Market Sentiment & Lateral Thoughts

from Neil Behrmann and other authors

Uncertain times in London commercial property

Industry groups are appealing for property tax reforms to relieve them from impending tax increases.
March, 2017

London:- INVESTORS in London commercial property face a period of uncertainty due to Brexit, higher tax rates and rising interest rates. Tighter scrutiny of opaque offshore corporate investors under the new UK Criminal Finances Bill is another factor, analysts say.
To ease potential pressures, City, retailers and business groups are appealing for property tax reforms and are hoping that Philip Hammond, Chancellor of the Exchequer will announce such intentions in the budget on Wednesday, this week. The acute problem is that rates – of property tax – are based on capital values and rentals rather than turnover of businesses. Rates haven’t been raised for seven years, during a time when commercial property prices and rentals have surged.
In particular, small firms renting offices, retailers, pubs, hotels, leisure centres are facing “an alarming cliff edge” and could fail, cautions CVS, a commercial rents and rates advisory firm. Business rate bills for some offices in the City of London, which currently have a rates bill of £876 million (S$1.5 billion) are set to rise by a staggering £1.44 billion over five years, estimates CVS.
The government has indicated that there will be temporary relief for the increase in rates, but even if that takes place, it will be difficult for landlords to raise rents at a time when yields are not that high.

Low yields and shifts to warehouses

According to estate agent Knight Frank’s calculations, London West End and City Prime offices are on gross yields of 3.25 and 4.25 per cent respectively; prime shops 4 per cent and Oxford and Bond Street shops 2 to 2.25 per cent and prime warehousing and industrial space 4.25 to 5 per cent.
The fourth quarter survey from the Royal Institution of Chartered Surveyors (RICS) illustrates negative growth expectations for London commercial property.
RICS stated that overall investment enquiries were flat in the London office sector and declined modestly in the London retail segment. The UK commercial property market has largely recovered from an immediate post-Brexit-vote slump according to the RICS, but London has underperformed the wider UK market. Some projects have been placed on hold, property companies have cut rental growth forecasts and rents are beginning to stagnate.

Impact of devalued pound

CBRE, a commercial property consultant, said that 2015 represented the peak in UK real estate investment volumes with an all-time record of record of £69 billion. Last year total investment slid by 30 per cent to around £49 billion, estimates the firm and the prediction is that 2017 will be “weaker still”.
“Superficially, it is a compelling argument that the pound’s depreciation will underpin the attractiveness of UK real estate,” states CBRE. “To this currency discount can be added the 4 per cent fall in all-property capital values during the third quarter of 2016.”
CBRE predicts that on average “prices will fall by a further 4 to 5 per cent over the coming year as occupier demand is affected by a weaker UK economy”. The firm contends however that the devaluation and lower prices have encouraged “very strong overseas interest… in supply- constrained markets with long income and good covenants”.
It thus forecasts price gains to recover to the 6 to 7 per cent average range from 2018 onwards.
RICS agrees that continued demand from overseas investors means “that prospects for UK property are by no means bleak. Some 28 per cent of RICS respondents expect to see a rise rather than a fall in property values over the next 12 months and more deals could be in the offing.”
CC Land Holdings, a company run by Cheung Chung-kiu, a property tycoon in China, for example, has agreed to pay £1.15 billion to buy Leadenhall Building, dubbed the “Cheesegrater” (because of its wedge shape), from British Land and Oxford Properties. The size of sale is the second highest since 2014, when the HSBC tower in Canary Wharf was sold to Qatar’s sovereign wealth fund for £1.18 billion.
Knight Frank is also hoping that foreign demand will continue to prop up the London commercial real estate: “In 2016, Central London remained a popular destination for overseas real estate investment, with the office market alone attracting over £9.3 billion of deals by foreign buyers. Last year 73 per cent of transactions involved an overseas buyer. This compares to 40 per cent in New York City, 33 per cent in Paris and 65 per cent in Singapore.”

© copyright Neil Behrmann- first published in The Business Times, Singapore

Neil Behrmann is author of Trader Jack- The Story of Jack Miner and anti-war children’s novel Butterfly Battle- The Story of the Great Insect War
Signed copies and background can be obtained directly from http://www.thestoryofjackminer.com/?page_id=14 and Butterfly Battle at http://www.readmore-books.com/
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