UK commercial property – modest growth continues with 0.3% month-on-month increase in March 2011

It seems that NAMA is making progress with its declared aim to dispose of up to €5bn of UK loans/assets in 2011 with reports of sales of the Houndshill shopping centre in Blackpool and 157-183 Waterloo Road in London and now we hear of a significant property being offered for sale in London – the Citibank building in London’s Canary Wharf owned by Derek Quinlan and Glenn Maud, the Sheffield lawyer turned investor. NAMA’s Head of Portfolio Management, John Mulcahy’s former employer, Jones Lang LaSalle (JLL) is handling the sale. In common with recent reported sales or receiverships in the UK I cannot find the building on the selling agent’s website, in this case JLL’s website; yes, a property bought for GBP 1bn in 2007 and probably worth not far off that today, will have a limited pool of buyers but why are these properties not being publicly marketed? And given that the world knows that the building is for sale and is in NAMA, why doesn’t NAMA at least link to the selling agent’s on its website? This is really beginning to stink of clandestine sales which may bilk NAMA and by extension, the Irish state. NAMA may feel that association with NAMA may depress the price because there is the suggestion that NAMA is only there for distressed assets. My experience is that mentioning NAMA pricks the interest of potential buyers who will study any sale proposition, and the feeling on here is that the benefits of maximising marketing exposure outweigh the possibility of low bids, particularly on marketable properties. (UPDATE:6th May, 2011. JLL has announced the sale of 25, Canada Square otherwise known as the Citigroup Tower)

Today sees the publication of the UK March 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of March 2011. 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 shows that capital values are still increasing but at a modest rate compared with the end of 2009/start of 2010. The Index rose by 0.3% in March 2011 compared with February 2011. Overall since NAMA’s Valuation Date of 30^th November, 2009 prices have increased by 10.8%. Commercial prices in the UK are now 34.7% off their peak in June 2007. On an annual basis prices are up by 3.5%. The NWL index is now at 895 which means that NAMA needs to see a blended increase of 11.7% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).

In terms of outlook for the UK’s commercial real estate (CRE) you could do worse than review the recent stress test documentation (page 74 on is particularly helpful) published by the Financial Services Authority for UK banks which are still mightily exposed to CRE lending. The document notes that prime CRE has more or less recovered to its peak in 2007 whereas secondary assets are still considerably off-peak (35% plus). British CRE companies are just as highly leveraged as their Irish counter-parts and NAMA may not be the only driver of property liquidations in the UK. Unlike the Irish stress tests there is no projection of commercial property prices but the outlook I deduce from the document is that there will be pressure on prices, particularly secondary assets. The UK as an economy faces its own challenges with massive debt (60% of GDP in 2011) and an annual deficit that was 11% of GDP last year. You would have to say the outlook for commercial property in general was anaemic at best though prime well-located assets may still deliver double digit growth.

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