Barry Gilbertson, the former president of the RICS and now a consultant to Knight Frank gave a very sobering presentation in Londonlast Tuesday on the subject of banks dealing with distressed property loans (reported in PropertyWeek here, the speech is not online yet but should be available here). It was reminiscent of the Kubler-Ross stages of dealing with grief as he described the four Phases banks are going through in dealing with distressed property loans in the UK. According to Professor Gilbertson, Phase 1 was total shock. This was followed by Phase 2 in which “the banks micro-managed their advisers, pulling the plug on the odd hopeless case” In terms of the UK, Phase 3 started in 2010 when banks realised that, in many cases, their borrowers are the best people to help them maximize returns from a distressed loan. And Phase 4 should now be beginning with wide-scale disposal of property by banks. Sobering. Particularly if you’re working in NAMA and trying to maximise returns from the London market where you just might find that supply of property will swell with banks offloading property. And what was just as sobering was the reminder that even if NAMA forecloses on a loan and sits on the asset, the asset management costs are likely to be 5% per annum, and there may potentially be other costs. Very sobering indeed. The picture above is of one of the many Grehan brothers assets in theUK to which NAMA appointed administrators over the past fortnight.
Today sees the publication of the UK April 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of April 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 0.1% in April 2011 compared with March 2011. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 10.9%. Commercial prices in the UK are now 34.6% off their peak in June 2007. On an annual basis prices are up by 2.7%. The NWL index is now at 886 which means that NAMA needs to see a blended increase of 12.9% 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).
The table below 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.
In terms of outlook for commercial property in the UK, the short term looks challenging particularly outside London. If banks start offloading property as suggested by Professor Gilbertson, we might just find that supply exerts a downward pressure on demand. It was interesting to witness the Pick ‘n’ Mix innovation by Jones Lang LaSalle recently where they bundled together disparate property in one portfolio and are selling it as one lot. On the other hand, as revealed in the May 2011 Driver Jonas Deloitte survey ofLondon construction in the pipeline, there may well be shortages of property for some years to come, which might consequently boost prices inLondon.
NAMA Wine Lake 