Tag Archives: Pamela Gray

Richard Higgins

CKD Galbraith: opportunity knocks for bumpy 2013

Richard Higgins, Pamela Gray and Ian Forbes of Scottish independent property consultants CKD Galbraith make their predictions for the commercial property investment market in 2013.

As predicted, 2012 was a testing year. The economy continued to stall, there was a persistent polarization between prime and everything else and a continued lack of debt funding, but with the re-emergence of private equity looking for greater returns. All in all pricing – with the exception of prime – moved out.

In 2013 there will be more of the same.

Richard Higgins, Commercial Investment Partner at CKD Galbraith (pictured top), said: “The retail sector, in particular, will continue to struggle in 2013, and, while everything will be set against the backdrop of new uncertainty caused by the Scottish independence debate, it will also be a year of opportunities for those willing to take some risk as pricing moves to realistic levels. Getting the right advice is paramount.”

Emerging opportunities

Although investment into the commercial property market is likely to remain weak in the short-term, with investors wary of continued uncertainty in the occupational market, the first signs of a turning point are now being seen, which could provide opportunities and value.

Richard Higgins continued: “Property companies and opportunity funds are back in the market. But they’re very selective, and still constrained by availability of debt, particularly as many of the previously active banks are not currently in the market.

“However, there is an opportunity to invest in the market during a period when it is anticipated that properties can be acquired at levels which allow for significant growth into the next economic cycle.”

Occupier Demand

Pamela Gray, Partner in charge of CKD Galbraith’s Commercial Asset Management division, said: “Whilst the commercial property market is likely to remain weak, as a firm we have seen an uptake in occupier activity generally, across the sectors, in the fourth quarter of 2012 and, so far, in 2013. Whilst some of this activity is simply occupiers flushing out terms for use in negotiations with existing landlords, we have seen an increase in the number of relocations or expansion deals.

“Tenants see opportunities in the current climate to secure better quality accommodation on attractive terms and this has resulted in a rise in the number of lettings.

“As the supply of good stock continues to decline, there is going to be more pressure on the major occupiers over the next 12 months and beyond. This lack of development has started to restrict options for occupiers, particularly in the office and industrial sectors, and there are currently a number of key occupier requirements in the market, which will be difficult to satisfy.

“In the retail sector we have seen a number of high profile business failures, but equally there are other national operators such as Subway, B&M, Aldi and Iceland who have significant requirement lists and are actively looking to open new stores in 2013.”

With the exception of Aberdeen, and some landmark streets in Glasgow and Edinburgh, headline rental levels have either fallen back or remained static since the peak of the market in 2007, but the first signs of a turning point in the occupational market are now being seen. This, in conjunction with a UK-wide lack of development, is likely to see rents begin to grow in the medium term.

In addition, improved business confidence supported by continued global economic recovery is expected to generate employment growth in the UK, initiating requirements for additional space from occupiers.

 

Market Polarisation

Since the downturn, the UK investment market has been characterised by polarisation between investments with long-term secure income streams and those let on short to medium term leases.

Since the second half of 2008, the gulf between prime investments, and the secondary and tertiary markets has continued to increase.

The definition of prime has also contracted, with many assets, which would previously have been classified as prime, now being discounted due to less than perfect attributes.

Ian Forbes, Investment Agency Associate at CKD Galbraith, said: “Prime properties are now defined as those which are not over-rented, let on long leases to an excellent covenant tenant, superbly located, and best in-class specification.

“The recurring theme in all sectors is that of risk pricing, and the polarisation between perceived low risk and everything else.”

Secondary Opportunities

With prime investments unlikely to offer value to investors seeking a return in excess of 5%, many investors see the secondary market, which now includes investments formally labeled prime (now good secondary), offering good opportunities.

Ian Forbes added: “There is still a mismatch between buyer and seller price expectations over secondary stock but realism is emerging.

“Secondary yields are expected to continue to drift out in the short term, but could quickly swing back when sentiment improves. Only prime assets with long income can be expected to remain stable but are unlikely to be attractive to investors seeking above average returns.”

 

Debt Finance

The availability of debt financing continues to pose a serious issue for commercial property investors.

Lenders are pricing the risk aggressively, and margins are considerably higher than have been seen historically, resulting in a relatively high overall cost of finance, particularly for anything that is less than prime.

This lack of finance has increasingly put pressure on asset pricing, with investors often unable to source the debt required, or at such high cost that values are deflated further.

Richard Higgins commented: “As always in these secondary markets, “cash is king”, and vendors not using leverage, or only requiring minimal debt, are put in increasingly strong negotiating positions.”

-Ends-

Notes to Editor

For further information please contact Jenny Kumar of JK Consultancy on 07989 5571989 or email jenny@jkconsultancy.com

CKD Galbraith – www.ckdgalbraith.co.uk

CKD Galbraith is an independent property consultancy specialising in serving the needs of private clients. It employs over 180 people in offices in Edinburgh, Stirling, Perth, Cupar, Inverness, Aberfeldy, Castle Douglas, Ayr, Elgin, Galashiels, Kelso and Peebles.

The firm provides the full range of property consulting services across the commercial, residential and rural sectors throughout Scotland. The company enjoys a successful relationship with its associate firm in London, CKD Kennedy Macpherson.

CKD Galbraith’s commercial arm delivers partner-led commercial property intelligence across a range of services, including property and asset management, professional services, investment consultancy, sales, lettings and acquisitions, project co-ordination, facilities management and building surveying.

Pamela Gray web res

CKD Galbraith Forecast Importance of Asset Management Expertise in Uncertain 2012

Pamela Gray, Richard Higgins and Ian Forbes of Scottish independent property consultants CKD Galbraith offer their predictions for the commercial property investment market in 2012.

2011 was a tricky year for the commercial property market: fewer transactions, a widening yield gap between prime and secondary assets, risk-wary investors continuing to sit on their hands and continued restricted availability of bank funding. Then add to the mix the Eurozone crisis at the end of year, which saw the market weakened further by increasing uncertainty. On a positive note, there were fewer distressed sales than anticipated.

2012 looks set to be equally challenging.

Richard Higgins, Commercial Investment Partner at CKD Galbraith, said: “Adopting a holistic approach to investment, agency and asset management is required for 2012. More than ever, it’s absolutely vital to work assets hard to maintain income and value.”

Political uncertainty
The Eurozone crisis remains unresolved, resulting in further market uncertainty. An unravelling, breakup or default of the Eurozone is still a possibility, leaving the UK exposed. Recent pressure from Westminster to force the Scottish Independence referendum highlights this political and structural uncertainty. However, looking at long-term historic returns, there is an opportunity for purchasers with cash or affordably funded debt to make strategic medium and long-term acquisitions.

As ever, careful selection and management of assets is imperative.

Lack of supply
While the London and South East markets experienced higher transactional activity driven in part by foreign investment, activity in the regions and Scotland was limited, particularly in secondary markets.

Looking ahead, development activity will be limited due to lack of funding and the reluctance of developers to take the risk of promoting schemes through the planning process. The effect in the medium term will be a shortage of space just as market demand increases.

Richard Higgins continued: “The lack of development in conjunction with aging stock may stretch the definition of prime in the medium term, resulting in cautious investors looking at opportunities that are currently considered as more secondary or even seeking alternative asset classes. If this coincides with the banks loosening their reins and looking to compete for market share, it should lead to an improvement in the secondary market. However, this is looking far into the future.

“Conversely, there is concern that distressed secondary property will be released to the market in some volume from either lenders or speculators who are purchasing portfolios of bank controlled stock currently. This could effectively neutralise any upturn.”
Widening yield gap between prime and secondary
Since the end of 2010, prime yields have stabilised to levels similar to those seen pre-downturn. In contrast, secondary yields have continued to soften.

Ian Forbes, Associate Investment Agent at CKD Galbraith, said: “Many investors remain of the view that the yield gap between prime and secondary is not worth the risk. It’s this contrast between prime and secondary where the real problem lies, with significant activity almost solely limited to prime stock.”

2011 saw secondary and regional stock continue to suffer with yields moving out and extremely limited demand for short unexpired lease terms or poor covenants.

Ian Forbes continued: “Highly geared, risk-taking purchasers have been out of the market since 2008, which has coincided with the lack of secondary demand. Investors in this market have many investment opportunities and expect substantial returns for their effort and the risk. For the secondary market to improve in the short term, funding must become available and affordable once again. However, as many of the traditional funders are simply not lending, we see little scope for change in 2012.”

Occupier market – The two-tier investment market shadows a two-tier occupier market across all sectors with the secondary occupier market remaining generally very weak, albeit there are pockets of continued growth across all sectors, depending on the location.

Indeed, prime rental growth has moved back to zero, which is an improvement on previous negative growth.

Local markets will drive occupier demand.

It is not clear where capital values will be this year. There is potential for further reductions, however, this is wholly dependent on local market and supply and demand.

An interesting sub-market is the demand for investments with leases containing rent reviews linked to RPI, with institutions in particular seeking these reviews as a hedge against inflation.

Asset Management
In line with this, Pamela Gray, Partner in charge of CKD Galbraith’s Commercial Asset Management division says that it will largely be down to the skill of the Asset Manager during 2012 to maintain value and marketability of property assets.

She said: “Looking after the needs of existing tenants has always been our mantra, and in these difficult and highly competitive times, the relationship between landlord and tenant is of paramount importance. There is a growing appreciation that landlords and tenants need to work together, not in conflict, and the best relationships will benefit both parties.”

Landlords are bitterly aware of the impact of void holding costs on their investments. Equally, tenants can find landlords far more receptive, in the current climate, to restructuring their existing leases, making asset management opportunities, for those with the appropriate skills, the most likely area of activity for the year.

However, contrary to popular belief, the balance of power has not shifted wholly to tenants. Covenant strength is fundamental to landlords and their lenders, and in the majority of cases the tenant will be required to give detailed evidence of their worth, or at the very least, offer a reasonable deposit in order to facilitate some of the imaginative deals currently on the table.

Pamela Gray said: “These are interesting times for those of us in the property world. It is the focused players who are able to identify the opportunities, which are likely to be acceptable to both sides.”

-ENDS-

Notes to Editor
For further information please contact Jenny Kumar of JK Consultancy on 07989 5571989 or email jenny@jkconsultancy.com

CKD Galbraith – www.ckdgalbraith.co.uk
CKD Galbraith is an independent property consultancy specialising in serving the needs of private clients. It employs over 180 people in offices in Edinburgh, Stirling, Perth, Cupar, Inverness, Aberfeldy, Castle Douglas, Ayr, Elgin, Galashiels, Kelso and Peebles.

The firm provides the full range of property consulting services across the commercial, residential and rural sectors throughout Scotland. The company enjoys a successful relationship with its associate firm in London, CKD Kennedy Macpherson.

CKD Galbraith’s commercial arm delivers partner-led commercial property intelligence across a range of services, including property and asset management, professional services, investment consultancy, sales, lettings and acquisitions, project co-ordination, facilities management and building surveying.