The UK economy is coming under pressure. Discretionary spend by consumers is likely to fall along with a loss of confidence with risk of a recession.
Most commentators are predicting that the housing market will cool off. Less discretionary spend may impact retail and leisure and blunt the effect of the post-pandemic V-shaped recovery.
The commercial real estate market will be impacted in different ways. Some sectors, such as logistics, are likely to remain strong and indeed may benefit from the supply chain issues. Retail, already facing longstanding structural issues, is vulnerable. We may see more renegotiation or regearing of leases and company voluntary arrangements to address the burden of rent. The demand for office space has yet to reach a post-pandemic landing.
A decline in values will often lead to a change in economic ownership. A breach of LTV covenants and the need to finance capex will put pressure on owners; and stakeholders will be faced with the choice of funding, inviting new investors, restructuring ownership or selling the asset.
This does not necessarily mean the prevalence of receivership appointments or insolvency proceedings, although such data as there is already shows an uptick. Some of the casualties of the last few years demonstrate that distress is often addressed through negotiation, which is seen as less value destructive. However, stakeholders will want ‘plan Bs’ in their back pocket to inform their negotiation and provide an alternative should a consensual approach fail. Given the prevalence of offshore ownership structures, it may be appropriate to enforce over equity offshore separate to or in addition to onshore enforcement over assets.
For those with long memories, it is unlikely that the same pattern of enforcement will occur as happened in the 1990s, with receiverships being the favoured tool of lenders. The credit market is now much more varied, structures are more complex and there are a greater number of tools for enforcement and a cultural change favouring restructuring, but at this point one should be wary of making predictions.
Vikki McKay is a real estate partner and Adrian Cohen is a restructuring partner at Proskauer Rose