Relevant economics of the past week (for intermediaries)

- Tesco, the world's third-biggest retailer by sales, has priced the initial public offering of its Thailand property fund at Bt10.4 per unit, at the top of an indicative range, according to people involved in the deal, the FT reports. The IPO is set to raise Bt18.4bn ($602m), which would make it Thailand's largest property fund and its biggest offering since Rayong Refinery's $710m listing in 2006.

- UK manufacturing performance was 'good in parts' in February. The Purchasing Managers' Index (PMI) survey of UK manufacturing showed that the sector expanded for the second month in a row, but the rate of growth slowed. Factory production increased, leading to a rise in employment, but this is due to work on backlogs rather than new orders. Less good news is that UK domestic demand is still low and the boost from better exports to
Asia and the US has been offset by poor Eurozone demand for UK goods. News on prices wasn't good either. The surge in oil prices caused input prices to rise at their fastest monthly rate in over 19 years.

- UK housing market data were stronger. The price of a typical house in the UK increased by 0.6%m/m in February, which brought the annual rate of growth up to 0.9%. This may seem at odds with the current difficult
economic conditions, but it concurs with other recent data. Mortgage approvals for house purchases reached their highest level in more than two years in January, up 36%y/y. Some of this is due to particularly weak levels
in January 2011, but the improvement in prices and approvals is more likely
due to activity brought forward to beat the end of the stamp duty concession later this month.

- Eurozone banks were eager to take up the ECB's second dose of long-term funding. 800 banks took advantage of the ECB's liquidity operation, compared with 523 in December, as collateral rules were loosened.
The move has reduced tensions on bond yields in the most vulnerable countries. But it's unlikely ECB Chairman Mario Draghi will offer another dose. He is eager for banks to begin to operate 'normally' again by borrowing from each other. Jitters about bank solvencies in the face of the sovereign debt problems are preventing this happening at the moment.

- Inflation increased and Eurozone unemployment reached a record high rising 10.7% in January. Spain is suffering with an unemployment rate of 22.3% and a youth unemployment rate just under 50%. And Eurozone
inflation rose to 2.7% in February up from 2.6% in January. Oil is the main culprit as prices rise because of increased political tensions in the Middle East. This remains as another threat to economic recovery, in the Euro and globally.

- Savills expands list of property lenders - Savills today names 21 active "bigger ticket" property lenders, an increase of two in the last six months. The firm said the named lenders had completed at least three deals of more than £30m over the last six months or were well advanced in doing so. The four new entries to the list are AIG, Citigroup, Deutsche Postbank and Lloyds Banking Group, while Aareal and Eurohypo have disappeared.
Savills' list includes all the UK clearing banks (Barclays, HSBC, Lloyds and RBS), eight German banks and five insurance companies, AIG, Aviva, Axa, MetLife and M&G Investments. Other emerging insurance or life companies are Canada Life and Legal & General. William Newsom, Savills' UK head of valuation, said: "There is no shortage of organisations seeking to provide both senior debt and mezzanine. However, the real issues are firstly that lenders are very selective, and, secondly, tighter lending terms. "Of the lenders listed, they are looking to provide finance to selected borrowers with track record, secured against good quality commercial investment
properties, let to strong tenants on long term leases in good locations, preferably located inside the M25." Savills confirmed that loan to values had fallen over the past eight months and interest rate margins had increased by 100 basis points to 325 basis points for prime investment. Loan-to-value ratios against prime investment are around 55-60% with some banks having difficulty lending above 50%. Savills also identifies a further 50 senior debt providers, who are active at the small and medium-sized ends of the spectrum, and 30 providers of mezzanine finance. "The number of lenders in the market is encouraging to see, but the further reduction in loan to value ratios means that borrowers may increasingly access the mezzanine market in order to bridge the funding gap," Newsom added. The 21 bigger ticket lenders are: AIG, Aviva, Axa, Barclays Bank, Bayern LB, Citigroup, Deka Bank, Deutsche Bank, Deutsche Hypo, Deutsche Pfandbriefbank, Deutsche Postbank, Helaba, HSBC, ING REF, Landesbank Berlin, Lloyds Banking Group, Met Life, M&G Investments, Royal Bank of Scotland, Santander

- UK regulators and global banks are discussing a potentially far-reaching overhaul of the calculation and regulation of interbank lending rates, amid claims that the benchmark for $350tn contracts worldwide may have been subject to manipulation

- Lloyds Banking Group is lining up its second loan sale in the space of six months, PropertyWeek.com can reveal, with a £600m portfolio being put together. A sale would come on the back of the successful disposal
of £923m of loans to Lone Star in December, the Project Royal portfolio. Lloyds has not yet given the final green light to the sale, but is understood to be working with adviser JP Morgan Cazenove, which handled the
Royal sale, to decide which loans to put into the portfolio, in a process some in the market are calling Project Launcelot. A sale would be part of the range of options being considered by Lloyds to reduce its property
exposure. It is understood that this portfolio will eventually total around £600m, and that the loans will have similar characteristics to those in the Royal portfolio, where the average lot size was around £4m, and the loans
were secured against office, retail and industrial properties around the country. If the Launcelot portfolio does come to market, it will likely be bought by one of the large US private equity firms which have raised tens of
billions of dollars of equity to buy loan packages. The final two bidders on Project Royal were Lone Star and Cerberus Capital Management, both of which are looking to step up their European distressed loan acquisitions.
Blackstone has also recently set up a new division, Blackstone Real Estate Debt Advisers, to manage the £1.4bn Isobel portfolio in which it bought a stake from Royal Bank of Scotland last year, alongside other loan portfolios
Blackstone is looking to buy. It is expected that Launcelot will be the last UK loan portfolio sale undertaken by Lloyds in the medium term, because it will then have exhausted the type of loan which can be packaged up and sold. Loans that can be sold in a portfolio need to have a certain characteristic, such as no change of control covenants and minimal swap liabilities. Lloyds has a portfolio of more than £21bn of loans that are managed by its business support unit, headed by Richard Dakin, that need to be restructured or sold. Last year Lloyds achieved the difficult task of reducing its property exposure by £13.5bn to £68bn while at the same time nearly halving its losses on property to £1.3bn. This process was partly due to loan sales like Royal. Lloyds sees the Royal sale as a success, having sold the portfolio completely, without providing vendor finance, at a discount of around 40% in a process that took roughly six months. But it is thought that it is not wedded to the idea of a loan portfolio sale, having used other workout strategies in the past three years such as putting together portfolios of
assets for sale, and setting up platforms to asset manage properties over the longer term.

Switzerland - Property Rules

Switzerland

Swiss real estate is some of the most coveted in the world, but the country also has some of the strictest rules when it comes to foreign ownership.

• The government assigns annual quotas to the country's cantons limiting the number of houses or flats that can be sold to foreigners who do not reside in Switzerland. Each sale must still be authorized by the canton in which the property is located, and the cantons can set their own additional restrictions. Many limit foreign property sales to tourist regions, for example, or allow foreigners to purchase only property that is already foreign-owned.
• Foreigners can buy only one property to be used as a holiday home or a secondary residence. They cannot purchase a property for the sole purpose of renting it out, although holiday homes can be rented out periodically on a short-term basis.

The Swiss alpine resort town of Andermatt is one of the few places in Switzerland where foreign ownership of real estate is unrestricted. Luxury studio apartments marketed as vacation properties can sell for several million dollars. (Arnd Wiegmann /Reuters)

• Property owners need special authorization if the surface area of their real estate exceeds 1,000 square metres.
• In some cantons, foreigners are barred from selling their property for a certain number of years after purchasing it — generally between five and 10 years.
• If foreigners buy vacant land, they must build on it within a year.
• Foreigners who live in Switzerland do not need to get prior authorization to purchase real estate that will serve as their main residence and can rent out the property or use it as a holiday home if they move to another part of the country.
• One area that is exempt from restrictions on foreign ownership of property is the alpine ski resort town Andermatt, where luxury condominiums marketed to wealthy foreigners as vacation properties can sell for several million dollars.
• Foreign nationals from EU members states and some other European countries who want to buy property do not require the same type of prior authorization as other foreigners.

Slowdown in South African house price growth

The slowdown in house price growth in South Africa continued in January 2012, as on a monthly basis the nominal price growth remained in negative territory, according to recent data from ABSA.

The average nominal price levels of houses in the various categories of the middle segment of the market were R664,400 for small homes (80m²-141m²), R995,000 for medium-sized homes (141m²-220 m²) and R1,559,800 for Large homes (221m²-400m²) in January 2012.

The ABSA report stated: “Having expanded by an estimated real 3% in 2011, the South African economy is forecast to grow by 2.8% in 2012. The lower growth expected this year will largely be the result of a slower pace of expansion projected for the world economy, which will impact South Africa’s export performance. A weaker rand exchange rate compared with last year will, however, provide some support to the country’s export earnings.”

Relevant UK Commercial Property information this week

- Retail vacancy drops to 12.7%: Vacant retail units and floorspace have continued to fall for 18 months according to research by Colliers International. Colliers’ seventh National Retail Barometer report has found that despite the third successive half year fall in retail vacancies, the levels of vacant shops remains well ahead of pre-recession levels. In October 2011, 12.7% of units across the sample of 15 towns and cities were empty, down from 13.3% last April. Some 9% of retail floorspace was vacant in October compared with 9.7% six months earlier. Richard Doidge, director of research consultancy at Colliers International, said: “The overall amount of vacant floorspace in our sample of towns has risen by 570,000 sq ft, or just over 51%, in five years. However, over the same period total retail floorspace stock increased by 1,421,000 sq ft or 8% (adding in new development and subtracting demolitions). Therefore, the total occupied retail floorspace actually increased by 851,000 sq ft (or 5%) through the recession. Although our sample does include a couple of major shopping
centre openings, the headline vacancy rates do tend to mask the broader picture which is not as negative.”

- Axa is gearing up to lend €2bn to European property companies during 2012 as one of Europe’s largest insurers bids to cash in on the regulatory pressure curtailing bank financing across the continent. Axa Real
Estate, the French group’s property arm, raised the funds from its parent company and a club of other institutional investors last year. The group intends to accelerate investment during 2012 in what it has called
“exceptional market conditions for senior lending”. The €2bn Axa intends this year to divert into debt provision, in both primary and secondary markets, compares with 1.5bn it spent in 2011. Isabelle Scemama, head of commercial real estate at Axa, said the focus would be on Germany and France because banks in the two countries “follow their UK peers in adjusting down their lending strategies”. Ms Scemama added that Axa would concentrate on senior debt, secured against high-quality commercial property, rather than mezzanine or junior debt. She said the shortage of supply in new lending to the sector meant senior loans “currently offer by far the most attractive risk-adjusted returns”. The move to increase its lending activities comes after Axa last month said it had raised €2.5bn for a separate fund targeting the development of new offices and shopping centres, highlighting the growing role of insurers in the property sector. Other insurers, such as Legal & General, have recently launched lending platforms to take up some of the slack in the market. The acceleration in investment by insurers coincides with a slowdown in bank lending to the sector. Germany’s Eurohypo
and France’s Société Générale both announced a moratorium on commercial property lending at the end of last year. Banks are shrinking their exposure to the sector ahead of changes under the Basel III rules, which will
increase the amount of capital they will have to hold against property loans. Insurance companies were historically an important source of finance to the property sector. But, during the 1980s, more aggressive banks wrested
control of the market. The result was that many banks were left nursing billions of euros in non-performing loans when the financial crisis precipitated a collapse in property values. This led insurers to forecast a
greater role for themselves in the property-lending market. They face a challenge over how to structure loans to match their needs and include clauses that prevent early repayment.

- When Royal Bank of Scotland launched an exercise on Tuesday to buy back £5.4bn of outstanding bonds, with the aim of profiting from the gap between their trading price and par value, it made sure to add a line of
explanation: “Any profits made by the issuer on the exchange offer will be subject to UK tax in accordance with normal rules.” It may have been a swipe at Barclays, or just a statement of standard practice. Either way, it was
probably a wise move to stress the point, given the furore that surrounded Barclays after it emerged that the bank had tried to deprive HM Revenue & Customs of as much as £500m, largely by avoiding a tax liability on a
December debt buyback. On December 5 Barclays moved to buy back £3.7bn of outstanding debt for up to £2.5bn. The gain of about £1.2bn should normally have been taxable, generating £300m under normal circumstances for Treasury coffers. But according to people briefed on the affair, Barclays sought to avoid that tax by replicating a traditional mechanism used by near-failing companies when buying back old debt. The buyback was Barclays’ first since new rules were introduced in 2009 ending an effective tax break on the
practice. In the immediate aftermath of the 2008 financial crisis, banks across the world made billions of pounds of capital gains through these so-called liability management exercises. Both RBS and Lloyds Banking Group – harder hit by the financial crisis, and therefore with more of an incentive to buy back cheap debt to book as profits – have done the most. According to data compiled by analysts at Nomura, RBS has launched an aggregate £23.6bn of debt buybacks over the past two years, with Lloyds buying back £6.4bn. Both banks said they had either paid tax on the gains, or had been exempt from paying it because of overall pre-tax losses across
their businesses. Both banks reported last week that they were making heavy losses in 2011. The balance of the lost tax targeted by HMRC was the result of the use by Barclays, and a “very small number of [other] large financial groups” of so-called authorised investment funds designed to create tax credits that can be repaid or offset against a bank’s other income where the tax in question has not been paid. Blocking this scheme – widely described by tax advisers as highly aggressive – would save £140m of tax, said HMRC. Tax experts said the HMRC crackdown would have a minimal impact on banks’ tax regimes.

- Taxpayers will have to wait up to 15 years to recoup the money spent on rescuing Northern Rock, according to the first official analysis of potential returns from one of the highest-profile bail-outs of the financial crisis. A report published on Tuesday by UK Financial Investments, which manages the government’s stakes in banks, forecast an eventual profit of up to £11.2bn from Northern Rock. However the bulk of that will be absorbed by
funding costs on the loans provided to the bank since its nationalisation in 2007. Overall UKFI expected to extract £46bn-£48bn from the £36.8bn of government funds that have been pumped into the bank. It said this amounted to an annual return of 3.5 per cent to 4.5 per cent excluding tax. After estimated annual funding costs of 3.9 per cent, which will eat into that return, the taxpayer is expected to break even on its investment. “Taxpayers are going to get every pound back from their investment in Northern Rock,” said Keith Morgan, who oversees the government’s stakes in Northern Rock and Bradford & Bingley. He stressed that UKFI also expected the government to make up to £21.8bn from B&B, taking its eventual return from the two failed banks to £33bn. This could take 10-15 years, however, as it is dependent on borrowers gradually repaying their mortgages. Nevertheless, the research will be a relief for the government, which came under fire last year for
selling the “good” part of Northern Rock - its branches, retail deposits and some mortgages - to Virgin Money for a £400m loss. The government received £747m in cash for the Northern Rock business – far below the £1.4bn of equity it injected – and is in line for further payments based on future performance. Deutsche Bank, which advised on the sale expects it to ultimately deliver £863m-£977m for taxpayers. That compared favourably with other disposal options, including floating or remutualising the bank, both of which would have generated less than £500m, according to UKFI. Justifying the timing of the sale, the group said that waiting until 2013 would have reduced the proceeds to £650m-£735m as a result of the deteriorating economic environment. While the sale to Virgin Money was considered a symbolic moment in the rehabilitation of Northern Rock, the vast bulk of
taxpayer returns – £45bn-£47bn – will come from the bank’s old loan book. This legacy business has been merged with the mortgage portfolio of Bradford & Bingley, which ran out of money in 2008. UKFI expected to recoup £49bn from the £27.2bn it injected into B&B following its collapse. The group revealed it paid out £3.2m in fees relating to the sale of Northern Rock. Deutsche Bank took £1.84m, which UKFI said was a low price compared with demands of up to £7m from other banks. The remainder was distributed among
firms including lawyers, accountants and PR advisers.

- Capital & Counties has announced strong results for 2011 with a hike in net asset value of 11.7%, to 166p per share. In a further display of the strength of the London economy, the value of the company’s portfolio
rose by 9.2% to £1.6bn with a loan-to-value ratio of 29%. Highlights of theyear included the £300m refinancing of its Covent Garden development and the submission of planning applications for its 10m sq ft Earls Court
Masterplan. The company also announced this morning that it had sold its half share in £150m worth of West End property to Great Portland Estates, from the pair’s Great Capital Partnership. The deal includes five properties in Regent Street, Broadwick Street and Dufours Place. Ian Hawksworth, chief executive of Capital & Counties Properties, said: “The transformation of Covent Garden into one of the most vibrant retail and leisure destinations in London continues to create value and attract new brands, whilst the recent resolution to grant planning consent for our Seagrave Road development is an important milestone in our progress with the Earls Court Masterplan following the submission of our planning applications in June. “I am confident that Capco’s place-making vision, creative teams and central London-focused assets will provide considerable opportunities in both the retail and residential markets during 2012.” Ian Durant, chairman of Capital & Counties Properties, said: “Capco is well positioned to maintain itsmomentum following a year of progress and value creation in 2011. Strong total returns were generated by energetic and profitable activity in line with the strategy articulated at the time of establishing Capco as an independent company in 2010. Carefully targeted acquisitions and the drive
towards creative regeneration have established a solid platform from which to continue to create value from Capco’s assets.”

- Five of the most dominant fund managers in the UK property market have started pooling data on more than £10bn of property in a bid to chart how the green attributes of buildings affect rental growth and capital values. As part of the most in-depth study of its kind to date, described as “game-changing” by valuers and fund managers, Aviva Investors, Prupim, Legal & General Property, Henderson Global Investors and Hermes REIM have pooled fifteen funds. CBRE UK head of valuation Michael Brodtman and the Royal Institute of Chartered Surveyors have compiled a framework of sustainability information, named EcoPas, which will be gathered and fed into the Investment Property Data Bank, which tracks the performance of funds. Brodtman expects to be able to track how sustainability performance affects the performance of all fifteen funds as early as autumn this year, alongside which sustainability features affect performance the most. It is understood that seven further fund managers are likely to commit to the scheme imminently. “There has long been a link between why sustainable properties perform better, but in the UK this has been impossible to prove,” said John Symes-Thompson, senior director, valuation and advisory at CBRE. Bill Hughes, managing director, Legal & General Property said: “Current metrics systems are designed to look at all aspects of ‘sustainability’ rather than
the different and more narrow issue of ‘the investment implications of sustainability’. “As such, they cannot do this very necessary job for investors in the way that EcoPAS can. In time, this critical project will bring the impact of sustainability upon investment performance into the Boardroom.” Call for rethink on third runway at Heathrow

- The head of International Airlines Group, parent of British Airways, has challenged ministers to have the “political balls” to reconsider the case for allowing a third runway at Heathrow airport.

- Christian Candy’s CPC Group has returned to the UK development scene with the cash purchase of the Sugar Quay site in the City of London. CPC has exchanged contracts for the site on the north bank of the Thames
with administrators at KPMG. It is CPC’s first purchase of a development asset since it bought Chelsea Barracks with backing from Qatari Diar for £959m in January 2008. There is a 110,000 sq ft office building on Sugar Quay, and planning consent for another of up to 231,000 sq ft. The building is vacant and is leased to Tate & Lyle. Nevertheless, the site is a complex development prospect. Candy said: “This is a unique site directly on the river, with potential for redevelopment. We are reviewing the possibilities for the site, which could potentially be an existing office upgrade, or redeveloped for commercial or residential use, subject to freeholder consent
and planning.” However, the City of London does not encourage new homes except in areas of existing residential development, such as the Barbican or on the fringes of the Square Mile. If the planning consent cannot be revised, CPC could proceed with the office plan. The ownership structure of the property adds a further layer of complexity. The Fishmongers Company owns the freehold, and the site is held on an 80-year lease, which would need to be regeared for a complete redevelopment. If this is not possible, the office building could be refurbished instead. The purchase price is not known, but accounts for Tilemead, the special-purpose vehicle that owns the property, show a £34m loan to Lloyds Banking Group, and this is expected to be the region of the purchase price. CPC Group has bought more than £150m of property for redevelopment this year. It includes: Two houses in Chester Square, Belgravia. A penthouse in Connaught Place, Bayswater. A penthouse in
Arlington Street, St James’s. A house in Cornwall Terrace overlooking Regents Park. An apartment in Park Mansions overlooking its One Hyde Park scheme. Real estate in New York

Leftfield Capital has completed its latest UK Commercial Property acquisition

Leftfield Capital and Tungsten Property Investments International have completed the acquisition of their Property VI distribution centre in Oldham Business Park, Manchester, England for a consideration £9,000,000 at a 7.74% Net Initial Yield. Strong banking relationships ensured mortgage finance of 65% Loan-to-Value at 4.80% fixed-cost finance over 5 years, delivering a positive cash flow investment. The property is conservatively projected to return a cash multiple of 1.6 - 1.8 times money invested over 5 years.

The attractive building is only 3 years old and 12m to under-sided eaves. The property boasts strong fundamentals with an excellent location, strong covenant and a Fully Repairing and Insuring lease with guaranteed minimum rental uplifts in 2015. The property was purchased below its replacement cost of £10,400,000 and presents attractive asset management and rental growth opportunities over and above the minimum uplift guarantees. The investment (details attached) is fully subscribed with £3,600,000 of equity and all investors will receive completion packs in due course detailing final outcomes of the acquisition process, share certificates, final sales brochure and signed copy of their share subscription agreements.

This acquisition takes to £60,000,000, the value of property transactions in just under 3 years.

Leftfield has been focusing on distribution warehouse assets of late. The asset class has been attracting considerable industry attention in recent months. Figures from IPD show that the UK industrial sector provides the highest income returns in a zero-capital growth market when compared against the office and retail sectors. The sector is characterised by long leases and has been isolated from the worst of the unpredictable rental dips
suffered by central London offices, where some rents have dropped from nearly £100/sq ft down to £60/sq ft. Opportunity buyers have also turned their attentions to the sector, using their access to equity and debt to buy
large portfolios. The combination of yields in excess of 7% with lower fixed cost leverage can drive up returns. US private equity firms invested in the sector over the new year. In the property press last month: 'Shortly before
Christmas, Blackstone bought two portfolios for a total of £500m from Prologis. Harbert Management Corporation also snapped up £200m of Segro's non-core UK business parks. Both Blackstone and Harbert are understood to be interested in investing further in the sector. "Against a backdrop of pretty much zero speculative development, the dwindling supply is ensuring occupiers have very limited options," said a market source. "As a result, you'll see investors looking for the good-quality stock with the prospect of adding value through regears and extensions. The sector is ready for rental growth, too." ' In addition, high inflation and low supply is driving up
replacement costs. There has also been a lot of focus on the change the Internet, with rapidly increasing bandwidth, is bringing to the distribution and retail landscapes. Technology advances are increasing roof heights of distribution centres, which has not yet filtered through to impact the underlying rental values per square foot.

The property latest acquisition will be added to the website at www.leftfieldcapital.com in the next few days.