Rising prices unlock real estate portfolios

According to recent research*, the number of property companies that have gone through an insolvency process has more than doubled in the last five years. In total, 346 property companies became insolvent in 2015, up from 319 in 2014 and 154 in 2011.

This 8% rise in the numbers of property company insolvencies between 2014 and 2015 is mainly down to UK lenders, who have been recouping the values of the commercial-property loans they had held onto since the 2008 crisis, by forcing distressed property companies to sell their assets.

According to a study published in December 2015 by academics at the De Montfort, University in Leicester, this increase in distressed activity by UK lenders has cut the value of the defaulted commercial-property loans on their books by almost a third in the first six months of 2015. This value fell from £23.2 billion at the start of the year to £15.7 billion in June 2015. The amount remaining in default represents about 9.6 per cent of loan books at British banks.

This phenomenon has been encouraged by the rise in commercial property prices over the past few years.

This increase so far is mostly due to higher occupancy levels and rental increases, especially on office investments in London and the South East.

The regions have also experienced their share of rental increase as a report published in December by Schroders underlines: if Central London offices have led the upswing, other cities including Brighton, Bristol, Cambridge, Manchester, Leeds and Oxford have also seen a significant increase in office rents. Similarly, industrial rents increased in many locations, supported by growing demand from on-line retailers and parcel couriers.

As a matter of fact, investment activity outside London is expected to rise in 2016, building on a strong year for the regions in 2015. Birmingham and Manchester alone accounted for 49% of total turnover in the third quarter of 2015, according to information issued by Knight Frank.

In the second half of 2015, Michelmores LLP acquired three sites in Manchester for its developer client Boultbee Brooks Real Estate. Two sites are earmarked for re-development by Boultbee Brooks and the other – an investment property – is under contract for onward sale.

James Whitcher, Asset Manager at Boultbee Brooks commented:

"Boultbee Brooks have significantly invested into the Manchester city office sector in the last year. We have worked with a number of fast growing digital and creative firms as tenants in our London schemes and we are looking to replicate this model in other parts of the country further strengthening our reputation as a successful provider of quality workspace."

Michelmores' Property team expects there to be a lot of opportunities for refurbishment and redevelopment of existing stock in the region, particularly given the lack of supply. This highlights the importance of recycling distressed assets where significant value can be added.

Banks calling in their loans is a fairly new trend as they were reluctant to put property investment companies through insolvency procedures during the recession. Banks were concerned that the increase in properties being placed on the market would further depress weak property prices.

The rise in property company insolvencies is not all negative though – there are positives to take advantage of. It sends a strong signal to investors looking to take on commercial property that opportunities from distressed sellers and their lenders are there to be taken. This signal is also strengthened by the increase in the value of new loan originations in 2015. New lending in the first half of 2015 was £24.7 billion, up 25% year-on-year in comparison with the £19.6 billion recorded in the first half of 2014, and the highest half year value reported since the onset of the financial crisis, according to De Montfort survey.

From a real estate perspective there are a number of asset classes that have proved to be particularly attractive during this period, namely central London office stock, hotel sector growth in the regions, increased investment into the healthcare and continuing care retirement communities sectors, student accommodation as well as further focus and investment in the private rental sector.

Alexander Wood, Partner in the Restructuring & Insolvency team at Michelmores said:

"Directors of distressed property companies may take advantage of the combined rise in property prices and the post-crisis deleveraging situation, by selling their assets at an increasing price which would enable them to allocate more satisfactory returns to their different stakeholders, as a resolution to the situation".

For more information please contact Coralie Gass on coralie.gass@michelmores.com or 020 7659 4648

*From law firm EMW