2006 represented the fourth consecutive year of divergence between the property investment market and the occupational market
Sustained and strong investment demand was reflected
in 2006 with capital values rising almost as much as they had in 2005.
Investors were seemingly willing to accept the further compression in yields
that this represented. Whilst it remains to be seen whether these investment
ratings are sustainable in the medium to long term, it is comforting to
observe that the fundamentals underpinning the real UK economy remain supportive
of property values. In particular, office rents are now growing at their
fastest rate for five years, albeit that this positive trend owes much to
the considerable improvement witnessed in the Central London market. Employment
growth is expected to remain fairly constant over the next few years, supported
by an economy which might be expected to return to trend growth in 2008
and 2009, after a possible slight deceleration in 2007. Interest rates in
2006, both in the UK and the US, have trended upwards largely in response
to inflationary indications and have probably all but peaked. Even so, the
rise in property values continued uninterrupted in 2006 and may well be
sustainable in the medium term if investors feel confident regarding economic
fundamentals and the prospects for rental growth.
Through this period of rising property investment prices, we have maintained
our strategy of realising surpluses where we felt we were no longer able
to extract additional value rather than expecting market momentum to generate
further gains. Conversely, it has been a much more difficult market in which
to source new investment product. Competition in the market place in 2006
was even less discerning in the relationship between quality and value.
Accordingly, during 2006, the investment markets became less attractive
to us in general terms than the development arena.
Current development programme
2006 has seen considerable activity in our development programme with successes
achieved on a number of existing projects and some further deals which either
extend, or have a significant possibility of extending, our pipeline of
future work. We are encouraged that institutional investment support is
increasingly available to fund development projects, since it is precisely
this class of long-term, patient capital that is the best underpinning for
market stability and growth. A concern with any development activity must
be that developers and institutions engender such a significant oversupply
of product that the current upswing ends prematurely. Whilst we are always
mindful of such events, we believe there is some way to go to the end of
this development cycle, especially if UK and global economic growth continues.
The Central London markets are, unsurprisingly, currently demonstrating
the largest increases with strong rental and asset value growth in both
the City and West End markets. It remains to be seen whether demand here
can be sustained and to what degree the supply side response may act as
a brake on rental growth. The lead times involved in large-scale, urban
development are considerable and there is little margin for error especially
if site acquisitions are made at values which reflect current short-term
investor demand rather more than those predicated on economic fundamentals.
399edgware
399edgware is a major regeneration project bringing 300,000 sq. ft. of high quality retail space and 340,000 sq. ft. of residential accommodation to the Edgware Road, Colindale, London NW.
