The property slump- It’s not over

The property slump- It’s not over.

After taking heavy losses in the dot com crash, many investors moved their funds and efforts into the commercial property sectors, believing their asset allocation would be diversified and that this would be a much lower risk asset to hold. For several years this move paid off handsomely. Capital Values and rents were also pushed up. The global financial; crisis and that came about from mid 2008 and the subsequent recession has hit commercial property hard.

There are many global property projects that have put on hold; many landmark buildings that have been put on sale have had considerable reductions in price to secure a sale. There is presently a murmur in the media of some green shoots of recovery and that the worst is over.

I think that the opposite is in fact more probable; that the worst is yet to come. The trouble that is brewing for the sector is the financing issue for the commercial property sector. There are many deals that are taken on initial commercial bridging or short term rates of around 2% above bank base rates and these deals will need to refinanced over the next year or so. The issue is that the value of the property is significantly below the value of the debt outstanding – a negative equity situation which will clearly mean that the borrowers will be unable to refinance their deals. The banking sector could be hit further if they do not allow the loans to roll over on their current deals.