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Inflation, Borrowing and the Commercial Property Market

October 27, 2014

How will inflation rates affect commercial property investment?The recent national inflation data showing that prices have dipped if anything has influenced the Bank of England to keep Base Rate on hold and pundits reckon they will probably stay that way until mid-2015. By that time we will have been through a General Election and it is anyone’s guess how that will turn out with politics being in such a state of flux at present.

It has some relevance to borrowing rates for commercial property acquisitions, in that the chances are such rates will slowly come down over the next year or two. However in many cases these are currently set as many times base rate, unlike the heady days of 2005-7 when some clients of ours were on as low as 1.5% above base rate. Base rate was of course much higher then, varying between about 4.5 and 5%.

Meanwhile some clients of ours have recent experience of dealing with mainstream lending banks in arranging property loans. In one case in point, the Bank in question approached our Client not vice-versa. Even so our Client expresses disappointment to us about what they perceive as harsh valuations placed on their commercial property assets by such Bank’s Panel Surveyors, usually Registered Valuers from large regional or national firms. They complain about inaccuracies in information provided and an apparent lack of convincing or logical argument in arriving at their valuation figures.

We listened to one client last week who was commenting that the valuation figures provided for his multi-million pound property company represented only a fraction of the cost of building the units concerned.

In other words the commercial property valuations, if correct, were showing that the properties concerned had suffered a steep depreciation in value, which if it continued would render their shelf life less than 25 years say. Thankfully the Client did not have any historic borrowings but if they had done their property company would have been ‘under water.’

To be fair, surveyors can usually only value on the basis of comparative evidence of transactions that have already occurred and so there will always be an element of ‘catch up’ in a changing market. As I write, there is still distressed stock coming onto the market albeit at a much lower volume then was the case say two years ago.

But the impact of changing occupational trends, with some buildings suffering long vacancies; the burden of empty business rates; and the pressure to improve heating efficiency; have all caused some commercial properties to nose-dive in value over the past 10 years.

Industrial Unit in BradfordIt is not all doom and gloom though. Business rate assessments for commercial property can sometimes be mitigated and Andrew Idle Associates have enjoyed considerable success in this; empty floors can be put to other uses than those originally intended with some adaption or upgrade of fire safety; and prospects for re-letting empty space can be improved by agents being pro-active; advertising on appropriate media and carefully assessing what a realistic rental would be.  In other words, keeping our fingers on the pulse.

Andrew Idle Associates recently completed the letting of a modern 10,000 sq ft industrial unit in Dudley Hill, Bradford within days of it coming onto the market by doing just that. The Landlord was delighted to secure an early re-let whilst the tenant was grateful to be able to achieve a quick turn-around to start preparing their new factory operation.

And confidence in commercial property investment in West Yorkshire has shown a marked improvement over the past 12 months in general.

Andrew Idle

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