Equity market instability accentuates downturn in tenant demand

The CB Hillier Parker Rent Index fell by 0.1% in the year to August, the first time that this measure has been negative since 1994, highlighting the current weakness of occupational demand in the UK.

Weak demand is, at least partly, attributable to a growing corporate paralysis in the wake of this year’s extended equities bear market. A 22% reduction in UK share prices over the course during 2002 has contributed to weak and falling business investment and accentuated the marked reluctance of corporate occupiers to commit to new rental liabilities.

Occupational demand in the UK property market has been falling consistently over the last 12 months, mirroring the downturn in the UK economy. This negative trend is most evident in the Central London and Western Corridor office markets where a virtual tenant strike has resulted in rental values by 10% and 5% respectively over the last year.

Among other factors, falling share prices reflect weak corporate profits (the gross operating surplus of corporations fell by 1.6% in Q2 2002) and a reaction to the unrealistic profit expectations at the turn of the Millennium. The related downturn in overall business investment (which fell by 10% between Q1 2001 and Q2 2002) has been accompanied by a marked change in corporate behaviour towards their property commitments. With nominal debt fixed, debtequity ratios have risen, with the combined effect of emphasising the importance cash flow and constraining finance for new investment. This is particularly pertinent given increased investor and shareholder scrutiny in the wake of the recent accounting scandals.

Understandably, in an environment of corporate and economic uncertainty CEOs are reluctant to commit to new, often expensive, premises unless a compelling business need is demonstrated and have increasingly sanctioned the release of unwanted existing space.

Looking forward, there are positive signs of a return to corporate expansion. The UK economy is forecast to return to marginally ahead of trend growth in 2003, on the back of still buoyant domestic demand and tentatively improving world trade. Recent surveys reflect a growing sense of optimism, indicating that forthcoming order books and output expectations are rising. This will provide the foundation for expanding business investment and ultimately demand for commercial property space. However, accelerating rental value growth is unlikely to become evident until the current excess of secondhand space is absorbed in the latter part of 2003.

(source: CB Hillier Parker)

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