UK Market Pauses for Breath

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