When will the Property Freeze begin to Thaw
Given European wide austerity measures and economic uncertainty, it is expected that 2012 will be a difficult year for the commercial and retail property fund sectors. The sovereign debt and financial crisis continues to negatively impact financial markets, specifically within Euro dominated countries in the Eurozone. Relative inaction by some European policymakers appears to have engendered a degree of uncertainty and lack of trust within the financial markets about the possibility of an effective and prolonged solution to provide financial stability.
Furthermore, the increase in the global legislative framework is impacting on the funds sector with new regulations such as the AIFM Directive, the Dodd-Frank Act, the Bribery Act, the EMIR, Solvency II and Basel II, requiring review and attention. This growth in legislative measures is substantially increasing the compliance, legal and administrative fee base attributable to the fund structures. It is therefore even more important that the firms competing for this business (across all jurisdictions) remain competitive whilst retaining their technical knowledge base, which will ensure that the business is in a position to manage the legislative demands.
Jersey continues to prove itself as the jurisdiction of choice for property structures, due to its robust regulatory governance within which flexible structures can operate competitively. Furthermore, Jersey service providers have the ability to offer world class and competitive legal, tax, accounting and administrative services, which are provided within close proximity to its European neighbours. The Jersey funds sector continues to adapt to the legislative changes quickly and efficiently; and in concert with the Jersey government and the industry regulator, positive steps are being taken to ensure that Jersey’s fund industry has the relevant policies in place to ensure compliance with the ever changing financial services landscape.
Moreover, investors and fund managers alike are becoming more proactive in their search for the preferred jurisdiction to domicile property funds, with the favoured solution being those jurisdictions that can deal not only with the economic challenges, but also the increased legislative requirements. In Jersey’s favour are reports such as the Global Financial Centres Index (most recent report dated September 2011), which show that Jersey is the highest rated offshore international finance centre. As reflected in the quarterly league table, Jersey sits 10 points ahead of its closest offshore rival, Guernsey and even 8 points ahead of one of its closest European competitors, Luxembourg.
In light of the current market conditions, I believe one of the key risks that property funds face in 2012 is access to funding, given the significant impact that the sovereign debt crisis is having on European economies. It has recently become apparent that banks are taking steps to de-leverage their balance sheets and reduce exposure to new property lending and the potential risk involved. This could lead to a shortage of available finance, which will ultimately have a prejudicial impact upon property values.
The commercial lending arm of Commerzbank (Eurohypo AG) has suspended all new property lending until June 2012, similarly, Société Générale has suspended new UK and European property lending indefinitely. With other lenders sure to follow, it is likely that only the most liquid of property structures will survive during this difficult period. This does, however, mean that there is potential scope for funds that are cash rich with an appetite for long term investment, to acquire good quality commercial properties at relatively low prices. It is expected that the space left by the retracting banks would be taken up by Insurance Companies and private lenders but this is yet to be confirmed.
The prevailing market conditions also appear to have impacted on investment decisions made by fund managers. In the context of investment selection, throughout 2012 it is expected that commercial property investors will focus on high-quality buildings in prime locations, situated in liquid and transparent markets: See: the CBRE Global Research report ‘The Global ViewPoint for 2012’. These trends correlate with what we’re currently seeing at Whitmill, with various funds administered by Whitmill purchasing four office buildings and a shopping centre during the previous two quarters, all of which are predominantly situated in prime city centre locations in both the UK and other European countries.
However, having a prime city centre located asset will not guarantee success. Whilst the London commercial property sector continues to thrive with vacancy levels in London’s West End at 4.4% at the close of Q3 in 2011, other UK regions such as Birmingham (20.1%) and Liverpool (19.1%) are not faring as well: Jones Lang LaSalle – UK Corporate Occupier Conditions 2011. Notwithstanding, it is a positive sign that commercial property investment throughout Europe totalled €31.4 billion (2011, Q4), which is a 17% increase from €28.6 billion (2011, Q3): DTZ Research – Investment Market Update, Quarter 4, 2011.
Essentially, the success of any type of commercial property investment, particularly those operating in difficult market conditions, requires excellent asset management to ensure positive asset performance. This is particularly prevalent in the retail property sector, with footfall numbers reducing at the same time that the popularity of online shopping is on the increase. Whilst it is correct that retail sales experienced a 6.2% growth in December 2011 and the volume of sales increased by 2.6% during the same period (www.ons.gov.uk), such statistics do not differentiate between shop and online purchases. Online shopping has never been more popular, so it is vital for an investment manager to consider such factors to ensure maximum rental returns and occupancy rates in retail outlets. It is paramount that a prudent property manager can ensure its business model is suitably flexible so that any retail letting defaults are minimised. This is only possible if the entire investment model is similarly flexible to adapt to changing circumstances.
Ending on an optimistic note, there is still scope for investment potential in commercial property deals outside of the capital cities. There are more regional satellite airports and cheap airlines than ever before, which open gateways and develop transport hubs that naturally lend themselves to attractive retail investment opportunities. Similarly, the pull of free parking and late night shopping in out-of-town shopping centres continues to challenge the traditional high street retail trading. Even the BBC’s decision to relocate operations countrywide has benefits – for instance, boosts to the retail, commercial and private sectors have been witnessed in Greater Manchester with the ‘Media-city’ development in Salford. Similarly, urban redevelopment plans for cities like Preston, albeit temporarily halted, are indicative of potential investment opportunities outside of the usual sphere.
About Whitmill: Whitmill Trust Company Limited (“Whitmill”) was established in 1992 when Don Wijsmuller (Managing Director) made the strategic decision to develop the business independently of any financial institution or banking organisation. This independence ensures flexibility, quick decision making and a highly personal approach to its clients, which sets it apart from its competition.
Whitmill is regulated by the Jersey Financial Services Commission.
Claire Keeney is a Senior Manager within the Funds Department. She joined Whitmill in April 2009 to establish and head-up the funds team. Claire has considerable technical expertise and experience of both day-to-day administration and the launching of new funds, which has been gained whilst working for the Jersey office of a major international fiduciary group. Claire is able to draw upon skills and knowledge gained from her academic qualifications, combined with her considerable experience in the funds and alternative investments area. Claire is also experienced in the listing of a wide range of structures on the Channel Islands Stock Exchange ("CISX"). Following her arrival, Whitmill applied for and has been accepted as an authorised Listings Sponsor with the CISX. Claire can be contacted on +44 (0) 1534 886129 or by email at Claire@whitmill.com.