Deal market has gone full circle

Jan 23 2008 by Iain Laing, The Journal

The commercial property investment market almost came to a halt at the end of 2007 with sellers not being prepared to sell at the prices being offered, says Chris Pearson, partner, Gavin Black & Partners.

THE end of 2007 is well-documented with regard to the financial markets and the pressure on just about everything connected with the pound in our pockets. However, the sub-prime crisis masked to an extent the heat generated in the commercial property investment market which had been building up over the year.

Those at the leading edge of this market recognised that deals were being done at exceptional prices and that common sense needed to prevail through price adjustment – that is, bringing the market back to sensible values. The heat was generated by an almost buy anything at any price approach which clearly was unsustainable. Quality of leases and covenants were often not factored in and this apparent side-stepping of risk was unhealthy.

As the market tightened, knowledgeable buyers were aware that values were adjusting but sellers were unwilling to complete deals at these markedly lower prices.

This stalemate has caused a temporary cessation in deals. The market has gone full circle. While 2007 saw some blistering deals at very keen yields, I feel the market in 2008 can get going quite quickly if the expected fall in interest rates takes place.

The market has not seen any distressed sales, that is sales brought on because the returns are insufficient to pay off bank loans. This may happen to the smaller investor who has been carried along on the wave of hype but all in all there are some shrewd investors in the market with the funds available to take on opportunities which surely will emerge this year.

With less competition between investors, this year will be a buyer’s market. Some deals completed at the end of 2007 could prove to be too hot for the new market conditions. For example, we were involved with a Government let deal in late 2006 which was struck at 4.75%. This would probably be now at 5.75% if not 6% – a significant difference.

This adjustment has been warned about throughout 2007 but the comforting fact is that 2008 starts with consolidation from which will arise opportunities. Deals will be done this year but at more appropriate values.

A good example of the correction that has taken place is the recent sale of the Barclays sale and leaseback in Acorn Road, Jesmond, Newcastle. This was sold in the Allsop’s December Auction 2007 at 5.14%. In Allsop’s December 2006 auction, however, Barclays on Gosforth High Street, let on identical terms, achieved 3.84% a swing of some 1.3%.

I expect 2008 will be an interesting but challenging year.

PAGE TWO: Property values are now at realistic levels