean you pay CGT at 28%.”

Phil Westerman, Head of Construction at Grant Thornton, had this to say about the impact of today’s Emergency Budget on the construction sector:

“The tax and VAT hike announced today will add to the distress of an already fragile recovery in the construction sector. As consumers now face an increase to their tax bill, coupled with a rise in VAT, this will undoubtedly lead to a fall in the confidence they need to make larger-scale purchases. Many will question if now is the right time to buy; whether they have the funds to do so and whether their jobs are secure.”

“Another fear of a VAT rise is that it will lead to more cash-strapped consumers resorting to cash-in-hand payments to builders for home improvement, or smaller projects to avoid paying the higher rate of VAT. This is a practice that could lead to the unfortunate promotion of a cowboy culture, which we certainly don’t want to see increase.”

“The past few years have seen the construction sector experience a tumultuous period where it has witnessed falls in volumes and prices, and rises in redundancies and business failures. With public-sector spending cuts well on the way, it could mean that many construction contracts with larger contractors – including high-value PFI agreements for schools, roads and hospitals – will be cancelled.”

“Given that the majority of public sector construction contracts are with bigger players, smaller building companies will face a further challenge as they see larger builders vying for a slice of the cake they would not normally target.”