Are property receivers rubbing their hands in glee?

In the current climate, are those smiling only the mature and experienced investors believing they can pick up property on the cheap, or will they be joined by property receivers anticipating a significant pick up in their business? It is worth briefly looking at the state of the commercial and residential property markets; why we are where we are, and from here, crystal ball gaze with some knowledge as to what will happen in the short to medium term.

Whilst there is much despondency in the commercial investment market and signs of jitters in its residential counterpart, we must not lose sight that the UK economy is relatively strong, tenants in both sectors can generally pay the rent, in the commercial sector void rates are low (residential is rather more patchy) and whilst interest rates have risen significantly over the last few months, they are still substantially below those that were seen during the last property recession over 17 years ago.

Both the commercial and residential investment markets are suffering from a lack of capital liquidity. A meaningful number of debt providers are out of the market and those in the market are generally taking a more cautious view as to who they lend to (many preferring existing customers to new). In addition, they are being rather more cautious with regard to loan-to-value ratio and pricing the risk of lending at what they perceive to be more realistic levels. On the residential investment side, the sub prime market has largely dried up, making it very difficult for those with blemished credit histories to borrow, and again the cost of debt has risen appreciably.

There is without doubt a credit crunch in the world economy and the UK cannot be immune from this due to the global nature of the banking sector. Debt is more difficult to obtain than it has been for some considerable time and whilst this is a new phenomenon, there has been pressure in the residential development and buy-to-let sectors for some time.
There has been a noticeable pick up in the volume of property receiverships over the last few months, although the substantial parts of this have been in the buy-to-let residential sector. This has primarily been caused by investors being unable to fund the gap between the true net yield obtained on residential rents and the cost of funds. In addition, some of the smaller residential developers have been having difficulties with either having insufficient cashflow to complete schemes or to fund vacant properties due to extended sale periods. In truth, smaller residential investors and developers have been struggling for the last 2 or 3 years, but this has been hidden by capital growth which has allowed insolvency to be avoided by re-financing. The re-financing merry-go-round has stopped.

There is no doubt that the sub prime crisis will magnify the volume of buy-to let-receiverships as a result of the significant tightening in the credit market with both the cost of money and the subsequent net monthly cost to borrowers of funding mortgages rising, and the unwinding of discounted or fixed mortgage rates.

There has been little receivership within the commercial property sector over recent years. Again, credit has been readily available and there has been significant downward pressure on yields and sustained tenant demand. There is little sign that this is changing in the short term as many borrowers’ cost of money is hedged or fixed, loans have been engineered to ensure that interest is covered by income (with margin for error in some cases) and tenant default is limited.

There is concern that with commercial investment values falling and many borrowers benefiting from historically cheap fixed or hedged debt, how will these loans unwind on maturity? If loan to value ratios remain under pressure with higher borrowing costs and therefore interest cover also under pressure, will refinancing be readily available as loans expire? If not, some lenders will undoubtedly wish to exit their positions with receivership as an option. Only time will tell if this will prove to be a reality. With the market moving rapidly and it proving difficult to predict movements in cost of money over the next few weeks let alone the next few months, property receivers may yet be disappointed.