MH Article

Green shoots in the south:

The year so far has certainly brought some worrying developments for the UK’s commercial property markets. At the end of January the Investment Management Association reported that small investors had pulled £242 million from commercial property funds in what the mainstream press exulted in naming a “mass exodus” from commercial property investment.

The last three months of 2007 saw almost £500 million leave the sector and the outlook for early 2008 was bleak. Among the organisations hit hard by the decline was property developer Minerva, which suffered a drop in net asset value of almost 20% in six months, with the company at the centre of takeover speculation throughout the winter.

However, in a press statement issued by the company after it had announced losses after tax of £90.7 million in the six months to December 2007, Chief Executive Salmaan Hasan appeared relatively sanguine. “Investment yields have moved out and we have done no better or worse than the rest of the market.” He said.

New light from New Star?
In mid-February there was another positive development as fund manager New Star effectively called the bottom of the slump in the commercial property market with the announcement that it was panning to invest over %50 million in UK property shares. New Star sold its holding in the London HQ of Commerzbank, 60 Gracechurch Street, at a small loss in order to place approximately £63.8 million in listed property shares, with the remainder held in cash holdings until later on in the year.

The renewed commitment to commercial property and the fund’s assertion that it would reinvest in the sector later on in the year were an important sign of a recovery not too far off.

Robust fundamentals nationwide
Further reassurance should be taken from the fact that the market fundamentals across the UK remain largely positive. In its 2008 Office Markets Review, King Sturge revealed the extent to which an undersupply of quality office space remains the norm in many of the UK’s business centres.

According to the report, agents in Bath, Edinburgh, Exeter, Glasgow, Leeds, Liverpo9ol, London, Newcastle, Nottingham, Oxford, Plymouth, Southampton and Swindon all reported few or no Grade A office premises currently available in any of those locations.

By way of an example, the report cites the shortages seen in Edinburgh, in which there is only around 28,000 m2 of available office space in the city core, with most of that in one building.

The City of London market, while showing signs of uncertainty and a subsequent weakening of demand, remains over-subscribed and prime rents rose by 13% during 2007. Rupert Perkins of King Spurge said: “Despite the uncertainty caused by the credit crunch, the City occupational market has remained active throughout 2007. The supply of Grade A space will remain limited until mid-2008, after which point a number of new schemes will be delivered to the market.”

Healthy demand in the West End
The West End of London is another area showing a continued limited supply, although this eased slightly during 2007. According to research released by Kling Sturge, there is 121, .900m2 (1.3 million ft2) of speculative accommodation projected to complete during 2008, which should provide some short term relief in the supply pipeline.

The demand for space in the West End has led to a diverse range of industry sectors represented in the firms based there, with financial and TMT businesses showing a particular keenness to set up shop there. Indeed, the area’s diversity presents something of a challenge for developers. Following a Government draft Green Paper on creative industries. Westminster council may force developers to subsidise creative businesses such as media, fashion and the film industry.

Despite this, the West End is arguably more aptly equipped to weather the current storm than other parts of London, largely because of the strength of market fundamentals there. Rental growth has been bullish and looks set to remain so in 2008, albeit with a new undertone of conversation. A key teller is that there have been no improvements of incentives to tenants, which is usually an early indicator of a market in distress.

A major draw for the Middle East
The UK’s status on the world stage is an important defence against further decline in national commercial property markets. London in particular has attained an unrivalled global position as a result of the strengths and pragmatic regulation of its markets and the sophistication of its professional services.

In 2007, a major contribution to London’s commercial property market was made by Middle East based investors, marking the coming of age of the region and cementing the relationship between the UK and Middle Eastern investors.

DTZ’s European research quarterly for February of this year states that Middle Eastern investors spent over “2.3 billion on European property during 2007. The UK was the clear favourite destination, with the value of investment actively rising over threefold between 2000 and 2006 to reach £1.1 billion. On average Middle East investment accounted for some 10% of total foreign investment in UK commercial property last year.

DTZ posits that the wave of investment from the Middle East is backed by a rapidly growing Islamic banking and finance sector, estimated to be worth over £562 billion worldwide. Much of this market, of which property is an increasingly large feature, confirms to Shari’ah law.

Recent examples of the enthusiasm Shari’ah compliant funds have for UK property include the acquisitions of the Qatar Investment Authority and Arab Investments in the early part of 2008. Qatar acquired Chelsea Barracks for £1.3 billion last month and Arab Investments acquired the City’s Bishopsgate Tower.

Green shoots appearing
Despite the undoubtedly gloomy start to 2008, there is evidence emerging already of a medium term recovery in commercial property DTZ predicts that European real estate investment activity in general will continue to slow during the first half of the year, although there will be a wide variation of performance across a number of difference markets. However. Strong fundamentals indicate that international investors are preparing to re-enter the European market at the right price.

In the UK, the market is believed to be approaching ‘fair value’, John Slade, managing director of DTZ International Investment, said: “Despite recent uncertainty, we are beginning to see the green shoots of investor interest returning; and whilst many continue to occupy the sidelines in the short term, there’s no doubt that a mix of strong fundamentals, realistic pricing and opportunities in specific markets are underpinning a cautious return in investor confidence.”

As the days grow longer and the mercury begins to creep tentatively north, perhaps a recovery in commercial property is, like the spring, just ar9und the corner.

MARRIOTT HARRISON – Andrew Astachnowicz, Vivienne Elson, Guy Hitchin
Marriott Harrison is a leading corporate/media/property practice with a refreshing and personable approach. The firm offers pragmatic advice and practical solutions to legal issued facing business and individual clients.

The property department at Marriott Harrison provides a full service to corporate occupiers, investors and property developers.

Recent transactions include a £100 million plus disposal of a private schools business, a £20 million plus portfolio purchase of industrial estates and a number of hotel acquisitions.

We also deal with the purchase of high value residential property including country estates and prime central London properties.

The department is experiences in dealing with the property requirements of growing businesses and providing support at all stages from start up to disposal. The members of the department have many years experience acting for industrial, leisure and high tech companies based in the UK and abroad.