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Banks Become Property Developers Recession Bites

Wednesday, 30 September 2009

Banks could become the next generation of property developers if current trends continue, according to experts from property consultancy GVA Grimley.

A recent shift in the market has seen many banks restructuring their property portfolios and holding onto distressed properties in order to maximise the potential for capital and rental returns.

According to industry experts, this change in behaviour could lead to banks behaving increasingly like traditional property companies in order to avoid oversupply and further delay in the resurgence of the property market.

Andrew Foster, corporate recovery advisor from GVA Grimley's Leeds office, explains: "In the last recession, property agents were employed by the banks to dispose of repossessed properties as quickly as possible, in order to reduce risk and ensure maximum return on the original amount loaned. 

"Today this is not the case. Real estate values have dropped by some 40 per cent on average and banks quickly disposing of property would further accelerate this loss. Instead, some financial institutions are seeking to maximise values and are retaining real estate and by default, building a property portfolio.

"The key issue is that banks have been lending so aggressively to the property sector that if they simply sell assets to the highest bidder in today's market the loss would be too great. 

"In some cases, prior to the recession, property values were so over inflated that developers were looking at secondary locations for opportunities. Due to the appetite, real estate prices were at a premium. If the bank is forced to foreclose, they cannot sell the property and cover the value of the loan. However by retaining or buying in the property, the banks can minimise losses, and help to control the marketplace."

This activity has a two-fold effect, it is preventing the real estate market from being flooded with distressed property for quick sale, which would impact on values, but it also means that some banks are essentially 'land banking' properties.

Foster continues: "The challenge is that bankers are financially adept but not necessarily property experts. They are therefore seeking professional advice in order to better manage the asset through restructuring, investment or good management in order to derive some rental income in today's challenging economic environment as well as maximising the long term opportunity.

"This new trend is particularly true of part-built developments and undeveloped land, especially in the residential arena. I believe that this could increasingly spread into the commercial investment sector particularly if interest rates rise in the future."

Industry experts believe that this market shift has led to an increasing demand for multidisciplinary property firms to not only offer valuation expertise but also to advise on managing and developing banks' property portfolios.

Foster concludes: "There is a new property investor emerging and the question is where will this stop? In the medium to long-term, we could see some properties released from bank portfolios, but they will work to drip feed the flow onto the market in order to maintain supply and demand and therefore prices.

"I predict an interesting future - one where we could see banks entering into Joint Ventures with property companies with portfolio management experience or even banks becoming property developers themselves."



 Alex Bolton, principal surveyor who has worked in GVA Grimley's Leeds office for the past eight years, has become qualified as an Environmental Assessment Method (BREEAM) auditor for BREEAM In-Use Auditor.

The Building Research Establishment has been developing its Environmental Assessment Method (BREEAM) for a number of years and this has become a recognised standard for the assessment of new and existing buildings.  GVA Grimley has qualified assessors in a wide variety of BREEAM schemes, now including Alex as an Auditor for the brand new BREEAM In-Use, which has been developed to recognise and encourage better building management and targeted investment in existing buildings.

Alex Bolton, principle surveyor at GVA Grimley, comments: "With environmental issues still very much on the radar, a qualification that enables me to help businesses become more environmentally conscious and responsible is a major asset for GVA Grimley and its clients. 

"Aside from the obvious environmental benefits, BREEAM In-Use will help businesses achieve long-term cost-savings which I'm confident will appeal to all in the current climate. "

Existing buildings have a significant environmental impact and their improvement would represent a major boost to carbon reduction commitments of individual firms and the UK as a whole.  BREEAM In-Use separately assesses the performance of buildings, building management and organisations, aiming to both reduce costs and improve the working environment.