Cash is king for property bargains

With the prices of office buildings crashing by nearly a third, many investors are fleeing. But others see opportunities

By Jenny Davey - Times Online - Jan 6th 08 PROPERTY billionaire Sol Zakay is in the mood to spend. For the past few days he has been relaxing in an eight-bedroom villa on the island of Koh Samui in Thailand, and to while away the hours, mulling over the purchase of a new, 70-metre, $50m (£25.3m) Benetti yacht.

But only when he returns to work this week after a four-week break will his spending plans get really serious.

Zakay and his brother Eddie will start mapping out how their property group, Topland, should spend the money in its coffers.

In the world of the super-rich inhabited by the Zakays, a $50m yacht is little more than a trifle. Topland has a £1.5 billion cash pile to splash around. And the Zakays are targeting commercial-property deals.

Commercial propertyBut surely, conventional wisdom has it that the credit crunch has killed off the commercial marketReturns have nosedived into negative territory for the first time since the crash of the early 1990s, and the prices of some shops and offices have tumbled at an even faster rate than in 1990-92 falling by about 30% since the summer.

It all seems a far cry from last year, when the Spanish property giant Metrovacesa smashed the record for the biggest single building sale in the UK when it bought HSBC’s Canary Wharf headquarters for £1.1 billion, and Permal Capital, the asset manager, set a new record rent of £140 per square foot for an office suite in St James’s Square.

Small investors have been the first to flee redeeming their units in listed commercial property funds at breakneck speed and in the process wiping out funds’ cash reserves and forcing many into emergency cut-price asset sales. Shares in many of the listed property companies have lost more than a third of their value and may fall further when they reveal further asset writedowns in the spring.

And there are signs that the misery is spreading across the world, with property companies as far afield as Australia and Spain reporting acute difficulties last week.

But while today’s downturn may be fierce, parallels with the early 1990s crash are misplaced and there are already some flickers of light amid the gloom.

The Zakays and many like them are beginning to voice a quiet optimism. They reckon there are now bargains to be had. “Cash will be king in 2008 and we believe there will be plenty of opportunities this year,” said Sol. Nick Leslau, who runs Prestbury, the private property group, agreed: “It has been a while since I’ve been the bull among the bears but, for the cash-rich out there, the pickings will be fine.”

In the early 1990s the market was crippled by punitively high interest rates, and banks had lent indiscriminately against a swathe of speculative office developments that failed to find tenants when the recession took hold. In 1992, almost a fifth of the office space in the Square Mile lay empty.

Today the economic situation is very different. Interest rates are a third of the levels of 15 years ago, and a combination of lower financing costs and declining values during the past three months has once again made property a sensible investment, even for buyers funding deals with debt. Bank lending to commercial property is at a record high, but most of the debt is secured against income-producing properties rather than the speculative construction projects of the early 1990s.

Developers appear to have learnt some lessons from the previous crash and there is now nervousness about whether many big projects, such as Renzo Piano’s Shard Of Glass, at London Bridge, will go ahead.

The building boom will peak this year with 7.1m sq ft of new projects across central London, according to CB Richard Ellis, the world’s biggest property consultant. That is half the 14m sq ft which appeared during the early 1990s. Construction levels during the past few years, leading up to the peak, have been much more modest, too. As a result, vacancy rates in the City of London, at only 5.8%, are well below the 18% peak they reached in 1992.

And in London’s West End, supply is even tighter: only 3.9% of floor space is empty, the lowest level since 1989.

What is more, although demand has started to thin and several investment banks have put new office-space requirements on hold, there are still large companies looking for more space. Both Apple and Google are still hunting for offices in the West End, and Imperial Cancer Research is understood to be hunting for a new headquarters. Toby Courtauld, chief executive of Great Portland, the West End property specialist, said the group agreed more lettings last month, and at better terms, than at the start of last year.

Perhaps even more tellingly, the supposed “crash” is barely six months old and already investors armed with billions of pounds of cash from home and abroad are waiting in the wings to snap up cut-price assets.

In theory, the credit crunch should have put paid to the ambitions of debt-backed investors such as Topland. But during the past two years, the group has refinanced its £5.5 billion property portfolio to release huge cash reserves for fresh investment.

Topland is not alone. Leslau’s Prestbury is sitting on £500m of cash, which could be geared up to generate £2 billion of purchasing firepower. And Delancey, a property group run by Jamie and Sir John Ritblat, has raised €1.5 billion for a property fund with €6 billion spending power. Even Canary Wharf Group is sitting on an £800m cash pile and is ready to snap up development opportunities outside its core Docklands estate.

But property agents believe that the really serious money will come from overseas buyers. The Abu Dhabi Investment Company has earmarked Britain for a slice of its $1 trillion (£506 billion) war chest.

Investors from Hong Kong and Singapore have started picking up the phone to property agents in Britain during the past few weeks, eager to snap up bargains. Even the Norwegian state pension fund is scouring the British property market for deals.

From almost every corner of the globe there is huge investor interest. Property agents from DTZ, CB Richard Ellis and Knight Frank, are reporting demand from Canadian, American and German funds all eager to use market weakness as a buying opportunity.

In the last two months of 2007, several cut-price deals were struck: one of the most striking was the sale of 10 Queen Street Place, an office building let to the law firm SJ Berwin in the City of London.

Norwich Union slashed the asking price from £180m to £150m and a deal was agreed at the end of last year with a private Irish buyer. It was not an isolated example.

LaSalle decided to cut the price of Condor House, another City office block, from £130m to £115m to clinch a deal with the investment group Evans Randall.

Clive Boultbee Brooks, co-founder of the private property group Boultbee, is one investor eyeing Britain again after a two-year absence to concentrate on more lucrative markets, such as Scandinavia.

“Yes there is a correction, but we are starting to see value in the UK market,” he said. “When you hear that people are already setting up vulture funds, you know it’s not a serious downturn. That didn’t happen in the early 1990s nobody wanted to touch many assets.”

His optimism is mirrored by the chief executives of the listed property groups.

Adrian Wyatt, chief executive of Quintain, the company developing land around Wem-bley stadium and the O2 arena, said: “Unless there is a sustained contagion from the financial markets, my best guess is that you will not see a sustained bear run in real estate . . . Come late summer, the worst will be over. It is a time to be cautious, but plan to be bold.”

Francis Salway, chief executive of Land Securities, Britain’s biggest listed property group, is also adamant that this is a correction rather than a crash.

“We have seen a repricing of property after a bull run the credit crunch has accentuated it and accelerated it,” he said. “Accentuating it has not been the best news, but accelerating it has.”

Salway agrees that the huge volume of capital looking for investment opportunities will eventually stabilise values.

“You can see where the floor comes in because there is a huge volume of capital looking for investments, and property yields are not far adrift from the cost of borrowing.”

Stephen Hester, chief executive of rival FTSE 100 property behemoth British Land, is similarly sanguine.

“In statistical terms, returns may be as bad as the early 1990s, but that’s ignoring the incredible boom of the past few years,” he said. “It’s very important to have perspective. Markets adjust much faster today than they used to. There’s more information, we do quarterly valuations now, which leads to sharper declines, but they’re over more quickly and that’s a healthy thing.”

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