Putting secondary property first – GVA Grimley
A new report from GVA Grimley examining the market for secondary commercial property in the UK points out that investors consider these properties to be risky for many reasons, including the greater difficulty of securing bank debt against them; their more management-intensive nature; and the fact that they are more prone to voids and consequent loss of income.
Around a quarter of the outstanding bank debt on UK commercial property is against central London property, where values have held up well and assets tend more to be at the prime end of the spectrum. But the De Montfort University survey of bank lending suggests that about 62% or £128bn is secured against secondary property, much of it at high LTV levels. GVA Grimley notes that many such secondary assets have breached their financial covenants or are in a default position.
The firm points out that there is a huge refinancing requirement looming for the 2011-2013 period, and that this is likely to trigger more asset disposals. While banks have so far been releasing properties onto the market in a controlled way, the firm says that now the banks have established their strategies, there has been a noticeable increase in secondary property entering the market, “and the rate of disposals is likely to accelerate”.
While the prime market is expected to experience further shortages of stock, secondary property is now significantly oversupplied across almost all parts of the market, leading to lower rental values. The firm notes in addition that “25-year leases on potentially obsolete buildings dating from the late 1980s development boom are now approaching expiry”, and also highlights the expected sell-off of public-sector buildings, many of which are secondary properties.
“So the supply of secondary property is likely to increase in the short/medium term, and as overall occupier demand rises, it will take time – beyond 2-3 years – to percolate through to this part of the market, reducing supply,” GVA Grimley concludes.
“As yields for secondary property continue to diverge further from prime, opportunities for attractive long-term returns from investing in secondary properties will improve,” the firm points out. GVA Grimley’s report looks at solutions for secondary properties, and suggests a full-service approach to improve the management of underperforming properties, where business plans can be drawn up on an asset-by-asset basis to make the most of market conditions. It says there are many innovative ways to mitigate the impact of empty rates and also advises looking at improving the sustainability of secondary buildings, to avoid their obsolescence.
