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Dealmaker interview: New rules in tough times

There are rules around downturns that all but the youngest entrants to real estate will remember firsthand. Global events happen, money gets tight, companies fail, schemes get mothballed and the market gets flooded by a slew of distressed assets.

But has the market somehow pulled clear of that old gravity? Was Dua Lipa more prescient than we assumed when she spoke of new rules?

One man who has both bad and good news on the subject is Jamie Lamond, director of Watling Real Estate, which was formed less than a year ago through a management buyout of Avison Young’s restructuring team. He believes we are yet to reach the bottom of the market, but he senses it coming.

“It does feel very different to previous times, but I don’t think we’re there yet; if you look at the number of administration cases in recent months, they have considerably increased, as have the number of appointments of receivers,” says Lamond, EG’s latest Dealmaker of the Month. “By the end of the year I think we will be seeing considerable amounts of distressed sales in the market.”

Lamond believes the main reason those old rules feel different is because of the way real estate debt is structured. In 2008 it was mainly the clearing banks who would appoint him to market distressed assets, but finance has evolved.

He says: “We still have that exposure to the clearing banks but they’ve been really quite quiet because the challenger bank, peer-to-peer lender – the ‘other’ lending market – is the arena at the moment where most of the debt is, and we didn’t have that last time round. We’re only now starting to experience how these guys who are structured very differently are going to play when they experience problems across their debt books.”

Lamond believes all sectors of real estate are still vulnerable, with hospitality and retail the most at risk. “We’re very aware of a number of independent restaurants, hotel groups, who are really, really struggling and I think we can expect to see an uplift in that further as the year progresses,” he says. “We’re all very aware of how the high street has been hit, not just by Covid but by changes of shopping habits. That will continue, sadly.”

He believes the “golden child” of logistics is generally stable but still prone to business failure, which will lead to a rebasing of values.

Lamond also has a warning for the office market. “I think the one that’s not fully explored [is] the likes of Canary Wharf and the City where values have plummeted from £100m+ down to £30m. There are going to be a lot of buildings here that are technically underwater, whether it’s a loan-to-value breach, changes in occupation, rental level changes, which mean there are going to be problems in the City and the West End on some core office accommodation.”

He also thinks ESG is a potential headache for much of the country’s office stock, particularly regional business parks. Quoting a quantity surveyor who warned him that ESG updates are not financially viable on units where rent is less than £60 a square foot, he says, “That’s a big number if you step out of the M25.”

“There is a lot of kit out there that is under-occupied and is coming to an end of its economic life and you’ve got to ask yourself what is the future of those buildings, because I think the ESG point is another challenge that is going to be placed on a lot of these buildings that we have in the UK. I await with baited breath to see how it’s going to be implemented but I think it’s going to have a detrimental effect on an awful lot of real estate – financially, that is.”

However, Lamond says the overall situation is far from apocalyptic because there are other key differences between now and the global financial crisis. “There is still plenty of weight of money in the market from those that are sitting on cash reserves and there is still a strong interest from a number of lender groups to lend, so across the two, yes there is still plenty of money around.

“The question is, and the deliberation on most of their lips, is when to buy? Is it today, is it in six months? Somewhere in between? Later? You’ll get many answers to that and I don’t think I can give you the perfect one, still.”

If Lamond is right, the coming months will prove decisive in answering just how many of the old rules still apply.

Listen to EG’s latest Dealmaker of the Month podcast here

 

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