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