The vultures are hovering, so we must be at the bottom

Peter Bill
3 Apr 2009

Welcome to the bottom of the commercial property market. It must be, for today the world's biggest property agent says so. "The time to buy UK property is now," reckons CB Richard Ellis.

The message from the group, with 29,000 employees, is contained in an eight-page piece of research which concludes the combination of plunging prices and plunging interest rates means it is time for investors to open their wallets.

"Property yields are now approaching levels where, even with some realistic allowance for tenant fallout, the income will provide a substantial real return," says Peter Damesick, UK head of research at CBRE. "Equity-rich investors will have the field."

To translate: An office block rented out for half a million a year would have cost £10 million in 2007. The same block can now be had for £6 million. Happily the tenant is still paying £500,000 a year in rent. Don't worry about the price going up or down, says CBRE. Thanks to low borrowing costs you can make profit on the rental income alone.

But the agent adds three important caveats. First, the office block must be in a good spot. Second, you must be pretty sure the tenant is not going to go bust. Third, you must be able to raise the asking price.

That final provision is still, of course, the big snag. But the ever-enterprising property market is now busy figuring it out. Right now, a great deal of brainpower is going into setting up property funds to buy distressed assets.

One man busy helping to set up such funds is John Forbes, head of real estate for Europe at PricewaterhouseCoopers. "UK property looks cheap. A number of fund managers are looking to raise real-estate funds to take advantage of the UK recovery when it happens," he says.

These opportunity funds typically look to pull in between £50 million and £500 million from professional investors, or other funds. They can be quite lucrative for those setting them up. The fees lie between 3% and 5% of the money raised. Most of this will go to lawyers, bankers and advisers like CBRE and PwC, who both have expertise in setting up funds.

But there is a little-known group of intermediaries who are sometimes needed. If the promoters don't have good connections to investors, they can turn to so-called placement agents.

For a fee of between 1% and 2% of the money raised, these guys get investors to commit to paying cash when the "opportunity" fund goes live. Imagine your cut if you could raise £500 million. The smell of vulture hanging around the word "opportunity" means most of the new funds will have bland names like "UK Office Recovery Fund". But make no mistake. They are being set up to pick the carcass of other funds and property businesses that have been killed in the jaws of the negative-equity trap. The bottom of the market is a very bloody place.

Regent Street sale's a taxing blow, Ma'am

The Queen's property company, the Crown Estate, is braced to announce plans to transfer its £1.8 billion Regent Street estate into a real estate investment trust (Reit) and flog off a stake of between £500 million and £750 million to the private sector.

This will not be met with universal rejoicing, but a viability study has concluded the idea is a Good Thing. So, pretty much all of Regent Street will be transferred into a new company with a separate board, probably headed by the Crown's head of Regent Street, David Shaw.

At the same moment 30%-40% of the new business will be sold for many hundreds of millions to a carefully selected someone who will get their hands on a portion of the Crown's property jewels at the bottom of the property cycle.

The losing grumblers ask what, exactly, is wrong with a set-up that has produced regular profits (for the taxpayer, not the Queen) from a £7 billion business that has ridden the recent storms precisely because it has eschewed financial adventurism since its foundation in 1760.

Rage is over as Ronson the Sage thinks positive

Lunch at the Dorchester on Tuesday must have been a pleasant break for City minister Paul Myners and Olympics counterpart Tessa Jowell. Neither politician had to make a speech at this annual fixture, hosted by Gerald Ronson's property company, Heron International.

Instead they got to hear the 70-year-old Sage of Property himself, who sounded a touch less grumpy than in recent years. Regulars recall the last time Gerald sounded happy was in 2004, when he called the property market “robust”.

In 2005 he became vexed with parvenus pouring money into bricks and mortar. “Do they understand what they are investing in,” he grumbled, “or are they following the herd over the cliff?” Two years later Ronson got personal. “I would not have some of these property fund managers do my shopping at Tesco,” he raged. In 2008 he said: “Last year the writing was on the wall. But the words might as well have been written in invisible ink.”

This year his opening attack was framed in the past tense: “money became too easy to be made.” He warned there would be no short-term recovery. But, lo, now was the time for “positive thinking” for “the world has not come to an end”.

The Sage of Property was almost perky about the prospects for Heron, whose nascent tower in Bishopsgate is more than a dozen stories high and climbing.

Fraudster Achilleas has yet to be brought to heel...

Allied Irish Bank is now looking doubly foolish. Not only has it lost £56 million to a property fraudster, the clowns didn't even bother to check that the man in question was who he said he was.

The Serious Fraud Office last week raided the Mayfair offices of Achilleas Kallakis after the bank discovered that leases used to guarantee huge loans to buy the headquarters of the Telegraph Group in Victoria were forgeries.

Or should that be the offices of Stefan Kollakis? The Guardian alleges that one and the same man was convicted of selling bogus UK titles to foreigners in 1995. Kallakis/Kollakis was no small player.

He managed to convince banks to stump up loans of about £500 million of property deals between 2003 and 2007.

And when will the Serious Fraud Office bring him to book? Don't hold your breath. The culprits of a separate property scam uncovered in March 2006 have yet to be charged.