Two major property chief executives were in the news recently and it is interesting to consider what their views mean for the wider sector.
No owners of commercial real estate in London can boast a portfolio of assets that is more prime than that of the Grosvenor Group. Encompassing huge swathes of Mayfair and Belgravia, Grosvenor’s London portfolio is the ultimate top slice of the capital’s property landscape.
At the end of April, its newly installed chief executive, Mark Preston, unveiled the group’s latest financial figures and took the opportunity to caution the marketplace, saying that sales of office buildings and flats in London have been slower this year than during the previous six months because “interest has chilled” from would-be buyers.
Less than two days after Preston’s remarks, his counterpart at the Battersea Power Station Development Company, Rob Tincknell, said that 150 prime apartments at the scheme were not being released into the market because demand had “softened”.
When figures as prominent as these speak about the market, it is natural that our industry sits up and takes notice. However, the immediate question is, how much of a “read-across” from these statements about prime property is there for other areas of the market?
The nature of the assets that flow through auction rooms is different from those in Mayfair, Belgravia and the reborn Battersea Power Station, but it is an interesting point to consider what the future holds for prime and secondary property respectively.
The UK prime property sector – whether it is central London trophy buildings, regional shopping centres or major industrial assets – has been fuelled by an influx of overseas money.
Everyone agrees that the property market moves in cycles, but you can anticipate what will happen next only if you have a grasp on the fundamentals rather than focusing on the exceptional transactions of a particular atypical sector.
The secondary property market is more closely tied to core economic conditions – often on a region-by-region basis. It depends more on consumer spending and occupier demand and not on the global capital flows of sovereign wealth funds. On that basis, it could be argued that the performance of
secondary assets is a much better reflection of the underlying fundamentals of UK
commercial property than the rarefied prime market.
As the economy moves forward, the picture will get even more complex. Economic activity is attracted to locations where there is access to a workforce and affordable property. Areas of prime property particularly can become expensive to operate a business.
Similarly, the cost of housing, which has risen in London at a rate that far outpaces incomes, pushes up salary expectations and has become a barrier to attracting and recruiting skilled staff.
There is an argument that we are at the beginning of a new model of decentralisation, where some high-value/skilled labour sectors will look to migrate or split some of their activity to more affordable locations. The rise of the highly skilled but relatively footloose self-employed adds to this story. These dynamics will help underpin the local economies of towns across the country.
Accordingly, while the comments from Preston and Tincknell have real relevance for London, it would be wrong to extrapolate them across the entire UK market, especially as there is now an increased volume of investment flowing into regional locations.
At the commercial property auctions that took place in February and March, London assets accounted for 9% of the total value of property sold. At the corresponding auctions in 2015, properties in the capital represented 19% of sales and in 2014 the proportion was 27%.
As the economy improves and UK locations strengthen, the focus of the success story is shifting away from London. Investors are recognising that the fundamentals of the secondary market are often more grounded in reality. Rents have rebooted, occupier demand is strengthening and a more compliant planning process is opening up asset management opportunities.
Of course, secondary properties come with a higher risk profile, but informed stock selection will minimise risk as well as provide the opportunity for growth in locations with a positive economic story. Such assets are also not subject to the distortions of buyers simply looking to dump money in the perceived “safe haven” of the prime market.
Prime will always make headlines but it is not the whole property story.
Richard Auterac is chairman and auctioneer at Acuitus
