An Analysis of Diverging Performance Trends
Phil Tily, UK and Ireland Managing Director of Investment Property Databank (IPD – www.ipd.com), does not, on first appearance, seem very like an angel – lacking the obligatory wings. However, he fulfils the function of recording angel for the commercial property investment industry. At our lunch on 9th December 2010 he gave us a masterly thumbnail sketch of the view this task gives him of the UK market and its drivers. At the macro level, his analysis of property portfolios demonstrates two things: over extended periods, property at the asset level loses value due to depreciation – ‘gather ye income whilst ye may’, but within that trend changes in investor sentiment leads to considerable variation. Secondly, the various sectors of the market tend to move in tandem and he rather wonders whether the investor’s mantra should change from ‘location, location’ to ‘timing, timing’; it seems clear that, in good times, all benefit, but in decline strategy becomes crucial. Within that long term framework, in recent times values in the investment markets that he analyses have recovered to levels that are consonant with a long term trend – way below the speculative peaks of early 2007, peaks driven by easy borrowing and retail commoditisation of property, but above the low point of June 2009 and now much on a par with the early 2000s. In response to a question, he relied upon his heavenly status and was not willing to be drawn on whether that implied ‘fair value’. This recovery, however, now seems to have lost momentum. Has it run its course and are we now at a point of inflection for investor sentiment? Is this the point for momentum investors to leave the room? The bear factors include the amount of debt not yet unwound, the prospect of rather extended economic weakness, doubts about the ability of the private sector to take up the slack arising from government retrenchment and, perhaps, the prospect of government bond yields rising. Against this lies the apparent weight of overseas money still seeking UK assets.
Looking at the market at present, and perhaps belying a little his dislike of ‘location, location’, it seems clear that the focal point of further strength in the market will be London-based. London and the South East seem to be the only areas that possess the economic strengths that will enable growth in the new economic climate; other areas will suffer from government retrenchment, but have little to fall back on. London, less so the South East, is also the area that foreign investors find attractive. As to prime versus secondary, whilst, by definition, prime rents are more secure and prices hold up better over time, the yield available on secondary property seems to him to be rather tempting; if total returns are going to be less than in the past, income becomes more significant. Beyond that, whilst the price differential may widen alarmingly at times of trouble, it narrows when bluer skies return. In the London office market there are also interesting possibilities in changes of definition. The all-singing and all-dancing large plate dealing floors may, with modern wireless technology, seem over-specified; modesty may command a premium. Risky, perhaps, but tempting.
Finally Phil gave us, not a forecast, but an interesting statistic (not that his others were uninteresting!). His research shows that, in the 3 years following an Australian win in the Ashes UK values rise by 4.5%. After an England win they rise by 16%. There was only one person in the room willing to short UK property.
Michael Mallinson, Chapter Scribe
Monday, December 13, 2010
Thursday, December 2, 2010
Like Nowhere Else
'Like Nowhere Else' - London's West End saw strong growth in 2009 and 2010. Is it set for further growth? Or could growth stall and reduce in 2011 and beyond?
Richard Dickinson gave us an erudite overview of the economic and political environment and prospects for the West End. He set out the positives behind significant strong performance in the midst of recession. At the same time questioned, with the era of austerity upon us, how can the West End continue to invest to keep it as a World Class destination?
Some of the answers lie in the continued success and support of the private sector to the Business Improvement District. Property owners could provide matched funding to the expected BID renewal at the end of 2011. The private sector is however already facing the 2% Business Rate supplement to help fund Cross Rail. This overall £16bn investment should add 30% capacity to tube travel. Westminster is examining ways to retain and reallocate rateable values. It has already been innovative in agreeing S106 credit offsets for investment in the public realm. Tax incremental finance is a medium term possibility for 2013 onwards.
The positives for the West End in 2010 are an 8% pa increase in sales, record rental levels, plus significant investment in flagship stores. These positives being supported by low interest rates, relatively strong economy (65% consumer driven) and growing tourism visits (25% are overseas visitors with a further 20% of visitors from the rest of the UK) helped by the level of the £. Also with a strong bias towards fashion the retail offer is more resilient to the impact of on line spending. The issue is the extent to which these factors continue to underpin growth or whether the VAT and NI increases in 2011 will slow or even reverse these trends.
In a lively Q&A the wide ranging discussion covered the impact of the 2012 Olympics, other suburban and out of town retailing, and whether the West End is and will struggle to maintain its identity. With rents escalating where is space for the street trader and independent retailer? Can the New West End Company ensure the West End keeps its true London identity and heritage, whilst being a destination for the worlds' and UK's leading branded Retailers?
Michael Mallinson
Scribe
Richard Dickinson gave us an erudite overview of the economic and political environment and prospects for the West End. He set out the positives behind significant strong performance in the midst of recession. At the same time questioned, with the era of austerity upon us, how can the West End continue to invest to keep it as a World Class destination?
Some of the answers lie in the continued success and support of the private sector to the Business Improvement District. Property owners could provide matched funding to the expected BID renewal at the end of 2011. The private sector is however already facing the 2% Business Rate supplement to help fund Cross Rail. This overall £16bn investment should add 30% capacity to tube travel. Westminster is examining ways to retain and reallocate rateable values. It has already been innovative in agreeing S106 credit offsets for investment in the public realm. Tax incremental finance is a medium term possibility for 2013 onwards.
The positives for the West End in 2010 are an 8% pa increase in sales, record rental levels, plus significant investment in flagship stores. These positives being supported by low interest rates, relatively strong economy (65% consumer driven) and growing tourism visits (25% are overseas visitors with a further 20% of visitors from the rest of the UK) helped by the level of the £. Also with a strong bias towards fashion the retail offer is more resilient to the impact of on line spending. The issue is the extent to which these factors continue to underpin growth or whether the VAT and NI increases in 2011 will slow or even reverse these trends.
In a lively Q&A the wide ranging discussion covered the impact of the 2012 Olympics, other suburban and out of town retailing, and whether the West End is and will struggle to maintain its identity. With rents escalating where is space for the street trader and independent retailer? Can the New West End Company ensure the West End keeps its true London identity and heritage, whilst being a destination for the worlds' and UK's leading branded Retailers?
Michael Mallinson
Scribe