The commercial sector recovery in the UK running out of steam?

Today sees the publication of the UK July IPD Monthly Property Index. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.

The Index reveals that the steam seems to be running out of the UK commercial recovery. Capital values in the month of July 2010 were 0.2% up on June, the lowest increase for more than 6 months – overall since NAMA’s Valuation Date of 30^th November, 2009 prices have increased by 9.2%. The recently published EU stress test of selected banks had a benchmark scenario of 0% growth in 2010 in UK commercial prices. Year to date, we are up 6% approx (the data at the top of this page is from Nov 2009 – NAMA’s Valuation Date – not Jan 2010) which would imply that the next 5 months will see an overall drop if the EU stress test was accurate. On the residential front, it certainly doesn’t seem unlikely that the actual 4% growth to the end of July 2010 would fall to 2% by the year end – 2% being the EU stress test benchmark scenario for UK residential.

The publication of the index today coincides with the news reported in the Irish Times that Irish developer Owen  O’Callaghan has sold a property in London’s Mayfair for GBP £58.1m – the price is seen as being noteworthy because the reported rent in the building is GBP £1.9m per annum which would represent a low 3.9% yield to the buyer.

Last week, AIB revealed that it was close to the sale of its UK operations which apparently have €3.2bn of what were NAMA-bound loans but apparently NAMA has agreed that these loans can be sold. These loans had provisions for impairment of 6% in the 2009 AIB accounts compared with 20% provisions for the Irish loans so the implication is that they have been performing better than the Irish loans. NAMA indicated that 27% of its loans were secured by assets in the UK (Great Britain and Northern Ireland) in its draft business plan in October 2009. In April 2010 at the Oireachtas, NAMA CEO Brendan McDonagh said that it was 20% and in July, 2010 Minister for Finance Brian Lenihan indicated that it was one third. Even with the forthcoming sale of AIB’s UK loans there will still be a substantial amount of UK assets with NAMA so the performance of the UK market will remain significant.

The first table below shows the month-on-month % change in commercial property capital values since 30th November, 2009. The IPD index is broken down into three components – retail, office and commercial.  The second table shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner. Overall it shows that commercial property in the UK is worth 9.2% more at the end of July 2010 compared with the end of November 2009.

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“The benefits of NAMA will soon be visible”

So said Peter Stapleton, President of the Society of Chartered Surveyors last Friday at the IPD/SCS Quarterly Briefing in Dublin. He was referring to the expectation that NAMA will bring assets to the market in the coming months, starting with a trickle but growing in 2011 and 2012. Good news indeed for SCS members who depend on transaction volumes for their livelihoods. Phil Tily, the new managing director for UK and Ireland at IPD chipped in that NAMA’s impact on the property market will depend on a number of variables including access to credit and investor interest. So a slightly bright outlook it would seem. Elsewhere at the Briefing, IPD analyst James Scott delivered a more sobering assessment confirming that Irish commercial rents have just experienced the second worst quarterly fall on record, at -7.5%. “The causes of these falls are a combination of falling consumer spending, rising unemployment, prompting corporate downsizing and increasing vacancy rates. All of these pressures on rental values are, in part, responsible for the underperformance of the market.”

So the outlook? Possibly more transactions with stock coming on the market but a challenging environment keeping pressure on prices.

The Briefing also heard that over one quarter of all Irish commercial rentals are taking in more rent than the present market would support. Why? Long term leases and upward-only rent provisions (which although abandoned for new leases in February 2010 will have an impact on older leases for many years to come).

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