A global financial panic is adding to the stresses on UK commercial property. Credit dries up particularly quickly in the real estate sector. That possible side effect of bank collapses in the US and Switzerland comes when rising rates and shaky office occupancy are already problems.
Going to the office has become a part-time activity for many full-time workers. Visits to the office have fallen 30 per cent in the UK since January 2020, according to real estate analysts Green Street.
Demand for commercial real estate space has dwindled just as interest rates have surged. Big investors such as JPMorgan Asset Management have warned it may be the next sector that aggressive monetary tightening will destabilise.
UK base rates have climbed to 4 per cent, up from a half per cent a year ago. Interest cover from rental yields has increased less. Prime office yields in London were some 4.5 per cent in February, according to Savills, compared with 3.75 per cent a year earlier.
UK banks have seen this movie before. They are prepared for a nasty ending. Loan to value (LTV) ratios last year averaged around 55 per cent, according to a report from the London Bayes Business School. They approached 100 per cent prior to 2009.
These figures assume valuations stabilise. During January, a commercial property index from Investment Property Databank fell 17 per cent, with warehousing down most at 22 per cent. Transaction volumes were only a third of figures a year ago.
If banks and other lenders, including insurers such as Legal & General, require borrowers to hold LTV ratios below 60 per cent that could trigger forced sales. That explains why share prices of big UK office owners such as Derwent and Workspace are down about 9 per cent this month.
Banks do not like to repossess and own assets. Transactions will stay on pause until it is clear that rates have peaked and contagion risk has abated. Higher-than-expected UK inflation inspires little confidence in commercial property.
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