Magazine article Real Estate Issues

Are Commercial Property Yields Fully Compressed?

Magazine article Real Estate Issues

Are Commercial Property Yields Fully Compressed?

Article excerpt

FOCUS ON THE UNITED KINGDOM

THIS IS THE SECOND IN A SERIES OF FOUR ARTICLES providing my personal perspective on the state of the property market in the United Kingdom. The first article, which appeared in the Fall 2006 edition of Real Estate Issues, focused on some of the more generic key drivers and the macro-to-micro picture. This article focuses on the phenomenon of seemingly ever-rising values in the commercial property sector. The third and fourth articles will review the residential property market and the seeds of doubt: key issues, words and phrases that trigger a response when they crop up in conversation, and cause property funders, lenders and investors to stop and think about their assets.

One of the reasons for writing these articles is to draw, in the mind of the reader, a similarity or contrast between the UK and the property market in which the reader operates. It seems to me that property markets function in very similar ways around the world, and we can all benefit by experienced practitioners and commentators sharing their opinions and expertise. There are exceptions, of course, and the United Nations is doing what it can to help to create and re-order property markets in some of the globe's transitioning economies, especially those that are moving from a state-owned asset base to the free- (or at least more free) market economy.

This task, of course, is not easy. However, drawing on the experiences of many individuals and governments, and synthesizing the ordinary from the extraordinary, the United Nations is beginning to make progress. One bonus of the change is starting with a clean slate, and the newly successful economies are leaping ahead of established real estate markets in the use of today's technology and transparency in information exchange. From satellite mapping to comparable evidence, knowledge management in many of these countries is better than in countries with mature economies.

SPECULATION, RECENT TRENDS MAKE UK MARKET A TOUGH READ

Meanwhile, back home in the UK, the commercial property market has emerged from the safe world of pre-let construction into the heady atmosphere of speculative development. Of the £152 billion lent to property-backed securities in 2005, about £5 billion is to property developments where no tenant has been identified or signed up before beginning construction. Another identifier of market growth and activity is the "crane survey."

Industry observers have long been aware of the correlation between the number of visible cranes over a property market and the prospects for the future of that market. One firm, London-headquartered Drivers Jonas, has captured this bellwether in a quarterly report. Extracts from third quarter 2006 show some 90 sites in central London where development is underway. An aerial view would show this activity in three distinct groupings: the West End, focused on Mayfair; Mid-town, centered on Holborn; and, naturally, central London, also known as the Square Mile. Looking at the statistics generated by this report, there is a total of 9.7 million square feet under construction, with about one-third let and two-thirds available space. This statistic indicates more than 6 million square feet of speculative development.

The previous article sought to demonstrate that the UK property market was extremely difficult to read at the moment. An analysis of the Drivers Jonas data bears out this sentiment. Though there remains a seemingly large volume of space unlet, the fact is that the past two years have seen dramatic increases in rental levels-up by about 26 percent in the West End alone-and the prediction for 2006 is strong growth of 25 percent or more.

The difficulty in reading the market is compounded by a growth of only 5 percent in the amount of available space under construction during fourth quarter 2006. One would have expected many more developers to bring forward their proposed schemes to capture this rental growth and thereby enhance their portfolios, or their profits. …

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