Outlook On Commercial Property: Going Back To The Future

10 January 2010

The aptness of the old Chinese curse "may you live in interesting times" has been very apparent over the last 12 months. Nothing has been straightforward and the continued lack of available funding from major financial institutions hampers any significant uplift in transactional business. The recent introduction of legislation in the Irish Republic confirming the statutory power of NAMA to underwrite toxic loans made during the insane property rush between 2003 and 2007 may well stabilise fears of financial meltdown, but also adds a new level of confusion to an already confused marketplace. What is worth buying and what represents fair value in these uncertain times? Some commentators would have you believe that all property is now a risky proposition, and yet the UK auction houses are seeing stellar demand for product that fits investor desire to move money into safe assets with reasonable returns. The key to success is market knowledge, sound advice and experience of how to operate in difficult circumstances.

I am all in favour of youthful enthusiasm, and having recently turned fifty would like to be able to turn the clock back a little, but I would not wish to trade any of the experience gained over the last 25 years. At the heart of all investment decisions, property included, lies the assessment of risk and investors’ willingness and ability to absorb the consequences of their decision. Risk cannot always be assessed easily and youthful exuberance rarely errs on the side of caution. Even the world’s greatest golfer has found out over recent weeks that if you believe the hype alongside a sycophantic entourage, you can bring all your successes crashing down around your ears. Tiger's advisors are guilty of ignoring his actions and obviously lacked the experience to assess properly the risk to their investment.

Trading our way out of the current recession will be a slow and complex process from which not everyone will emerge unscathed. The development of workable medium to long-term strategies is of paramount importance to property investors who will need to find ways to achieve support from their funders that will enable them to achieve sales and reduce debt. The next 5-10 years will be conservative so really understanding your market and adjusting your pricing to meet actual demand are essential.

Over the last number of years, Northern Ireland-based investors have been heavily dependent on extraordinarily high loan to value ratios, and consequently we have been slower than other regions to recognise the need to re-price investment assets. Northern Ireland needs to attract outside investment; in order to do so, we must be priced competitively in comparison to other UK regions. If we do not adjust our expectations, we will not see any significant inflow of cash.

Not all sectors of our market are currently flat lining. The office rent review market has continued to show rental growth over the last year and I urge all landlords holding such assets to be well advised as you enter the review process. A clear understanding of the issues and comparable evidence is essential if you are to maximise your assets. Opportunities exist to re-gear leases and trade immediate rental growth for longer-term continuity of income or more advantageous provisions, which can make the investment more saleable in the current market. Seek out the relevant experience if you want to see growth in this sector.

Well-secured investment properties of up to £2m are also highly in demand as an alternative to the paltry interest rates currently available. Many investors try to reduce debt burden by attempting to sell their weaker assets whereas they would ease their position faster by selling something the market actually wants to buy. Identifying market opportunity and pricing appropriately will be the difference between success and failure over the next period. This again requires experience and confidence from the advisory team who will ultimately prove their worth if they achieve the strategic goals set. Larger assets require careful structuring in order to place them successfully in the wider UK market.

As we enter a new decade, I predict less excitement albeit hopefully more stability in property. Prices have readjusted and a limited number of transactions are being progressed although the pace of play is still heavily dependent on availability of finance. The biggest change will be the re-emergence of old fashioned banking requiring proper business planning and well thought out proposals if developers/investors wish to do business. The age of the "back of fag packet" appraisal and "pretty boy" agent is over. Welcome back experience, warts and all!

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