A decade on from the financial crash and eight years into a fresh cycle, we unsurprisingly now face softening occupier markets and, at best, static capital values. However, a more substantial downturn – now arguably overdue – is yet to materialise.
Many expected the EU referendum result to tip the scales and briefly it did, with investment volumes dropping and deals falling through.
But UK real estate has proven remarkably resilient. Less than a year later, there was a series of big ticket transactions at record prices and, even now, voids across our portfolio remain extremely low.
This is an extended cycle then, but one that’s rooted in economic weakness rather than strength.
It was always likely that the principal effect of the special measures introduced during the global financial crisis and revisited post-referendum – ultra-low interest rates and quantitative easing – would be to inflate asset prices, creating a system that is flush with cash.
At the sharp end of this is the impact on UK house prices, which at the worst extremes have doubled, even tripled, in a generation, creating social challenges as well as beginning to threaten London’s ongoing attractiveness as a global city and as a place to do business.
Supply and demand
Some have suggested that this extended cycle indicates an end to boom and bust, and will bring about the birth of a post-cyclical market, but this is complacent.
A look at history tells us that boom periods in UK property typically collapse as a result of either supply side excess or demand side shock, and are often accelerated by an over reliance on leverage. Just think of the widespread overdevelopment of the late 80s, or the dramatic fall in demand which characterised the recent financial crisis.
Yet today, despite weaker occupier markets, none of these factors appear likely in the near term.
We haven’t yet seen an oversupply of quality space – something that is now further constrained by caution among developers – nor is the sector over-leveraged. For the time being, it looks as though the market is set for more of the same, albeit within a lower return environment, suggesting a further extension of an already lengthy cycle.
However, real estate remains a cyclical market and, by any standards, we are now surely at the back end of the cycle. The longer we go without a correction, the more material we can expect the eventual downturn to be.
Confidence is key
Perhaps now is a moment for caution.
At the Crown Estate, we are on site where we can see an appropriate balance of risk and rewards; both in central London, where we are bringing forward strategic developments such as The Marq, a new mixed-use scheme in St James’s, SW1, and One Heddon Street, W1, which will launch our flexible office brand.
Elsewhere in the country, we’re investing to develop some of our most successful retail and leisure destinations, including in at Fosse Park, Leicester, and Rushden Lakes in Northamptonshire.
Whatever comes next for the cycle, demand-side confidence will be key. As usual, we can expect this to ebb and flow, whether as a result of negotiations with the EU, further shifts in the base rate – which has only now climbed above half a percent for the first time in 10 years – or the ongoing structural shifts disrupting a number of markets, not least retail.
A decade of special measures may have extended the cycle, but we can’t rely on that forever.
Paul Clark is chief investment officer of the Crown Estate
