Desperately seeking green shoots

As seasons go, spring ushers in the promise of better weather in the form of approaching summer. Some in the UK real estate market reckon they may have spotted the green shoots of recovery, or are at the very least expecting their appearance.

Listed property companies London & Stamford and Helical Bar, both led by veteran wheeler-dealers renowned for their savvy, seem to be sensing opportunity. Numerous private equity groups with unspent investment funds are also getting that warm spring feeling. Some auctioneers have been reporting standing room only at auctions such has been the interest.

From a contrarian point of view, there’s some cause for guarded optimism. Commercial real estate is down by more than a third so far and the All-Property Yield is currently running at 8.45%, its highest level since July 2002 and a yield that beats gilts and cash hands down.

At the same time, base rate stands at 0.5% and may be heading for zero as the Bank of England paves the way for more quantitative easing. It will, in essence, create (print) money to buy mainly government bonds, some of them longer-dated, which should bring down the cost of credit at the long end of the curve.

A property investor’s best friend is cheap credit. But the big problem is the commercial banks – they’re simply not lending and when they can bring themselves to do it, it’s at a prohibitive cost to the borrower.

And the banks pose yet another challenge, which is likely to squash any green shoots, as they force owners to sell. Some £76bn of real estate loans are due for refinancing between now and the end of 2010 and in many cases banks will just want to be repaid. This could see plenty more forced sales of buildings against a backdrop of too much supply. Some of that debt could be picked up by private equity groups at deep discounts and restructured, which is an increasingly favoured route into real estate.

But risks will continue to abound. Rents are under pressure with tenants struggling to pay – witness the arguments going on between the big retailers and landlords such as British Land, Liberty and Land Securities over what they consider to be un-reasonable rental terms. Evidence of further pressure on rents comes from insolvency specialist Begbies Traynor, which reckons 1,600 companies will go bust this year.

In other words, the UK real estate market is still residing in the depths of winter with little evidence of recovery. If anything, the economy looks set to carry on deteriorating, with some economists not forecasting an upturn until at least late 2010.

Such a scenario is bound to further weaken real estate values. However, one slither of hope for property bulls is that if quantitative easing goes wrong and totally debases the currency – and debts – it could make real assets like property more attractive. In the meantime, it’s more a case of clutching at straws.