Monday 23rd September 2013, Commercial property was buffeted substantially by the Credit Crunch in 2007, the Lehman’s collapse and Great Recession of 2008/09, the Eurozone sovereign debt crisis in 2010 and austerity programmes that have slowed the recovery. Capital values fell by 40% in the UK and 20% across Europe; investment volumes also collapsed.
In the last six months, cross border investment increased across Europe and the UK from US opportunity funds and Asian pension funds. Investment confidence has run well ahead of fundamentals–supply and demand. As most agents will tell you, there has been precious little of either due to lack of development finance and lack of new leases, as bankers and CFOs remained cautious.
Most fundamental is the tenant, the business that needs space to operate and create value. Tenants are the real link to the economy and their lease payments generate property value. Among tenants, corporates play a special role. Corporates occupy a substantial quantum of space in their own right, but the supply chains that they support occupy an even greater quantum. Hence, the behaviour of a finite number of corporates impacts on a disproportionate amount of real estate.
Despite considerable cash reserves, corporates have not been investing in business expansion either through mergers and acquisition, or by capital investment in plant, equipment and human resources. The key missing ingredient has been confidence.
An EU–US trade accord can make a substantial impact here. Given excessive corporate cash balances, a recovery may unfold rapidly and if supplemented by a trade related impetus that links confidence to enhanced political and economic stability, the recovery could become supercharged. Occupier markets would feel the heat. In the UK, real GDP growth of 2.5% pa is associated with nominal rental growth of around 3% pa. Analysts say that an EU-US trade accord will add between 0.5% and 0.7% to national GDPs, hence the potential rental impact on the UK equates to a boost of another 0.6% to 0.8% pa. With a total UK inventory of around £750bn of commercial property, this amounts to a £270m to £300m boost to rental streams or a £4.5 to £5.0 bn boost to nominal capital values per annum.
Would this contribute to another property bubble? Probably. Is this a bad thing? That of course depends on your either your investment mandate or more fundamentally on your ideological views of capitalism and business cycles.