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Eight per cent rise in property investment insolvencies as market recovers

Improved property values leads to changing behaviours in banking sector

4 January 2016

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The number of property investment companies becoming insolvent has increased by 8 per cent over the last year as banks cash in on improved property values.

According to new research, the number of companies that have gone through an insolvency process has more than doubled in five years, up from 154 in 2011 to 346 in 2015.

As commercial property values improve, banks have begun recouping the value of distressed property loans by having investment companies sell their assets. In some cases this has meant 'zombie' companies going through an insolvency process.

'Ironically, the rise in insolvencies is down to the improved property prices, rather than an indication the market is in trouble,' explained Geoff Willis, principal at commercial firm EMW.

'Higher occupancy levels and rental increases, especially on office investments in London and the South East has driven up prices. Banks have been holding onto these sour loans since the credit crunch struck and are using this opportunity to recoup some of the value tied up in this bad debt.

'Banks have been patiently sitting on some of these loans for nearly eight years. They haven't been able to achieve the prices they wanted to get for this debt by selling to distressed debt investors such as private equity firms.'

EMW said the improvement in the commercial property market is demonstrated by the increase in the average rent on London's West End office space which, according to Savills estate agents, has risen by 21.6 per cent in the last year.

Increased rents have been driven by improved occupancy levels of commercial property, with take-up of office space by West End tenants rising by 58 per cent.

EMW added that, during the recession, banks were reluctant to put property investment companies through insolvency procedures as there was concern that the increase in properties being placed on the market would further depress already weak property prices.

Increased international investment in commercial property has been a major driver in the rise in asset values.

During the first six months of 2015, £9bn of the total investment in commercial property in Central London was from foreign investors, which accounted for 70 per cent of the total value invested.

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