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SNL Blogs
Thursday, June 02, 2016 2:40 AM ET
The death of the property cycle and the 'tectonic plates' of supply and demand
in London
By Sophia Furber
The property cycle is dead, long live the property cycle
"There was a folklore in the 1980s that property cycles last 10 to 12 years each. But the property cycle, if it ever existed, is dead," said Peter Rees,
professor at University College London and former City Planning Officer at the City of London Corp.
Rees, who oversaw the planning process for London skyscrapers including British Land Co. Plc's The Leadenhall Building during his 29-year tenure at the
City of London Corp., was speaking at Cass Real Estate Club's 2016 Conference in London on May 31.
The growing number of sovereign wealth funds pumping money into property and the prolonged low-interest rate environment of recent years means that
the property market is not behaving in the same predictable, cyclical way that it once did, he said.
There has also been a shift in what developers are prepared to build, and this too is skewing the picture, Rees added:
"Most developers don't want to build offices anymore. They want to build high-end residential to sell off-plan in Hong Kong."
Speaking of cycles, Land Securities Group Plc CEO Rob Noel during the panel discussion compared the forces of supply and demand in the London office
market to "tectonic plates" that are always moving at different speeds.
"You cannot possibly predict at the beginning of a 10-year development project what economic conditions will be like by the time it is completed," he said. He
admitted that when Land Securities proposed the Walkie-Talkie skyscraper in the City of London to investors almost a decade ago, "the room went silent." At
this point, the U.K. office market was already going into a downturn. But as Noel put it, it's not about where the economy is when you start a project that
counts, it's where demand will be when it is completed.
Noel predicted that booms and busts in the real estate market were likely to be more frequent in the future, partly due to the high levels of overseas capital in
the market, but that they would be less deep than in the past.
Commenting on the high levels of office supply currently under development or in planning, Noel said the present situation did not give any cause for
concern, but that there would be a problem if demand was "suddenly turned off."
Look out for consolidation in PRS
Investors and operators who want to get into the U.K.'s nascent private rented sector but have not found an opening may have a moment of opportunity if
they are prepared to wait it out for a year or two, panelist Laure Duhot, managing director, strategic capital management for Grainger Plc said.
"We will see consolidation in the next two years or so. Some new entrants into the PRS market will manage well after having bought or developed assets,
but others will struggle, and will look to sell properties," she said.
"Some of these newer players will find that managing PRS is more challenging than they first imagined it will be, and will recognize that they can get an
extremely good exit price if they decide to offload properties," she said in an interview on the sidelines.
It will be some time before the U.K.'s PRS market will look anything like that of Germany, where it is a major established asset class, as the British
government is "very pro home-ownership," she added.
And don't forget Africa
Sub-Saharan Africa provides "huge opportunities" for real estate development, panelist Nick Lambert, head of GWS complex and emerging markets, CBRE
said.
However, a downturn in oil prices has proved to be painful for exporting countries like Nigeria and Angola, just at a juncture when their nascent commercial
property markets were starting to pick up and international corporate occupiers were moving in:
"There are half-built and abandoned buildings all across Africa, but this will change once the oil price goes up," he said.
Lambert predicted that there would be some "excellent" returns in Africa for those who knew how to do deals. But there are some risks to be aware of,
such as proving legal ownership of land, he added.
Source: S&P Global Market Intelligence | Page 1 of 1