Where next for commercial property lending?
However, such optimism hides the fact that the recovery, if indeed there is actually a recovery, is only taking place inside the M25, and in reality is confined to very tight pockets in and around London, with specific areas such as the West End and the City Discount London Hotel being the major beneficiaries.This fact is proven by recent research from BNP Paribas,PCB Prototype, which showed that in the City prime rents rose to ￡54.50 per sq ft in the first quarter of 2011, which represents a 17.5 per cent increase from Q1 2010, whilst in the West End top rents have reached ￡92.50 per sq ft, an increase of 19 per cent from the same period last year. Midtown rents have remained stable at ￡50 per sq ft for the last two quarters and are up 14 per cent from Q1 2010, whilst the Docklands has seen a more modest increase of 4 per cent over the last year with headline rents now at ￡36.50 per sq ft.
The optimistic view would be reinforced if one were to take a cab ride from our offices in Canary Wharf to Oxford Street; that ride would leave you thinking the commercial property market was far from being on its knees. However, as every lender knows, a slender sliver of land in central London is not representative of our regional towns and cities.For the foreseeable future, describing the commercial property market Discount London Hotel as a ‘market’, whether in the UK or across continental Europe is misleading. In reality, there are only two markets: London Prime and everything else. The same is true for every country in the EU, with the only variable being just how much ‘prime’ there is in their capital city.It is worth mentioning that the true picture is often obfuscated by the commercial real estate indices that aggregate the data with the ‘overview’ presenting a rosier picture than is often the case. In our experience, the current position is so polarised that the ‘average commercial property price movements’ could be compared to putting your head in the oven and feet in the fridge and suggesting that ‘on average’ you’re at the right temperature.
This fact is very important when looking at the commercial funding issues as traditional lenders Discount London Hotel are now only interested in prime properties, which leaves much of the ￡600 billion of property loans that need to find a home in the next two years out in the cold.In reality, the picture is not even as clear cut as that, as you have two types of borrower - the one that found its funding through the CMBS (commercial mortgage-backed securities) route and those that used a balance sheet lender.The CMBS market, whilst much smaller, does afford a snapshot of the whole of the market and is also in the position of being publicly scrutinised and its servicers forced to act in a timely fashion. The woes of the balance sheet lender can, at least for the time being, be hidden from sight – a strategy aptly termed delay and pray. Indeed in a perverse turn of events, capital allocation rules means it may actually be cheaper for banks to hold these problematic loans on their balance sheets rather than enforce or sell them on at a discount. Being very pragmatic, having these loans in many respects ‘out of sight and out of mind’ is actually no bad thing as public disclosure could very literally lead to a calamitous event, possibly worse than the residential meltdown.
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