The number of distressed assets hitting the market continued to climb to record levels in 2012 - but things are looking up, says commercial lender, Think Tank.
The Colliers International annual Insolvency & Distressed Assets report found that around 816 commercial distressed properties were advertised for sale across the country last year, up from the 777 properties on the market in 2011.
However, this 5% per cent rise was far less than the previous year, when there was a 30% spike in distressed property listings.
Think Tank CEO, Jonathan Street, says his company has witnessed a ‘moderation’ in the incidence of distressed commercial property - most notably from around July, 2012 and around the time when the impact of more aggressive monetary policy applied by the RBA was starting to feed through to the economy.
“Conditions have continued to improve modestly since then, with demand certainly picking up, although we would characterise conditions as still very challenging for a large segment of property owners and businesses.”
Street adds that the Colliers report only covers those properties marketed for sale as distressed, while many lenders who’ve taken possession of properties choose not to market that way so as to avoid driving the price down.
“There are also plenty of other properties out there that may not be for sale but would certainly, in many cases, not be sold for a value sufficient to pay out the finance against them.
He says Think Tank’s experience has shown that the GFC involved both the immediate ‘bursting of the bubble’, as well as a slow-burn effect.
“Not all businesses impacted by the GFC fell over within a few months. Many were placed under stresses that only compounded with time and eventually saw the business fold and the underlying property, whether owner-occupied or leased out, come on the market. One significant factor has been the way in which the ATO reversed its practices with business from being very lenient and accommodative during the GFC, to becoming entirely focussed on revenue collection and liquidating businesses which have been unable to meet BAS and income tax payments as and when due.”
Behind a significant proportion of failed or failing business, Street says you’ll find action initiated by the ATO.
“With the passing of time and lower interest rates, things have tended to stabilise and along the lines of ‘survival of the fittest’, businesses have worked hard to leverage their strengths, found ways to adapt to the more challenging operating environment or gone to the wall.”
With 2013 being the best part of 2-3 years from the height of the GFC, he says the most difficult challenges that businesses are facing have largely come to pass, confidence has been seeping back into parts of the market and lower interest rates are serving to improve the relative attractiveness of yields offered by commercial property.
While the Collier report says development properties lead the depressed commercial trend, Street says Think Tank’s experience has been diverse, both from the perspective of exposures in their loan book and in new requests for finance where distress has been a factor.
“We’ve seen quite a lot of the smaller industrial units under pressure in varied locations, including parts of Sydney, Melbourne, Brisbane and the Gold Coast. Retail has been experiencing widespread distress in both the major metropolitan locations as well as regional areas…A mixed retail/residential property in Nelson Bay recently sold for almost half what it was valued at in 2007.”
He says there are still areas of widespread distress and, while some areas have begun to bounce back quite strongly, others will take several more years to recover pre-2008 values.
“There are some very good purchasing and refinancing opportunities out there in the market at the moment and brokers should look to their current client lists to see if they can help them get into a good property or a better deal. With low interest rates and yields on commercial property up around the 8% mark, it is a good time to invest in commercial property or for businesses to shift from renting to owning.”