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Wave of insolvencies predicted in commercial property

Restructuring firm Begbies Traynor warns the UK commercial property market faces a wave of insolvencies.
The firm says the move by leading UK property groups to raise cash through rights issues is symptomatic of wider problems in the UK commercial property market.

Hammerson, British Land and Land Securities are all carrying out rights issues, totalling a cash call of approximately £2bn on institutional investors.

In addition, CB Richard Ellis recently published figures on commercial property values, showing prices fell by a further 3.5 per cent in January, on top of a 27 per cent fall in 2008.

Begbies Traynor warns increasing pressure from falling asset values, potential tenant defaults and the lack of liquidity in the banking sector could lead to a surge in commercial property insolvencies.

Its Red Flag early warning system shows 304 property companies currently facing critical financial problems.

The early warning system flagged up 185 companies with critical problems in the third quarter of 2008 and 221 in the fourth quarter.

Begbies says the latest troubled companies are not major groups, but mainly middle and lower market players with total asset values in their last published accounts of £1.1bn, an average of £3.6m per distressed company.

The firm says 171 property companies have started insolvency proceedings and estimates this will surge to between 1,200 and 1,600 in 2009.

Nick Hood, senior London partner at Begbies Traynor, said: “We’re seeing a build up of problems in the commercial property sector, as the real economy in which their tenants operate continues to unravel.

“The only upside has been the fall in interest costs; however this offers little relief to landlords dealing with escalating tenant defaults and unprecedented difficulty in raising or preserving business funding. 

“There has been a sharp rise in our caseload in the sector, as lenders are forced to take control of commercial property right across the UK or landlords seek protection from their creditors to allow them time to restructure.”