A tale of two markets – rich and poor

Peter Williams of Lambert Smith Hampton
Peter Williams of Lambert Smith Hampton
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PETER Williams, head of office at Lambert Smith Hampton in Central Milton Keynes, gives this month’s commercial property insider’s view of goings-on in the market.

I dropped in on a company we’d recently let a unit to last week, just to see how they were getting on.

This is a small business that designs and manufactures panels and partitions for commercial bathrooms.

“Good,” the MD said; “Lots of interest in the product and some good orders in prospect, but customers are slow paying and we are struggling to get capital to invest.”

The MD then explained how he had rung his bank up and asked for a £10,000 overdraft to ease the strain. His bank manager then explained how he could have a £10,000 overdraft if he could put £10,000 on the table. He answered that he wouldn’t need £10,000 if he already had it!

Despite the persistent claims by the banks that they are in the market and lending, this is a familiar anecdote.

“Project Merlin” commits four of the UK’s biggest clearing banks to lending more money in 2011, especially to small businesses. However, the suspicion persists that there is a rule for ‘the rich’ and a rule for ‘the poor’ – in other words for ‘the rich’ – the well-funded strong cash flow companies, credit is available and relatively cost effective, whereas for ‘the poor’ – the smaller businessman and the SME market, credit is both tight and expensive.

Indeed, on March 1 no lesser authority than Mervyn King reported that there was no sign of a recovery in credit conditions for small and medium- sized businesses, and that there were “a lot of people who feel they have been denied access to credit”.

Legacy problems and regulatory changes (Basel III) seem to be dominating the environment and indeed against this backdrop, UK lenders have been forced into record corporate loan write-offs said to be £2.5billion just in the last quarter of 2010.

The property industry depends on capital; for development, refurbishment, maintenance and repair. It also depends on confidence.

Property is a fundamental factor of production, yet one that generally receives little in the way of either tax breaks or moral support from the government.

Some would argue (with more than a degree of justification) that property has dug its own hole and needs to learn to lie in it. There is about £150 billion of long-term debt secured against UK property, but about £50billion of this needs to be repaid or rescheduled within the next two years.

The limited debt that is available – maybe £4-£5billionn – is chasing prime stock – ‘prime’ now generally means the best buildings with the best tenants in the best bits of London – just about everything else is ‘secondary’.

With secondary property out of vogue and out of reach, the gap between prime and secondary property yields may well open up exacerbating the pain for the vast majority of owners and occupiers.

The importance of all of this is manifest on the supply side here in Milton Keynes.

Whilst the SME market fights its demons, the logistics market for example, remains robust at the larger end, with Lambert Smith Hampton recording some strong activity locally in 2010.

The biggest letting was the former TK Maxx building known as Meritas on Mount Farm of 108,000 sq-ft.

Also in 2010 at ProLogis Park, Marston Gate on Junction 13, buildings of 85,000 sq ft and 104,500 sq ft were taken by TiGi and Furniture Village respectively. At Knowlhill, Madison Cycles took about 80,000 sq-ft, whereas Bradbourne Point at Tilbrook 106,000 sq-ft was let to plumbing merchants, Pitacs.

2010 also saw the first design and build pre-let for several years with the letting of the Gravitas building at Tilbrook of about 83,000 sq-ft to Trek.

The first quarter of this year has already seen the re-letting of the Celestia Building (313,000 sq-ft) taken by Waitrose.

The flip side of this success is that it’s created a crisis of supply.

There is only one ‘new building’ in excess of 100,000 sq-ft available locally namely the Paragon Building at Denbigh West of 139,000 sq-ft.

A lack of finance means that those developers who are gaining confidence remain unwilling and unable to step into the void and bring new units onto the market.

The problem is compounded locally by the dominance of HCA’s landholdings, and a distinct lack of large chunks of land in the private sector; nationally by the government’s considerably more aggressive approach to charging rates from April 1, 2011 whereupon only three months relief (six months for industrial property) on vacant property will now be allowed. With the threshold for rates relief also falling from £18,000 to just £2,600 rateable value, most commercial property will now fall into the vacant rates trap.

Not only will this dissuade developers from building stock but this will also have a very severe impact on the smaller landlord struggling with bank debt and struggling to find tenants, or on occupiers needing to expand and trade up whilst trying to unload legacy estate.

The value of the small landlord in creating an environment to nurture growing SME businesses is simply not recognised which, given their potential, seems strangely at odds with the government’s objective of cutting red tape and creating private sector jobs.

As the case of the company seeking the £10,000 overdraft illustrates, the day to day pressures on both occupiers and property owners at the bottom end of the market remain intense, whilst higher up the food chain there is a good deal of cause for optimism with many companies slowly acquiring the strength to face down the prevailing headwinds.