Recession? What recession?
2 January 1999
The Far East has crashed, Brazil is teetering on the brink of economic disaster and in the UK, retail spending is in the doldrums. Yet commercial property lawyers say they are busier than ever. In fact, despite a slight cooling-off period in the latter stages of 1998, most predict steady growth this year.
James Barnes, partner at Herbert Smith, explains: "The difference between this and the previous property-led recession is that the market itself seems quite strong. It's the general investment market that's holding its breath and waiting to see how things are going to move. But I think we'll see more activity soon."
The advent of the euro, with its concomitant low interest rates throughout participating countries, should benefit the property market, says John Butler, London-based partner at Eversheds. "Lower returns on gilts will in turn make returns on property look reasonably attractive," he says.
His view is shared by Geoffrey Lander, head of Nabarro Nathanson's commercial property industry group. "Low interest rates, going down to around 3 per cent once we join EMU, will encourage investment in property - particularly as the stock market, though it offers higher returns, is so much more volatile," he says.
Furthermore, the advent of European accounting and valuation standards, which lawyers expect to come about within the next few years, should encourage investors to form European portfolios. In the meantime, lawyers say there is evidence of investors looking closely at the East European markets, particularly Poland and, to a lesser extent, Romania.
Lander reports a strong market in the industrial sector, particularly in call centres and large distribution warehouses, known as sheds. "After all, whatever happens, people will always need to go to Tesco," he says.
Cornelius Medvei, chairman of Eversheds' national commercial property group, sees a trend developing in shed portfolios whereby shorter leases of one, two or five years become the norm. "The old way of having 20 years' guaranteed income for major investors is going to be swept away," he claims.
Medvei believes the serviced office rental market is very much on the up, and increasingly affected by European letting standards. "The burden is going to shift to landlords, meaning higher rents, but also higher levels of maintenance by the landlord," he says.
According to chartered surveyor Jones Lang Wootton's property research for January, the City of London will see more than one million square feet of new speculative space this year, which will no doubt provide work for nearby law firms.
Like many City practitioners, Medvei is witnessing a significant increase in securitisations, including activity by Nomura and the Inland Revenue. "Securitisation is the way of the future," he says. "All the old-fashioned property companies are going to find it hard to compete, and they will fall victim to the Nomuras of this world."
However, the current tax climate is making the Holy Grail of liquidity difficult to achieve. Neil Warriner, tax partner at Herbert Smith, points out that securitisation vehicles are faced with two tax issues: first, the set-up costs of 3 per cent stamp duty on land, and secondly, two further levels of taxation - one on the vehicle that owns the land, and the other on individuals who own shares in the vehicle.
Mark Heighton, partner at Cameron McKenna, sees the continued trend towards joint-ownership projects, such as major retail centre BlueWater in Dartford, Kent (a joint enterprise between Prudential, Hermes Postel UK and Australia-based Landlease) as part of this drive towards securitisation.
"Investors are asking: 'How can we get our money out of property more quickly so we can adapt to the markets?' Rather than invest heavily in one shopping centre, you spread your investment across 10 with a group of others, so your property investment becomes more liquid," says Heighton.
The millennium bug has not bypassed the world of commercial property though, and tenants now signing leases, particularly in the retail and office sectors, are more often raising the issue in negotiations.
"Potentially I think this could be very serious - I wouldn't like to be selling a shopping centre towards the end of the year," says Heighton. He warns landlords of single-let buildings whose leases are coming to an end towards the end of 1999 that they should discover and rectify any problems in advance to avoid a protracted gap in their income stream while the property lies empty.