Torrent of projects slows to a dribble as lending dries up

By Ian Fraser

Published: The Financial Times

Date: November 4th, 2009

Quartermile Edinburgh; image courtesy of Sir Robert McAlpine

The crisis at Scotland’s two largest banks last October has cast a long shadow over the country’s commercial property market and clipped the wings of several of its best-known property entrepreneurs.

Ten subsidiaries of Jonathan Milne’s over-extended FM development group have been put into administration since February, while the empires of property tycoons John Kennedy (Kenmore Property Group), Remo Dipper (Gladedale Homes), Geoff Ball (Cala Group) and Iain Wotherspoon (Kilmartin Property Group) are now in effect controlled by Lloyds Banking Group.

“Following a near-halving in asset values, there have been a lot of breaches of covenants and asset-to-debt ratios are not ideal,” says Bruce Cartwright, head of restructuring at PwC Scotland.

Having been distinctly over-generous to the sector during the boom, RBS and HBOS are now taking a much more cautious view, while overseas lenders have melted away, causing the torrent of construction projects to slow to a dribble. Currently only 13 commercial developments are under construction in Glasgow, compared with 30 last year, according to Drivers Jonas. The chartered surveyors adds that no new schemes have been started in the city during 2009 – as opposed to 11 new ones in 2008.

Nor have the banks quite worked out what to do with the huge land banks they have inherited as a result of the plight of some customers. One of the biggest challenges they face is establishing how to “work out” distressed property assets, without flooding an already weak market. Until recently the banks seemed paralysed for fear of crystallizing losses through forced sales – but sources suggest they are now beginning to take action.

Sir David Murray, chairman of Edinburgh-based Premier Property Group, warns it will be “four or five years” before commercial property values in Scotland return to their precrash levels – though the Rangers football club owner expects the market for deals and property investment may unfreeze in the next three to four months.

In Edinburgh major developments such as the plans to redevelop part of the Old Town as the “Caltongate” stalled after their developers went into administration. Agents predict the site will remain vacant for four to five years. A controversial scheme to develop a 17 storey luxury hotel for Intercontinental Hotels near Haymarket station, which prompted a  furious backlash from conservation groups, has been rejected following a government planning inquiry.

However, one bright spot in the capital – where retailers on Princes Street are reporting 25 per cent falls in turnover due to the recession and protracted tram works – is that Henderson Global Investors still intends to build an £850m replacement for the 1970s eyesore of the St James Centre, at the east end of the street.

Charles Guest, a partner in Ryden, says: “The office markets in Edinburgh, Glasgow and Aberdeen have reached exactly the same low point, in terms of occupier demand, that we saw in the 1993 recession. Glasgow is the brightest spot due to large lettings to Tesco Bank, Shell and others. The new-build office development pipeline ends abruptly across Scotland early in 2010, which should help put a floor under the office market in advance of any more meaningful recovery driven by occupier demand.”

Mr Guest says the investment market has already bottomed out. He cites figures from Investment Property Databank (IPD) showing that UK commercial property prices rose by 0.2 per cent in August – having fallen by 43 per cent since June 2007.

This is partly the result of vendors accepting the new price realities as “bottom fishers” trawl the market for bargains. Scottish Widows Investment Partnership, part of Lloyds Banking Group, struck lucky in September when it purchased the 300,000 sq ft Hermiston Gait shopping mall on Edinburgh’s western fringes, where Tesco is a tenant, from Invista for £66m.

Investors are also showing interest in acquiring office buildings, especially if these are in the relatively scarce “prime” category. GB Immobilien Beteiligung, a German fund of Henderson Global Investors, recently acquired Standard Life’s Exchange Crescent building for a reported price of £55m while Invesco recently acquired New Uberior House from the Crown Estate.

“The yields on Grade ‘A’ office space in Edinburgh have jumped from 4.5 per cent in 2007 to 7 per cent, largely due to lower purchase prices,” says Mr Guest.

However investment activity in the retail market remains quite weak because of the growing numbers of vacant shops and the slowdown in retail sales linked to the recession. Mr Guest says: “The main areas of retail market activity are supermarkets, discounters and the letting of remaining new-build shopping centres.”

In Glasgow the market has been buoyed by the success of the International Financial Services District, dubbed “Wall Street on the Clyde”, the arrival of the Commonwealth Games in 2014 and some bullish forecasts for future visitor numbers from the city’s Economic Forum.

Alistair Letham, director of property firm Colliers Robert Barry, says: “The Games are acting as a catalyst and an opportunity. There are probably over 40 potential hotel development sites currently being promoted in and around Glasgow – not all with planning consent – and only a small portion of these will reach development.”

The Edinburgh-based Town House Company is opening a five-star hotel in Glasgow’s  Blythswood Square while Citizen M has started building a new hotel on the corner of Hope and Renfrew Streets and Indigo is converting an existing property in Waterloo Street into a hotel.

• This article was published in the Financial Times (Doing Business in Scotland Supplement) on November 4th, 2009. To view entire supplement in PDF format click here.

Short URL: https://www.ianfraser.org/?p=1330

Posted by Ian Fraser on Nov 4 2009. Filed under Article Library. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry