Commercial Property Storm Ahead

[billsballs]

My view as a commercial surveyor is that there is more pain to come here. More tenants are going bust with little appetite from new ones.

Whilst yields have fallen as far as they will probably go, companies are going bust and no one is in a hurry to take the space and fill the voids.

Example:

Industrial Estate let to ten units at £500,000 per annum. Currently worth 9% yield = roughly £5.25 million after costs.

That same estate but with three vacant units, £350,000 per annum. People still want 9% with the upside/risk of taking on the vacant units. = £3.66 million.

This would have achieved about 6.25% at peak whilst fully let. Circa £7.5 million.

The hit from £7.5 million to £5.25 million has been already taken and provided for in bad debt figures at the banks. The second sh1t storm is just around the corner.

[WiseBear]

Yes, it looks like the next down leg will be commercial & residential together.

Things start to get serious then...

[blankster]

Not just that but companies that are not going bust might be seeking to downsize or vacate surplus premises - like what Vestas seem to have done. There will probably be some huge vacant commercial sites in Luton and Ellesmere Port soon.

But it still looks that the residential market has been saved by low interest rates - what happens when they rise again, though?

Edited August 14, 2009 by blankster

[SNACR]

The watershed that hasn't yet been breached in commercial, is that some of it isn't just toxic assets, i's just plain worthless.

A worthless millstone with a big void rates liability. Worst case scenarios will be partially let shopping centres and office blocks where demolition isn't even an option.

[up2late]

An excellent post, billsballs. Thanks for taking the time to explain this so clearly.

[interestrateripoff]

But surely by then the recovery will be in full swing and demand will be up?

If they can create a false confidence they may somehow manage to get out of this mess. However reality may have a different view.

We may get to the end of the year now without anything major happening.

Cue tommorrow a major collapse somewhere.

[antmcc]

Yeah, a very interesting post. I'm a commercial surveyor working in real estate fund management in the industrial sector and I would totally agree with what you're saying.

Some of the letting's we're doing are so soft but we have keep the voids down. If you put the occupational market, and the empty rates liabilities to one side, the other issue which is hurting us is tenants going into administration then rising from the ashes as a pheonix company having stripped away their dilapidation liabilities and any arrears and then often asking for incentives to stay on in the unit.

Very frustrating.

[SNACR]

Yeah, a very interesting post. I'm a commercial surveyor working in real estate fund management in the industrial sector and I would totally agree with what you're saying.

Some of the letting's we're doing are so soft but we have keep the voids down. If you put the occupational market, and the empty rates liabilities to one side, the other issue which is hurting us is tenants going into administration then rising from the ashes as a pheonix company having stripped away their dilapidation liabilities and any arrears and then often asking for incentives to stay on in the unit.

Very frustrating.

Very good I'd say

[tpbeta]

Very interesting post. Thank you.

I suspect commercial price crashes have a more serious impact on the economy than residential, because they create huge holes in the balance sheets of business, who then rush to pay down debt. Consumers can be stimulated to borrow much more easily than business. It was, if I recall, commercial real estate crash that caused most of the problems in Japan.

[MOP]

CRE delinquency rates.

[SNACR]

Very interesting post. Thank you.

I suspect commercial price crashes have a more serious impact on the economy than residential, because they create huge holes in the balance sheets of business, who then rush to pay down debt. Consumers can be stimulated to borrow much more easily than business. It was, if I recall, commercial real estate crash that caused most of the problems in Japan.

Things are all shaping up very nicely for a duplicate version of Japan's lost decade.

[Neverland]

firstly BB..welcome.hope you post a lot more.for me and qutie a few on here,the CRE implosion is gonna be the biggy.why?purely that people,at the right price will use a hosue to live in.CRE on the other hand is only of use if you have a business that needs it.I've had a few flame wars on ehre with people saying buy in on the 10th per centile.

as you've shown,that's just plain mad as the capital value keeps adjusting downwards.

how many LL's do you know of that are running up debts to pay council tax bills?how many warehosues/factories have you seen knocked down to avoid the costs of voids?

zero hedge has been talking about the implosion coming around 2010 + when a lot of 2005/6/7 loans will reset,do you have a view on timing?

SNACR has talked about rent free being common for retailers with good covenant?How much of this are you seeing?

again thanks for posting

Could he mean me, he surely does

I still think its a matter of degree, but I am staggered by the share prices of the major UK REITs now

They should be trading at 20-30% discounts to their 2009 valuations instead they are trading at single figure discounts

its difficult to argue that quoted property companies arent overvalued

[OnlyMe]

Without viable businesses (or more likely fools to take up letting these industrial units at anything like current rates) then these units will remain empty.

The mentality of landlords seems to be that they would just set the rental rate to match whatever borrowing/investing money they could throw at these things to make the sums work. The landlords and investment companies have lost the plot (like the councils who expect the business rates to keep rolling in) they have totally ignored the fact they can choke demand and they are reliant on willing and functional companies to fund THEM and their speculative interests.

Actually I don't think there are that many fools left, it is quite obvious where this countries priorities lie now, anybody looking to start up anything associated with manufacturing should give the UK, its commercial backbone and its parasitic banking system an extremely wide berth.

Edited August 14, 2009 by OnlyMe

[Moley]

Without viable businesses (or more likely fools to take up letting these industrial units at anything like current rates) then these units will remain empty.

The mentality of landlords seems to be that they would just set the rental rate to match whatever borrowing/investing money they could throw at these things to make the sums work. The landlords and investment companies have lost the plot (like the councils who expect the business rates to keep rolling in) they have totally ignored the fact they can choke demand and they are reliant on willing and functional companies to fund THEM and their speculative interests.

Actually I don't think there are that many fools left, it is quite obvious where this countries priorities lie now, anybody looking to start up anything associated with manufacturing should give the UK, its commercial backbone and its parasitic banking system an extremely wide berth.

I thought business rates went to central government. Anybody know for sure?

[Goat]

I have a friend in a similar role to the op.

Lots and lots of restructuring in the fund he works for; multiple calls on shareholders etc to keep the funds within the banking covenants, managed it by about 20 quid last quarter.

[OnlyMe]

I thought business rates went to central government. Anybody know for sure?

Collected by council, goes to a national pool and then gets redistributed back the councils (in part or in whole not sure).

.........

Interesting to see how the effective rate (set by the multiplier and valuation) has been scaled up over time, pretty crucifying in all but bubble times.

.........................>>>>>>>

The national multiplier is set each year by the government. The multipliers set since 1990 are as follows:

Financial year Multiplier Small business

2009/10 48.5p 48.1p

2008/09 46.2p 45.8p

2007/08 44.4p 44.1p

2006/07 43.3p 42.6p

2005006 42.2p 41.5p

2004/05 45.6p N/A

2003/04 44.4p N/A

2002/03 43.7p N/A

2000/01 41.6p N/A

1999/00 48.9p N/A

1998/99 47.4p N/A

1997/98 45.8p N/A

1996/97 44.9p N/A

1995/96 43.2p N/A

1994/95 42.3p N/A

1993/94 41.6p N/A

1992/93 40.2p N/A

1991/92 38.6p N/A

1990/91 34.8p N/A

Edited August 14, 2009 by OnlyMe

[@contradevian]

Things are all shaping up very nicely for a duplicate version of Japan's lost decade.

+1

Indeed. Had a stroll around the West End yesterday and even that is not immune it seems, with increasingly roller shuttered up units. Then again Oxford Street has been shabby for years.

Edited August 14, 2009 by HostPaul TAFKA Rover2000

[SNACR]

Without viable businesses (or more likely fools to take up letting these industrial units at anything like current rates) then these units will remain empty.

The mentality of landlords seems to be that they would just set the rental rate to match whatever borrowing/investing money they could throw at these things to make the sums work. The landlords and investment companies have lost the plot (like the councils who expect the business rates to keep rolling in) they have totally ignored the fact they can choke demand and they are reliant on willing and functional companies to fund THEM and their speculative interests.

Actually I don't think there are that many fools left, it is quite obvious where this countries priorities lie now, anybody looking to start up anything associated with manufacturing should give the UK, its commercial backbone and its parasitic banking system an extremely wide berth.

You could stretch that out over all sorts of asset classes currently. There's still a very persistent mentality that the starting sale price for anything is how much the current owner owes on it.

[OnlyMe]

You could stretch that out over all sorts of asset classes currently. There's still a very persistent mentality that the starting sale price for anything is how much the current owner owes on it.

Quite so. The level of commitment required in this case though is so high that I think this is about as extreme as it gets.

Edited August 14, 2009 by OnlyMe

[winkie]

Bump... not because I know anything about this thread, only because it is saying something important.

[billsballs]

Tenants are having a field day.

A corporate occupier wanting an HQ in The City would now pay £40 per sq ft on a 15 year lease with 4 years rent free. At the peak it was £65 psf and 9 months rent free if you were lucky.

Any tenant doing a lease renewal is similarly turning the screw.

New shopping centre developments have over supplied Leeds, Leicester, Bristol, Cardiff, Derby and you can't give shops away.

Landlords are terrified of empty units because they have to pay full empty rates thanks to the new legislation. All this is f#cking their cashflow.

Also, new low rental levels are setting a tone of comparable evidence for the other tenancies within the block/estate/centre of the ownership. The properties are then getting down valued as some of the units are over-rented. For example an industrial estate i've looked at - most tenants paying £7.50 per sq ft, the latest letting at £5.75.

The only kit that is going (and it's going well) is long let modern stock let to good tenants for a long time.

[BearNecessities]

I too work in commercial real estate and would echo the comments on here.

We actually manage what was (when let) the most expensive office in the world at £110 ft sq. One of the tenants is trying to sub let now and is quoting £70 - will be lucky to get £60.

Secondary stuff is holding up quite well if it is well maintained and in a good location as a lot of downsizing firms look for less space. Prime development stuff and low grade stuff is very difficult to shift. I saw some offices to let in Harrow on the way home offering rent free for the entire term (presumably so the landlord can avoid service charge and rates).

I was amazed during 2008 how much development work was continuing when the sky was falling in - all that space is still coming onto an an already over supplied market.

The main point of my post however is to highlight what a dreadful investment class residential property is at present. Normally I would expect a return on residential property to be slightly better than commercial property given the higher management costs associated with it. However whilst commercial yields are pushing double figures, an investment in residential property will get you 5%, if you are very lucky maybe 6%. This is the main reason for my thinking that further alignment of the cost of house prices is at some stage inevitable

[billsballs]

I too work in commercial real estate and would echo the comments on here.

We actually manage what was (when let) the most expensive office in the world at £110 ft sq. One of the tenants is trying to sub let now and is quoting £70 - will be lucky to get £60.

Secondary stuff is holding up quite well if it is well maintained and in a good location as a lot of downsizing firms look for less space. Prime development stuff and low grade stuff is very difficult to shift. I saw some offices to let in Harrow on the way home offering rent free for the entire term (presumably so the landlord can avoid service charge and rates).

I was amazed during 2008 how much development work was continuing when the sky was falling in - all that space is still coming onto an an already over supplied market.

The main point of my post however is to highlight what a dreadful investment class residential property is at present. Normally I would expect a return on residential property to be slightly better than commercial property given the higher management costs associated with it. However whilst commercial yields are pushing double figures, an investment in residential property will get you 5%, if you are very lucky maybe 6%. This is the main reason for my thinking that further alignment of the cost of house prices is at some stage inevitable

Indeed, you can buy a building let to the government for 10 years at a higher yield than a 2 bed flat. If the boiler breaks they fix it as well.