Small businesses and commercial property

The subject of small businesses and commercial property used as security is not something which has been covered in great detail over the last few weeks. The main headlines have been dominated by Brexit and the consequences for the economy and the UK property market but what does the future hold for small businesses and especially those using commercial property as security?

Now is not the time to panic, now is the time to plan ahead and where possible adjust your financial situation to ensure you have a buffer to protect you from any short-term volatility.

The forgotten knock-on effect

It is estimated that around 75% of small businesses use commercial property as a means of securing finance to fund their operations. Even though many small businesses will be re-evaluating their situations today the idea of using existing assets as security makes perfect sense. This security has allowed many small businesses to negotiate more favourable finance terms and also ensures that the banks have enough security to “let small businesses get on with it”.

Even though there are concerns that commercial property prices in the UK could fall in the short to medium term, in light of the Brexit situation, the long-term possibilities for the UK economy are very attractive. The raft of traded property trusts which have suspended trading due to excessive redemptions have spooked many in the market but in some ways this shows what we already known, liquidity issues with property trusts. Again, this is one of those times when the long-term timescale associated with property investment should be re-emphasised.

Benefiting from the long-term trend

In many ways it is understandable that some small businesses are concerned about the falling value of property assets used as security. However, if we take a look at the UK domestic and commercial property markets for the last 20 years so there are many companies out there who will have benefited. A significant number of companies will over the years have created a buffer between the value of properties used as security and their financial liabilities. So, while a short-term reduction (or perceived reduction) in property values is not perfect it is not something which should really impact underlying businesses.

The UK has a very active small business community and while in the immediate aftermath of the worldwide economic crisis of 2008 there were money market liquidity issues, many of these have since disappeared. If required the Bank of England is on hand to inject liquidity into the money markets, exports are now far cheaper because of recent currency movements and there are many reasons for business leaders in the UK to look forward with anticipation and confidence.

Now is not the time to panic

The UK commercial property market has come under the spotlight over the last few weeks amid claims and counter claims about the prospects for the UK in the longer term. We have seen some investors stepping aside in the short term until the situation becomes clearer while others believe even short term price movements have been overdone and there are opportunities aplenty. Demand for UK property, both domestic and commercial, may have slowed in the immediate aftermath of the Brexit vote but there is a backbone of long term investors looking to take advantage of oversold situations.

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