by David Cadman
Having enjoyed an all-too-brief period of group euphoria, the British property community is once again in danger of falling into collective depression. To the analyst who tries to make some sense of the seemingly inevitable rhythms of market behaviour such exaggerated joy and despair is a matter of continuing mystery!
Much of the problem lies in our traditional teaching. Although in more recent times students of land management and land economy have been introduced to the explicit techniques of discounted cash-flow appraisal, there remain in practice two or three generations of surveyors (of which I am one) who were taught to walk into the future looking backwards, relying for guidance on that mystical talisman, the “all-risks yield”. “Today’s rents and costs” and the use of historic “comparables” have discouraged us from giving sufficient attention to the articulation of likely future outcomes. Thus we find ourselves ill-equipped to place the present into a past-future continuum.
The real cause for present concern is not that markets may be following a cyclical pattern, and moving into a period of relative decline, but that we should regard this as a matter for alarm.
In trying to present a more measured view, we must start with a fundamental premise — that the performance of property markets is related to that of the economy. Over the longer period, such markets will follow the rise and fall of economic activity nationally, regionally and locally.
Figure 1 shows the long-run performance of the British economy from 1962 to 1989, adjusted to take out the effects of inflation. Here we see the underlying growth of GDP disrupted periodically by the peaks and troughs of periods of so-called boom and slump. Figure 2 then focuses on the period 1988-89 and shows how we have moved up to and down from the peak of the latest economic cycle.
While opinions vary as to the likely depth and extent of the trough which we have entered, it is a seemingly inevitable part of the continuing property cycle with which all of us should by now be familiar.
A longer-term and more measured perspective therefore suggests that, while in formulating investment and development policy it would be foolhardy to disregard the latest downturn in demand — particularly at a time of abundant supply — it would also be foolish to ignore the generally rising trend of national prosperity.
Perhaps the most significant characteristic of this present downturn is not the fall in demand but the unusual conditions of supply which have come about as a result of the introduction of the B1 Use Class. This easing of planning control, occurring on the back of a boom, has given rise almost everywhere to pipelines of potential supply that are both unusually extensive and varied. This means that occupiers of office, industrial and warehousing property are faced with much more choice across a very wide spectrum of locations and property types. They have responded by choosing different locations and buildings for different parts of their corporate activity. The functional composition of demand has become as important as the sectoral component (Figs 3 and 4). Furthermore, because many business park projects involve fast-track construction methods on greenfield sites, the different phases of a development can be eased on to the market with greater flexibility.
This new profile of supply/demand is important in terms of trying to understand the “shape” of the present property cycle. For, although local conditions will inevitably vary — and a knowledge of them will be singularly important — the shadow that this potential pipeline casts could, for some while, tend to keep market conditions more nearly in balance than has been typical in British post-war property markets. We have little experience of such conditions, but where they do occur, rental growth must be expected to be less pronounced, perhaps tending to settle close to zero growth in real terms.
Our traditional techniques and the use of historic comparables will not help us in the task of understanding these new market conditions. What we need is a much better understanding of the dynamics of the economy that underline the property market, a much better understanding of the nature of demand with all its complexity and variety.
In the meantime, we should be focusing our attention on the likely cycle of economic activity that will carry the property market through this present trough and into the next period of relative growth. The shape of this cycle, its depth and duration during the next couple of years, will be fashioned by several key factors. First, there are two important financial factors — the Chancellor’s Budget this month and the level of interest rates. Second, come two important political factors — the decision to join the EMS and the machinations of Government as we move towards the next election, the latest date for which is June 1992. Finally, there is the behaviour of the market. The present softening of yields and re-assessment of development projects seem entirely rational. Well measured, it will enable the property sector to adjust to the cycle of demand relatively painlessly. Overdone, it will cause an all too abrupt decline. Underdone, and the worst is yet to come.
