Commercial Market Commentary - January 2009

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It would be true to say that the commercial property market has been much worse affected by the credit crunch than residential, it just hasn't made the headlines due to the fact that most people don't reside in their commercial property. Values have fallen across the board with retail being by far the worst affected sector. The effects have been slightly different in the freehold and leasehold sectors.

Freehold
Prices for freehold property are very much fuelled by demand. In this sector of the commercial property market the credit crunch has had a pretty severe effect. Demand has fallen rapidly due to the fact that buyers have found it increasingly difficult to find finance at the correct level, if at all. As prices are very much driven by demand, this has resulted in values falling rapidly over the last 18 months, with some types of property falling by as much as 50%.

Small retail premises and the semi-commercial property sector have been particularly badly hit due to the demise of most of the self certification lenders that have served this buoyant market for the last five years. As a result businesses in this sector find that not only can they not find a buyer, but the asset is actually falling in value. The closure of adjoining or nearby businesses compounds the effect as many high street areas see businesses close and shutters in their place. There becomes a run down feeling in an area similar to what happened in the early 1990's.

What is also noticeable is that commercial agents and vendors were generally very slow to react to the changing market and held prices at an unrealistically high level for far too long. The good news though is that the fall in values has slowed and there are some fantastic bargains out there to be had. If and this is a big if, the buyer can raise a big enough deposit to support the deal or they are a cash buyer, maximum loan to value is now 70% or possibly 75% for a very strong deal. What is far more important to lenders these days is how the borrower will service the debt, particularly if interest rates rise at some point in the future.

So overall, the news is if you can raise the finance, low interest rates and falling values mean there has never been a better time to invest in a freehold commercial property.

Leasehold
The rental sector has not escaped the effects of the squeeze on credit. However, the issues are slightly different. Towards the end of 2007 rental values rose slightly as many people chose or were forced to back out of freehold purchases. This did not last long and 2008 saw falling rental values and low rent reviews with many tenants simply struggling to survive. Empty premises force down rentals on new lettings as landlords become increasingly desperate to put ‘bums on seats'. In many cases such as the pub industry, landlords will even have to consider lowering rents albeit on a temporary basis. Alternatively, they may have to consider other measures such as rent deferments and rent free periods, just to support tenants through these tricky economic times.

To compound matters for all landlords, the abolition of relief on business rates on empty premises, means a double whammy for a landlord with an empty property. Every £1000 of lost rental income will mean an extra £300 in business rates he has to pay out. As if that wasn't enough, the introduction of Energy Performance Certificates across the commercial property market adds another cost to the freehold or leasehold property transaction.

Dark days indeed you may say. I would agree, but with every cloud comes a silver lining. Over the last few years commercial property prices and rentals became unsustainably high, much like the residential. A realignment, albeit a very painful one, was on the cards. It will be interesting to see how long recovery in this sector takes, but it will recover and along the way there will be deals to be done.

For market commentary on Commercial Property please contact: Barry Frost from Commercial Plus on 01244 680360 or 07973 760701. Email: barry.frost@commercialplus.co.uk

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