Spin is the name of the game

Twisting the facts seems to be very popular right now with wild claims that the credit market is loosening. Yet the reality is that cash is still being sat on to shore up banking balance sheets. Only a few banks, when push comes to shove, are lending because the investment criteria are so prohibitive

Twisting the facts seems to be very popular right now with wild claims that the credit market is loosening. Yet the reality is that cash is still being sat on to shore up banking balance sheets. Only a few banks, when push comes to shove, are lending because the investment criteria are so prohibitive.

Quotes of three percent above the London Interbank Offered Rate (Libor) do little to inspire confidence that the banks realistically want to lend at commercially viable rates. Yet banks have been making great play on how they are supposedly starting to unshackle their lending coffers.

Economists’ claim the credit crunch is over, based on Libor’s return to a normal level for the first time since May 2007. But the reality is very different and while lenders make the right noises, the genie is still, in practice, corked into the bottle. But however restrictive the banks are, there is activity in the commercial property sector that has not been apparent for some time and it is not just from foreign buyers on the back of a weak currency although, detecting the potential for yields in excess of 10 percent in the City – and talk of yields moving out to 20 percent – it is not surprising a fair amount of lip-smacking is going on.

Phenomenal value is to be had but unless the stock is grade A with grade A covenants and unless it is meeting very good due diligence, it only leaves cash buyers who are able to clean up. Max Property Group, led by Nick Leslau, infused the market with hope when on May 21 it raised £200m on Aim in an offering backed by Och-Ziff – the largest IPO in Europe this year. The Financial Times declared that Max’s success and a spate of US IPOs could lead to more large flotations, perhaps as soon as the third quarter.

Manish Chande and Martin Myers raised more than £300m in equity through Mountgrange for an opportunity fund to invest across both the commercial and residential markets attracting overseas investors, hungry for exposure to a UK recovery.

Paul Orchard-Lisle, ex-chairman of Segro’s predecessor, Slough Estates, is also keen to make the most of the 40 percent decline in values in the UK since the summer 2007 peak, through Apache Capital Partners, with the launch of three funds focused on infrastructure, commercial property and central London residential property.

Henderson Global Investors is active as is Leo Noe, with the central London office market creating a frenzy of excitement. But the banks which have had more than their fingers burnt, still lack appetite and the market is suffering from an incredible overhang of refinancing. We have said this before but for those with cash, these are happy times, indeed, what the shrewd are calling the greatest opportunity for a generation.

But for those geared up to the hilt, their misery will be crystalised when the banks start foreclosing on covenants. They are currently turning a blind eye because it is in no one’s interest to start pulling the carpet out from under investors’ feet. But for how long?

As soon as the distressed property stock starts coming through, you will see a two-tier market developing exacerbated by the empty property rates relief situation.

Occupiers are squeezing property owners with renegotiate-or-we-quit threats. They say they will fold the vehicle in which the lease is held and the owner will be left with an empty property. Cushman & Wakefield’s latest Marketbeat report talked about the squeeze on retail rents all over the UK, with the North West one of the worst affected.

The recovery has to come from the banks. They are the ones that will loosen up the money supply to investors. But as long as they charge 15-20 percent to borrow capital, we can all wait a little longer for sunnier climes.

But despite this, better times are on the way and the giants of the industry are looking to return to the market to exploit a recovery. So just hold on a little longer – there is still some pain to endure but it could soon be time to put the Kleenex away.