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Credit crunch will hit property returns

Smaller contractors have seen steady profits over last few years, but that could be about to change

Many small and medium-sized contractors have built up solid commercial property operations that have produced steady development profits as well as investment income over the past few years.

But the recent credit crunch may mean that is about to change.

This week Richard Fildes, chairman of the Cheshire-based contracting group Pochin, warned that the adverse movement in property yields resulting from the re-pricing of credit risk means that the firm’s property division will be operating in significantly tougher conditions.

With borrowing set to become harder and more expensive, commercial property prices under pressure and rents stagnant, contractors might find it harder to generate profits from their property businesses.

A reduction in profits at Pochin’s property division to £7.4 million in the year to May, from £9.7 million previously, was behind a 3 per cent dip in group pre-tax profits to £9.1 million. But the firm’s three other businesses improved their results.

Yet Pochin’s property results are more a reflection of a major sale in the previous year and for now, the division looks to be in good health and has expanded.

It has £68 million of investment property and developments in progress with a carrying value of £78 million. Among various schemes it is working on, the firm has recently won planning permission for a 34 acre mixed use scheme in Ellesmere.

But Pochin is rare among publicly quoted contractors, which have focused more on building up support services and PFI businesses rather than property operations.

Earlier this year MJ Gleeson decided to exit the commercial property development market following an earlier withdrawal from property investment. This reflected a belief that the market has probably peaked and that its cash would be better invested in housing regeneration.

Recent events in the financial markets might bring more medium sized contractors round to that way of thinking.