Commercial Property

Commercial Property - the next shoe, or perhaps more appropriately the next meteor, to drop?

Various commentators and market participants have been mentioning this for a while, but it hasn’t had any real impact on the markets lately.

Of course this was one of the things that brought Lehman Brothers down, as they had huge commercial property exposure, but lately the market has been disregarding comments about problems and potential losses in commercial real estate.

Now things may be changing, as defaults are starting to occur even if the tenants in the buildings are still paying their rents - see the media coverage of billionaire Simon Halabi’s property company defaulting on £1.15 bill worth of debt.

This portfolio of nine properties include JP Morgan’s two buildings in the City of London and Aviva’s City HQ, so it is fair to say that this is a portfolio of prime property. The interesting thing is the current valuation - the portfolio was valued at £1.8 billion in 2006 - the current valuation is just £929 million, so a fall of almost 50%. If this is what has happened to prime commercial property, what has happened to the rest of that market?

In this week-end’s FT Merryn Somerset Webb writes about the US commercial property market and the story is very similar. The Boston Hancock Tower falling 50% in three years, or very similar to the London properties mentioned above. She also mentions a newly constructed office building in LA, which has just been sold for 40% less than it’s construction cost, not 40% less than it’s peak value........!

I suspect that most banks do not have adequate loss provisions to enable them to take the losses that are coming, as the loans have been performing, but with pressure on all metrics, these loans will be difficult to re-structure, if not outright impossible.......!

Watch this space!