Commercial Property Crash of 2009
Housing-Market / UK Housing Jan 29, 2009 - 08:04 AM GMTBy: MoneyWeek
Don't be fooled - commercial property is no bargain - They're an upbeat bunch in Southampton , it seems. The BBC took a trip down the local high street yesterday to ask shopkeepers in the town: "are you more or less optimistic about your business than 12 months ago?"
And the answer? Three-quarters of the panel were still "defiantly optimistic about business prospects for 2009".
So nothing to worry about then. All those scare stories about retail ruination and commercial property panic must be completely overblown.
If only that were true...
Commercial property could fall by 25% this year
Despite what Southampton 's shopkeepers might be hoping, things are going to get much tougher for retailers. And that in turn, means that commercial property prices have much further to fall – as much as 25% this year, reckons credit agency Moody's. Here's why.
This month's CBI Distributive Trades survey (which takes views from retailers around the country – so it's a bit more representative than the Southampton poll) showed that retailers' expectations for February were at their weakest since records began in 1983.
And for this year as a whole, Capital Economics reckons consumer spending in Britain will fall 3.5% in real terms (adjusting for inflation). Then there'll be a further 2.5% drop in 2010. That would make this the worst and most prolonged downturn for more than 50 years.
So retailers are facing emptier tills. That's bad news for cashflow. And that means it's hard to pay the rent - most stores still have to shell out three months' rent in advance every quarter.
"For those retailers that were feeling the heat at the end of last year, December's quarter rent day was a big test", says Ben Cooper at Retail Week. "Finding the cash for March's quarter rent day (the 25th) is likely to be even more stressful".
"This year's going to be really dire for retailers", says John Laker at Ldm. "Most will have survived through Christmas but from February onwards it's going to hit the hardest."
Things are going to get much worse for landlords
Retailers having it tough isn't much of a surprise. But the knock-on effect means things are going to get much worse for landlords too.
Commercial landlords will have to take some huge hits. Some of their tenants simply won't be able to pay up. The flak's already started flying. Overall retail rents fell 0.5% in December, taking the annual 'growth' rate to -0.4%. That's the first fall below zero since October 1994.
Both shopping centre and retail warehouse rents declined year-on-year. For the latter, this was the worst result in the 20-year history of the Industrial Property Databank monthly index.
What's more, some shopping malls are having to cut service charges, further reducing their income.
And unfortunately for the landlords, retailing is just one problem. Their overall rent book is being squeezed hard across the board, with things looking particularly bad in the City, where a mix of job cuts and oversupply means rental falls are likely to accelerate. Hence Moody's forecast of a 25% fall in property values this year. To put that in perspective, that would mean that by the end of 2009, British commercial property values would be down 45% on their 2007 peak.
Needless to say, that's bad news for the big property companies. The banks don't want to lend them any more money, so they're being forced to sell assets. British Land and Land Securities are trying to raise £750m between them to pay down debt. Further, they must now pay rates on many of their properties that are empty for more than three months – and the recession has hardly started yet.
What this means for investing in property
That means you shouldn't be tempted to "take advantage" of the big yields apparently being offered by UK property stocks, like the 10% historic payout at Land Securities. Many of these companies are cash–strapped. Their dividends "aren't sustainable" and will be chopped, says Andrew Jackson at Standard Life. What's more, a raft of rights issues to shore up balance sheets is also on the cards.
So despite both sectors seriously undershooting the market over the last two years, for investors the message is very clear. Retail: don't touch – well you knew that anyway. And as for commercial property – there's still a long way to go before we're anywhere near bargain-hunting time.
By David Stevenson for Money Morning , the free daily investment email from MoneyWeek magazine .
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