Who will buy distressed properties?

The volume of properties now coming up for sale could push down prices even further and frighten off potential buyers unless decisive action is taken to set a floor to the market, writes BILL NOWLAN

LOOKING THROUGH the long and growing list of secondary and tertiary commercial property coming on the market from banks and their receivers, I wonder to myself who is going to end up owning such buildings and if the volumes now emerging will impact negatively on current delicate property values. Values have been stabilising of late, but the absence of bank credit to support purchases makes the situation even more dangerous.

The traditional investors in such properties, before the madness set in the early 2000s, were of three types as follows:

Firstly, the professional investor with significant holdings of secondary assets and usually with their own property management office because, believe me, such assets are management intensive and usually require lots of TLC. Such professional investors work mainly below the radar and have a policy of investing in properties such as shopping centres, older office buildings and small industrial estates many with weaker tenants. These portfolios would generally be high yielding at 10 per cent-plus and borrowings would be limited.

Secondly, you have the location-specific investors. This type of operator tends to be confined to their “home” town. Often it is the local pharmacist or butcher who quietly builds up ownership of the buildings on his street or town – sometimes over several generations. They tended to use the profits from business, surplus rent and their pension funds to put together what becomes a type of informal family trust. Such property investors are everywhere in Ireland – in every town and village – but as to their ability to buy, currently many will be suffering economically and have limited funds to purchase new stock, no matter how cheap.

The third type of investor was and is the individual or family either setting up a new portfolio or maybe in an inherited situation. Usually such portfolios have no real coherence but are put together more or less by osmosis. For example, if there are some surplus funds from profits or inheritance they go into buying whatever is then on the market. This type of portfolio would be different from the two types mentioned earlier in that it would be random and unstructured and rarely focused or well managed. Its unspoken strategy would be wealth accumulation in bricks and mortar, and possibly tax management.

The overriding characteristic of all these investors would be low borrowings, high cash yield and, of course, vacant space – the current rate of vacant space probably being high.