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 General
Offices
Retail
The comments below reflect our views as at 30 September
2003 and underlie our approach to the valuation of
the portfolio.
General
Investment demand, based largely upon the level and
certainty of property’s income returns, has remained
strong. This has come from both domestic and overseas
buyers, ranging from Property companies and other
‘Professional’ investors, to private individuals. The scope to
add value and the underlying value of ‘bricks and mortar’
has added to property’s appeal. Favourable interest rates
have encouraged debt financed purchases and disillusionment
with other asset classes has generated demand from
a range of cash buyers.
Although there have been concerns over certain
occupational markets (mainly City and South East provincial
offices), these have been mitigated in investors’
minds by the security afforded by longer ‘upward only’
lease income.
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Offices
Over much of 2003 the outlook for many traditional City
occupiers has been constrained by the slowdown in
various economies and financial markets. Consequently
take-up has been low and rental values have fallen.
There is a substantial supply of available City office
space, but only about a third of this is ‘Grade A’ and in
historical terms there is relatively little new development
scheduled. This reflects a far more cautious approach on
the part of developers and their banks.
Looking forward to recovery some investors consider
that the prices of short-term income, 5-6 years unexpired,
offer good value as prices reflect current rent levels. At the
other extreme, yields for longer income streams, more
‘bond’ like property investments, have held firm at around
6%. One positive sign is the increase in viewings recently
reported by letting agents. So far these are mostly from
cost conscious tenants, looking to benefit from the
competitive terms on offer.
A high quality managed environment in a core
location, such as Broadgate, which is effectively fully let,
should therefore be well placed to benefit in both rental
and capital terms when demand increases.
In the West End yields are generally lower. This is
principally because the occupier market comprises a wider
range of business sectors, making it less volatile. Supply is
also more limited due to clearer geographical boundaries
and a planning regime that is geared to a greater proportion
of residential use. This has favoured Regent’s Place,
the Company’s main holding here, as there are few buildings
which can offer floorplates of the size and quality
provided there. As a result it has attracted high calibre
tenants, such as Abbey, who have entered into long-term
lease arrangements. This combination is particularly
sought after by investors, and its investment value has
benefited accordingly.
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Retail
Consumer spending has remained robust. This has been
based on house price growth, full employment, and low
interest rates. Retail sales across most sectors have
continued to grow.
Demand for shopping centre investments has
produced the most significant yield shift within the sector.
They combine the opportunity to create value by active
management, as illustrated within British Land’s holdings
by the increases in rental values at several centres, with
the traditionally low volatility of high street shops. The latter
have attracted keen prices, particularly in towns and cities
where there is felt to be latent rental growth. In all locations
small lot sizes continue to attract strong interest from
private buyers.
Out of town, retail warehousing has again been the
best performing property sector. This has arisen principally
from improving rental values. Yields have remained broadly
at their existing low levels, reflecting keen demand from a
wide pool of investors. The consensus is that rents will
continue to rise strongly. This is due to occupier interest
from an ever-increasing range of retailers set against an
extremely restrictive supply of buildings. The planning
controls that have created this situation are likely to
become even tighter. This can only increase the appeal of
the existing stock to both occupiers and investors alike.
Supermarket values have increased again. This
reflects a general demand for long let, secure income
streams, but also strong underlying residuals, the scope for
rental improvements, and the scarcity of such investments.
Investors’ expectations will also have been boosted by a
recent supermarket rent review at Trafford, where the
Expert determined a figure well in excess of historical
food-store rental levels.
ATIS REAL Weatheralls
Norfolk House, 31 St James’s Square, London SW1Y 4JR.
25 November 2003
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