Market Consolidation Presents Opportunities For Investors

11 October 2009

In recent years, the performance of the Northern Ireland commercial property market has become closely aligned with the banking sector due to the dependence of the majority of local investors on bank finance. It is therefore no surprise that the current banking crisis has resulted in a significant reduction in investment and development activity across all sectors.

Currently we have reached a stage where the banks' lack of liquidity means that they have limited funds available and investors, due to the drop in the value of assets and loan to value ratios, are not in a position to invest. These two things combined mean that the market is experiencing a low level of activity, levels that we have not witnessed for over a decade. However, there are some investors who are not restricted by the lack of bank finance albeit these would be in the minority and include institutional purchasers, pension funds, trusts and cash-rich investors.

The deals that Osborne King have been involved in so far this year reflect these market conditions with investment properties offering long term, secure income purchased by cash-rich investors or trust funds. They include the sale of a new-build Tesco Food Store in Enniskillen, which changed hands for £12.75 million and premises within a landmark new town centre scheme in Barking, Greater London, that we acquired for a local investor in a deal worth £5.3 million. Other recent deals include the acquisition on behalf of a trust of a new Marks & Spencer Simply Food Store in Dunblane, Scotland, for c. £5.75 million and the sale of a retail property in Coleraine for a sum exceeding £1.75 million. In addition, First Trust Bank has recently released a number of sale and leaseback opportunities, which have been received well in the market and have attracted strong bidding.

Pic: Tescos Enniskillen

As Irish banks face the prospect of the National Asset Management Agency (NAMA) coming into force and UK banks try to regroup, it is likely to be some time yet before a reasonable level of liquidity returns to the market and certainly not before the second half of 2010.

It is still unclear what the precise implications of NAMA will be, except that it will allow distressed assets to avoid fire sales therefore controlling market conditions going forward. The scale of the challenge is reflected in the fact that an estimated €4.9 billion (£4.5 billion) worth of property assets in Northern Ireland that were financed by Irish banks look set to fall within NAMA’s remit. This is a massive sum and would roughly equate to 22,500 houses (assuming a Northern Ireland average house price of £200,000), which in effect would be the entire housing stock in a medium sized town in the province.

Nonetheless, regardless of the efforts made under the auspices of NAMA or through initiatives engendered by our own government, the reality is that whatever happens, property values will still be depressed for the near future. This will limit activity for most of those already committed to significant property investment, but will also present opportunities for others, who are already beginning to dip their toes into the market.

From Osborne King's perspective the key to future sustainable investment is how the shift in the property market that we have witnessed during the past eighteen months is handled. Existing property owners and investors will have to focus extremely hard on managing their assets in order to maximise returns and a key element to this is obtaining the appropriate medium to long term advice in respect of their asset management strategies. Now more then ever is the time for sound advice and strategic plans.

New investors or people who previously were less committed to property investment now have genuine opportunities to acquire good quality product at realistic prices. In addition, as assets are developed and enhanced it follows that activity levels will increase and investors will start to come back in greater numbers. Let's not forget that property has been and is likely to remain a preferred asset class.

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