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"Zombies" still stalking UK commercial property

Coutts chief investment officer, Alan Higgins, talks about the UK’s “zombie“ companies.

Heavily indebted ‘zombie’ companies are still stalking the UK commercial property market. It will take time, and more importantly growth, to clear them away. But we believe patience will be rewarded.

Where did the zombies come from?

The aftermath of the financial crisis left a swathe of debt-encumbered property companies across the UK. They can’t raise fresh debt because their capital was wiped out. But extremely low interest rates mean they can stay alive by merely servicing their debts from rental income. Because zombies charge very cheap rent, new property developers can’t compete on price.

There is a huge divergence between valuations of ‘prime’ properties in areas like London, where the zombies have been largely cleared, and the rest of the market that is still darkened by their presence.

Why not just shoot them?

Unfortunately, death by insolvency would only bring a different set of problems – a sharp fall in affected commercial property prices, heavy bad debts for lenders to these companies and further disruption to a UK economy already flirting with another recession.

Will we be plagued by zombies forever?

Since the global financial crisis, the UK financial system itself has undergone a significant rebuilding project. It can now handle the restructuring of the property market, and new investors are being attracted in to support the process.

High income yields mean that investors are currently being paid well as they wait for the zombies to die out. And there should be plenty of time to take advantage of capital growth opportunities that arise outside of the more prime locations such as central London.

Read more from Coutts on their Investor Insights blog here.

This was posted in Bdaily's Members' News section by Coutts & Co .