Signs of green shoots in commercial property

It seems that someone has been going around pruning all the ‘green shoots’ of recovery as it emerges that we are no longer exiting the recession but are in fact still entrenched in the longest one since records began. According to the Office for National Statistics, the economy has shrunk by 0.4% in the last quarter and by 5.9% overall in the last year. It is the sixth successive quarter of contraction and leaves the UK in the grip of the longest period of continuous decline since 1955. This flies in the face of recent predictions that the recession was over and is even more galling when the UK’s major rivals, including France and Germany, are now officially out of recession.

The question is does this cast a further shadow over the mortgage market? To a certain extent the answer is inevitably ’yes’, as any economic failings could spell even greater problems in regards to funding and credit. 

However, it’s not all doom and gloom. We are seeing a few exclusive and semi-exclusive products creep back into the more mainstream and even specialist markets which is a positive sign. One specialist market that has suffered badly over the past couple of years through falling values and lending restrictions is the commercial property market but it appears to be finally enjoying a welcome resurgence according to recent statistics.

According to Investment Property Databank Ltd (IPD), commercial property values in the UK, Europe’s largest market for real-estate investment, have risen at their fastest pace in more than three years. 

The value of offices, stores and warehouses climbed 1.1% in September from the previous month, according to an index produced by the London-based research company, which represents the largest monthly increase since June 2006.

Other new research seems to back up this new found positivity. A report from Savills suggests that increasing numbers of banks are willing to lend sums of more than £20 million to commercial property investors. The report identified 23 banks in the £20 million and over lending category.

Commenting on the report William Newsom, Savills UK head of valuation, said: "In March when we conducted our last survey, we weren’t aware of any banks prepared to lend above £100 million on their own, but today perhaps half a dozen are prepared to do so." 

It was also interesting to read in a recent Financial Times article that investment levels in London are currently higher than the long-term average, with foreign investors and funds eager to snap up prime properties as the market bottoms out. 

But despite these relatively high levels of optimism about future growth, 2009 thus far has proved tough going for the commercial market. This is illustrated by an overwhelming 77% of respondents to the Forum of Private Business (FPB) latest quarterly referendum survey which reports seeing the terms and conditions of lending deteriorate in the last year, with many being forced to provide more security to cover their current lending levels. 

Just 4% of FPB members said they had seen access to working capital improve in 2009, with 58% believing it had worsened. Of those surveyed, 65% said it was harder to access finance for growth and 68% said the cost of finance had increased. 

When asked how the issue of finance could be improved, 36% of small business owners said they wanted to see a reduction in the cost of lending. Further, 27% said greater flexibility in negotiating and adapting terms and conditions to meet the changing needs of their business would be welcome. 

It is fair to say that any real prospect of recovery remains dependent on realistic access to funding but this is currently not quite reaching the private lending sector in any real volume. The indicators showing improvements in the commercial sector are good news but it is important not to get too carried away. There is still much work to be done in this arena but let’s hope those elusive commercial green shoots can continue to be carefully nurtured.