The recent De Montfort University annual bank lending report estimated that the size of outstanding bank debt in the property sector totals £300 bln, with the value of loans in breach or default estimated to be £50 bln. Against this backdrop Land Securities' Director of Tax, Treasury and Insurance, Martin Wood gives his view on what the future might hold.
The uncertainty around the economy is palpable and debt investors are clearly worried by the national and international economic situation. This was evidenced with our recent £250 mln repurchase of short dated fixed rate bonds, where final take-up exceeded our expectations as investors pursued their hunger for cash. It was a clear sign that the days of cheap and easy debt for property are a thing of the past.
This new reality naturally leads to a downbeat view for many in the sector. Small and medium sized property companies and single asset purchase vehicles are going to struggle to raise further debt.
Equity could be an option but that too will be expensive and only given selectively. Debt and equity investors alike will focus on prime assets, demanding significant premiums for anything else and creating further pressure on secondary asset values.
The bare facts support this view, the De Montfort survey highlighted that although debt facilities are being extended the amount of debt due for repayment in the next three years has grown from £90 bln to £120 bln.
However, one man's misfortune is another man's opportunity and the debt issue in itself signals an opportunity for well capitalised property companies and funds.
We are facing a two tier market. On the positive side a few large property companies able to raise finance, on the negative the majority struggling with prospective covenant breaches and payment defaults.
Source: Land Securities
