John has extensive experience in valuing a broad range of investment properties nationwide for institutional, property company and banking clients.
He is the national valuation partner with responsibility for liaison, co-ordination and advice to the firm on Red Book/compliance issues and to regional offices on specific projects.
Dorothée Queyroux: Have you seen a shift in terms of the lenders that instruct you to carry out valuations? For example are a narrower group forming that are responsible for the majority of your instructions? Are new overseas lenders approaching you? To what extent are lenders more cautious with their instructions, perhaps by asking for certain special assumptions or placing focus on alternative use?
John Barrett: Most of the usual sources have either withdrawn or scaled back their lending significantly. There has been a shift towards private wealth banks or the wealth divisions within major banks and a broader range of banks are instructing us over the last 12 months, predominantly Asian-based, but as yet, without large lending volumes. Lenders are more cautious and risk averse than previously. Only a few of them will consider development finance, they all want more comparables and analysis, and generally they avoid any property with "issues" which could be deemed to make it less marketable or affect the bank's exit position adversely
DQ: Voltaire is involved in several commercial investment transactions where the quality of the covenants are secondary. How do you see demand for such assets evolving amongst investors given both the fluctuations in yields that the market has witnessed and also the stiff competition for more prime assets from overseas investors and/or cash buyers?
JB: It really depends on the definition of secondary. One investor's definition of secondary may be classified as tertiary by another investor or lender. Investors and their lenders need to be highly selective when appraising assets, but there will be some very good buys for the professional investor who is well advised. The best assets should be marketable to UK institutions which need to invest rather than hold cash, and to overseas investors looking at wealth preservation. Each case is looked at on its merits, and much depends on the supply and demand characteristics from occupiers as well as investors. For example, a 20 year old industrial unit in Park Royal, London will be much less risky to lend against than the same unit with the same tenant in the Midlands or North where the supply and demand characteristics are totally different. At Park Royal, if the tenant goes bust, the unit should re-let without too much difficulty but in regional locations it may only re-let at a lower rent sometimes after a long void with all the costs of empty rates etc while vacant.
There is a risk of a disconnect between some occupier and investment markets. Buyers need to do their homework properly. For example, we are seeing regional industrial investments being marketed as rack rented, supported by letting evidence from headline rents set 12 or 18 months ago. In practice, close examination of more recent deals could show that rental values today could be in some instances 25% below the passing level, after allowing for incentives. If the lease is getting short, the capital value of the investment will be falling as well and the owner's or bank's exit position may be more difficult.
In summary, before transacting or lending one needs to get good advice from experienced professionals.
DQ: Voltaire has come across and assisted with an increasing number of Central London transactions which revolve around change of use from commercial to residential. To what extent do you think the continuation of this trend is inevitable given the lack of available or potential development sites in Central London? In addition do you think we’ll see higher densities and building heights achieve consent?
JB: Over the medium term (3 - 5 years) this trend is likely to continue, especially in prime Central London locations, particularly in the West End, where there is a shortage of available development sites. However, one needs to own the freehold first. Large estate ownerships (for example, The Crown Estate, Grosvenor, Portman, etc) and planning restrictions may limit the number of situations. The density issue is down to planning.
In addition the Government has recently consulted on proposals to remove the need for planning permission to convert offices to residential. This has proved to be a highly controversial proposal with many local authorities and the impact of the final legislation on the market is still unknown.
DQ: There is a strong sentiment emerging that 2012 will see a dramatic reduction in the inclination of banks to lend to one another resulting in constrained liquidity. First: do you envisage this happening? Second: should this prove to be the case how do you predict the impact on the appetite of commercial investors?
JB: Yes, there is a strong possibility emerging that 2012 will see a further reduction in the inclination of banks lending to one another, resulting in constrained liquidity - there certainly is less liquidity than before and much depends on the resolution of Eurozone difficulties and wider global economic conditions. Most banks and certainly the Government-backed banks, for example, RBS/Natwest and Lloyds, are very constrained regarding new lending. Those investors with significant equity and lines of credit should flourish. Those with little or no equity will struggle to remain in the market. For commercial property, it may be easier for banks to lend to businesses buying property for their own occupation instead of lending to property investors or developers.
The appetite for mortgage lending on better quality residential property, especially in Central London, has continued and prices have moved ahead. Given the difference between LIBOR and the rates lenders are able to charge borrowers, this has provided some banks (especially those at the Private and Wealth end of the spectrum) with significant profit margins.