Collas' Richard Lloyd assesses the state of the commercial real estate sector in the Channel Islands

The Channel Islands are widely known as a hotbed for investment structures. Many involve commercial property based in mainland UK. But what of the Channel Islands' own commercial property sector? How are its high streets affected by the economic crisis and what are the bailiwicks doing to counter the downturn in consumer confidence?

The Channel Islands' property sector performs as well as, if not better than, the UK. Although direct comparisons are difficult because of the islands' relatively limited space for development and high average income, commercial property agent Jones Watts' managing director, Joanna Watts, says: "The retail sector in Guernsey has held up relatively well. Although we have seen a few units become available and no real upward movement in rents, the local demographic and typically high spend means stores generally perform exceptionally well compared to UK counterparts.

"We are also fortunate to have only one main retail centre. Not only is this very vibrant, but the work of our Town Centre Partnership also means there is also a strong community focus."

Residential market

Aside from commercial property, the Guernsey housing market has continued to show its resilience. The average local market house price in Guernsey is now £427,025 – an increase of 4.5% since this time last year. The open market is more difficult to measure, as many transactions take place as share transfers and are not included on the public register; however, the median purchase price is still higher than last year at £1,358,500. Compare these figures with the average house price in the UK, which, according to the Land Registry's House Price Index, has dropped by 2.6% since last year to £162,109.

The strong residential market in Guernsey may account for the reduction in investment in commercial property. Spencer Noyon, director of local market sales at Swoffers Estate Agents, says: "There has been a clear increase in investment in residential property. As rental returns of 4.5% are not uncommon and can reach 5%, bank rates are clearly no longer competitive. For this reason, as well as the fact that demand for rental property continues, while first-time buyers struggle to get on the property ladder, buy-to-lets are keeping the market moving." Such a steady return is more attractive to investors than the return the struggling, high street retail property may provide.

While Jersey has many similarities, there has been a raft of new developments, especially at the lower end of the market, resulting in more supply than demand. Consequently, according to the Jersey House Price Index, the average price of dwellings sold in the third quarter of 2011 was 4% lower than that recorded during the previous twelve-month period.

Finance

If the investment in commercial property in the Channel Islands has not been affected by the buoyancy of the residential sector, then perhaps the difficulty lies with obtaining finance. The availability of funding has reduced for both individuals and corporates, although finance is still available as long as borrowers are prepared to explore all possible options.

It has been well documented that mainstream lenders' criteria for commercial property has tightened significantly, with a general reluctance to lend except to well-known existing customers who can meet stricter credit criteria. Where credit approval is achieved, the security package banks are looking for is generally more onerous on the borrower than it would previously have been, particularly for local development projects. Unsecured lending is now all but unseen.

An area of lending that has seen a resurgence is the private loan. During the 1980s the private, or advocate's, loan was a frequent method of raising finance against freehold property in Jersey. During the boom years, and with the availability of cheap mortgages, it declined, but now the dramatic increase in private lending in Jersey has two main drivers: the decrease in availability of funds from mainstream lenders and historically low interest rates since March 2009. Savers have been tempted by alternative investments and, while the risk is generally higher, a potential lender can help mitigate it by taking appropriate financial and legal advice.

Other factors

Changes in the UK Government's dealings with the Channel Islands have also had an effect on the commercial property sector, the removal of Low Value Consignment Relief being a major factor.

It may be too early to predict the long-term effect that the demise of the fulfilment industry in the Channel Islands will have on the property market. Already jobs have been lost and businesses have moved. The robust nature of the Channel Islands' economy has exceeded expectations in the past, and early indicators suggest that it will do the same again.

The condition of the high street

High streets are a barometer of local prosperity. With the UK's high streets in dire straits – one in seven retail stores is empty, though vacancy rates vary hugely by location – Mary 'Queen of Shops' Portas was drafted in to recommend ways to rejuvenate town centres.

Her recommendations weren't new – in 2009 the British Retail Consortium (BRC) published 20 not too dissimilar recommendations. But her government-commissioned review seems to have provided the impetus to kickstart our high streets and the majority of Portas' recommendations have been approved, with 12 Portas Pilot towns recently selected to share £1.2m to rejuvenate their centres.

The recommendations in both the BRC and Portas reports are typical of the suggestions being made by the Channel Island Governments. States of Jersey departments have been urged to 'get creative' with their policy to get the economy moving again; free car parking and quicker Planning decisions are among the suggestions.

Other BRC/Portas recommendations are to create town teams, or partnerships, so that all parties with an interest in our high streets can work together. Jersey's Association of Town Centre Management (ATCM) and Guernsey's Town Centre Partnership are drawing people to the high streets through initiatives like street markets and encouraging local, independent businesses. Both are essential to the future of our high streets as they connect local government and local community. By using the facilities and support offered by these offices, retailers and landlords can unite in their common cause to improve and rejuvenate the high street.

Martin Blackwell, chief executive of Jersey's ATCM, says of the Jersey high street: "The future is increasingly becoming more digital, but a high street has always been more than just shopping. Town and city centres are the focal points for government and public administration and natural locations for trade and commerce. They are key economic drivers across the whole country and it is difficult not to overstate their importance."

He suggests a town centre must:

l be easily accessible, clean and safe;

l have its own unique identity, using architecture, events, marketing and all forms of media to reinforce vital points of difference; and

l have professional, active management.

"But most of all it needs to be a place where people want to go."

Premises and leases

There has been considerable pressure from UK retail tenants, including the Property Managers Association, with its portfolio of more than 10,000 stores, to shift from quarterly to monthly rent payments. The aim is to provide tenants with a greater cashflow to develop and expand their businesses. So far, there have been only a few similar demands by tenants in the Channel Islands, but the fact that landlords are willing to listen to tenants' needs demonstrates a desire from all sides to improve conditions.

The trend in mainland high streets is for shorter leases with either market or turnover rents. The usual practice in UK retail leasing is five-year rent reviews rather than the three-year reviews generally accepted in the Channel Islands. UK retailers therefore have more time at a lower rent to establish themselves. A move to five-year reviews may be a solution in the Channel Islands, rather than trying to negotiate anything other than a three-year, upwards-only rent review.

Configuration is also a concern. Most premises in the hilly high streets of Guernsey have narrow shop frontages, are deep and cover several floors, which doesn't fit the corporate fit-outs of major brands. Jersey does better, with high street shops that have a more branding-friendly layout.

Doing our bit

Our high streets, as Portas says, are "uniquely placed to deliver something new. To be lively, dynamic, exciting and social places that give a sense of belonging and trust to a community. To provide that sense of belonging, which has been eroded and sometimes, totally eradicated". The Channel Islands are successfully engaging in new initiatives to return their town centres to the social and commercial hubs they once were.

As yet, the efforts have not made a significant impression on commercial property values. There are still a number of vacant units of primary stock and a very slow moving secondary market. But there are also green shoots of hope to nurture and develop. The Channel Islands' strong community ethos is an advantage for the property industry, since the ability to pull together makes driving business forward that much easier.

Richard Lloyd is a property lawyer at Collas Crill.