As forecasts for the coming year in the property owners’ insurance market look increasingly gloomy, Michael Faulkner says insurers are already taking steps to combat the downturn

Last week’s crash in global share prices may have sounded the warning bell for a worldwide recession. But the storm clouds are already beginning to build up around the UK’s commercial property market.

Only last week, Scottish Widows imposed a six-month ban on investors wanting to sell units in its £2.1bn property fund. It had become the latest in a string of property managers to impose time restrictions on investors looking to redeem units in property funds, fearful that they could be forced to sell properties in a falling market.

The warning from experts is that investors are set for months of pain as prices in the sector begin to slide.

Insurers are already takings steps to adjust their strategies in response to this, such as tailoring their products to cater for unoccupied properties. They insist that they can still grow their businesses despite the gloomy forecasts.

Brokers also continue to talk up the billion pound property owners’ insurance market, pointing to the continued willingness to invest in property.

But brokers’ and insurers’ optimism is hinged on only a short-term downturn. A protracted recession could have serious consequences for the insurance market in this sector.

David Schofield, a partner in the real estate and construction division of broker Jardine Lloyd Thompson (JLT) argues that the UK commercial property investors’ insurance market is unlikely to face a downturn in the short to medium term.

“I do not see a decline in demand because properties still need to be insured. We have witnessed the formation of opportunistic property funds to take advantage of property ‘fire’ sales,” says Schofield.

“And while market values are falling, property reinstatement values are still annually increasing, driven by the cost of labour and the increased demand for raw materials, given heavy expansion in the Far East.”

He adds: “There is an abundance of underwriting capacity in the London market and properties with institutional leases still need insurance whoever owns it.”

And Schofield is not alone, with other brokers and insurers remaining confident that they can weather the approaching storm.

Richard Owen, chief executive of Lockton Real Estate and Construction says: “On the construction side there is a lot of new build activity, with new contracts to 2010.

“On the investors side there is a willingness for people to invest in property. It is a stable investment with plenty of yield to be had on commercial property portfolios.”

He adds: “If the new builds dry up there will be conversions and re-fits.”

Owen says Lockton expects to grow its business in this sector in 2008. “Our clients see opportunities in the UK and further afield. There is a price correction but we are optimistic.”

“The warning from experts is that investors are set for months of pain as prices in the sector begin to slide

David Cooper, regional manager of Allianz’s London market property owners’ division says: “In the short term the market has been marked down, but we don’t see that as a long term trend. We expect the economy to slow in 2008, but that will be short lived. By second half of the year we expect to see an upturn in the UK.”

Cooper says Allianz is expecting to recruit further members to its property owners’ team. “We expect to recruit five more, targeting property in London and the regions.”

George Berrie, trading director at Norwich Union (NU) says any downturn in the commercial property sector could alter the risks faced by insurers. “It could affect loan repayments by property owners and drop in tenancies leading to unoccupied property. Both affect insurance risk.”

A more protracted downturn could also lead to an increase in arsons.

“We don’t have an issue if the downturn is short lived. [But] if it goes on longer than a year then we will have to consider rating by experience,” says Berrie.

Berrie says NU still sees opportunities to expand its property owners’ business this year, pointing to the opportunities for entrepreneurs to buy cheap property if prices fall.

“We grew significantly last year, and we have strong growth plan in 2008/2009. A downturn will not stop that.

“We expect to be market leader in 12 to 18 months.”

Royal & SunAlliance (R&SA) is developing its proposition to take into account the impact of any downturn.

Nigel Salisbury, R&SA director of property investors says: “We are trying to add to our proposition things which could be of interest in a downturn, for example there will be a greater number of vacant buildings.”

He says R&SA is currently piloting an inspection service for empty buildings, to tackle the risk management issues that are raised by unoccupied premises.

Salisbury says: “We haven’t seen a lot of impact yet [from the downturn]. Some construction and development projects will be put on hold. Property owners are being cautious.

“But we are not reviewing our projections downwards in 2008. We had a good year in 2007. We opened specialist offices in the regions and began doing multi-national business as well as energy certification in anticipation of new rules in April.”

In recent months there has been a large growth in UK-based developers looking to invest abroad, particularly in Europe. Insurers such as NU and R&SA have been looking to capitalise on this development.

Lockton’s Owen says foreign property investments provide opportunities for brokers and insurers.

Warning of professional indemnity claims surge on back of property downturn

Insurers could face a surge in professional indemnity (PI) claims on the back of falling property prices.

Flaxman Partners, a firm of independent professional liability risk consultants, has warned that mortgage lenders may look to recoup their losses from defaulted loans by suing the surveyors, lawyers and accountants involved in the valuation, application and conveyancing processes.

Roger Flaxman, managing partner at Flaxman Partners, said the predicted decline in property values, a slowing economy and the growing number of repossessions and property owners defaulting on their loans was causing concern to PI insurers.

Lenders will seek to recover their losses and could well go after the mortgage brokers, lawyers, accountants and surveyors who originally advised on the deals.

History has shown that these claims can be difficult and expensive to defend; very often there is insufficient documentary evidence on the professionals’ files to give them a robust defence.

He added: Insurers are also seeing more evidence of mortgage fraud, driven particularly by organised crime syndicates, where professional advisers may have been induced to collude in the fraud by inflating values and misleading lenders. Combined with the prevailing property and financial market conditions, this could see a significant increase in PI insurance premiums together with a tightening of terms and conditions.