Wars tend to go through quiet patches, moments of reflection in between the decisive battles, and markets exhibit similar behavioural patterns. Right now, commercial real estate appears to be experiencing one of those contemplative moments. Yet, most pundits reckon there are still more price falls to come.
It is therefore of little surprise that even private equity groups, many of which have raised property funds recently, aren’t doing much investing at the moment.
“I would say a lot of them are sitting on the sidelines waiting for the right time to make a move,” says Jeremy Waters, a negotiator with commercial real estate agents,
Indeed, the key to making deals work now is finance. Banks have basically clammed up and have become particularly cautious towards real estate. However, bank attitudes may also provide the catalyst for the next move in commercial real estate prices.
“You had many people borrow on loan-to-values of 80%, and now their buildings have fallen 20% in value and this breaches their loan covenants. The big question now is how the banks will react to that,” says Andrew Causer, a negotiator with
He reckons that for important customers, banks will try and find ways around the problem, as long as the debt is serviced. “For your so called rate-tarts the banks might not be quite so understanding and could call in the loans,” says Causer.
In other words, owners will either have to refinance with more equity or sell, possibly at reduced prices. So far, distressed sales have been relatively constrained. Nonetheless, it’s a topic that hangs over the market like a dark cloud. But its also one storm private equity groups would like to see break. After all, it could spell bargains and that potentially means out-performance on their portfolios later on.
However, one potential sale that could really test appetites is that of the Bullring, the high profile Birmingham-based retail centre. The UK’s largest listed property company,
So hardly bargain, but then again Land Securities is under no pressure to sell. If it doesn’t get the price it wants, it has a tendency to simply the pull the deal. It sold £2bn worth of real estate last year, but is now once again investing and is reshuffling some of its portfolio.
But given the quality of the Bullring, precise timing may not be quite so important. After all such trophies don’t come on the market that often. It’s also the type of asset that’s likely to catch the eye of private equity groups. It’s both prestigious and cash-generative and should be able to withstand a downturn in the economy better than most retail developments. Let battle begin!