A special report on property
Commercial property has bounced back, but only in the best locations
IN SOME corners of the commercial-property market a slight whiff of self-congratulation is in the air. Doom-laden warnings issued in 2008 and early 2009 that commercial real estate would be the “next shoe to drop” have not come to pass. Opportunistic investors hoping to cash in on the sale of distressed assets have been largely disappointed. Governments have intervened less than they have in housing (there are fewer votes in office buildings and shopping centres). “Commercial real estate was not at the heart of the crisis,” says a big fund manager in Germany.
Investors’ interest in the asset class is growing, thanks in large part to the extreme macroeconomic environment. Near-zero interest rates make the yields on offer from property look attractive. The cashflow from tenants is more stable than that from equities, where values zigzag day by day and dividends can suddenly be suspended by the management. And unlike many types of bonds, property is seen as a useful hedge against inflation because rental agreements can be renegotiated with tenants to reflect rising prices. Bulls note that Norway’s $543 billion state pension fund, one of the world’s largest sovereign-wealth funds, is starting to allocate money to property. It made its first real-estate investment in January, spending ￡452m ($723m) on properties in London’s Regent Street.
Led by Britain, which had seen the steepest fall of the big property markets (see chart 5), values are rising again. According to IPD, which provides information on property markets, British commercial property delivered a total return of 15.2% in 2010, its strongest performance for four years. Investing in property has paid off handsomely for many since late 2009. Global REITs performed twice as well as global stocks and bonds in the 12 months to the end of September 2010. Take a closer look at this resurgence, however, and the picture becomes more complicated.
In one crucial respect, the bubble in commercial property was less dangerous than in the residential sector: there was no development boom and hence no oversupply. The enormous amount of liquidity sloshing around the system was directed at acquiring existing properties rather than building new ones. “This was an excess of capital, not an excess of cranes,” says Jonathan Gray, the boss of Blackstone’s real-estate business.
That flood of money drove up debt burdens and property values and reduced yields (the ratio of the income flow from a property to its value). Madness became routine: the 110% loan-to-value financing for a hotel in Germany, offered to a borrower with no knowledge of either hotels or Germany; the fact that yields on Grafton Street in central Dublin, hardly a retail paradise, came close to those in some of the world’s most prestigious shopping streets; the willingness of staid fund managers to base their investment case on capital gains rather than rental growth.
If the market had been left to run for a little longer, it might have become crazier still. Just before the crisis broke, there had been talk of securities made up exclusively of riskier development loans. But in contrast to the overbuilding of the early 1990s, when rapid rental growth persuaded developers to dig lots of holes in the ground, this time lenders and investors were disciplined enough to want income-producing properties; they were just not disciplined enough to price the risks correctly.
Indeed, if there is going to be an imbalance in commercial property now, it is more likely to involve a scarcity of supply. As prospects for economic growth gradually improve, demand from large companies, which are sitting on lots of money and are able to take a long-term view of the business cycle, is picking up. Yet there is very little development in the pipeline, at least in the rich world. Estimates from CBRE show that 65% of the new office space due to come on stream in big cities between 2010 and 2012 is in Asia and just 8% in North America. As a result, says Brett White, the firm’s boss, vacancy rates will go down and rents, which have already stabilised in many places, will go up: “Power is very quickly shifting from the tenant to the landlord.”
Some are well placed to benefit from a prospective squeeze on space. A cluster of new buildings is going up in London, with nicknames like the Shard, the Walkie-Talkie and the Cheesegrater. Francis Salway, the boss of Land Securities, a big developer, says his firm made a conscious decision at the start of 2010 not to be too risk-averse. It has since committed itself to development projects costing over ￡1 billion. Mr Salway reckons that there could be a shortage of new office space in London by the end of this year; completion of his next project in the city is not due until 2012.
一些开发商已经准备好从预期的拥挤空间中受益。伦敦的一批新楼盘正在拔地而起，并有了“碎片(Shard)”、“步话机(Walkie-Talkie)”和“干酪擦(Cheesegrater)”这样的绰号。大型开发商“土地证券”(Land Securities)的老板弗朗西斯·萨尔维(Francis Salway)说，他的公司在2010年初做出了一个清醒的决定——公司将不会过分规避风险。该公司自那时起用在开发项目上的资金超过了10亿英镑。萨尔维认为，到今年年底，伦敦的新建写字楼可能会呈现短缺状况；他在伦敦城下一个项目的完工要等到2012年。
Outside London, the chances of an immediate surge in new building are slight. Debt financing for development projects, which lenders inevitably class as risky, is very tight. Land Securities has been able to start building in part because it raised lots of equity during 2009 and in part by joining with others. The Walkie-Talkie building, work on which started in January and is due to be completed in 2014, is a joint venture with Canary Wharf Group. And London is arguably a special case: the city’s leases tend to be unusually long, often 25 years, which means that tenants in old offices whose leases are due to expire in the next few years may want to up sticks for a modern building.
在伦敦之外，新楼盘迅速矗立的机会渺茫。针对房地产开发项目的债务融资非常紧张；银行不可避免地会把这样的项目定级为“危险”。“土地证券”之所以能够开始新楼盘的建设，部分原因是该公司在2009年募集了许多资金，还有部分原因是这些项目是与其它公司联合开发的。一月开工、定于2014年完工的“步话机”大厦就是与金丝雀码头集团(Canary Wharf Group)的合作项目。而且伦敦可以说是一个特别的例子：该市房屋的租期往往格外长，经常是25年的期限，这意味着旧写字楼中的租户，如果其租约几年内就到期的话，可能会想要搬到一个更现代的大楼中。
In any case, all this talk of rising values and space constraints can be misleading. The recovery in commercial property is confined to the best, or “prime”, assets. Prime is an overused word in the industry, but in essence it means the best buildings in the best locations, with good tenants and long leases. For offices, that means buildings right in the centre of big, international cities. For other types of commercial property it might mean something different: a great logistics centre with a long lease, for instance, might be near a motorway and nothing much else.
In the boom the distinction between top-quality assets and lower-quality ones (also known as “secondary” and “tertiary”) blurred. Money chased property of all sorts, closing the yield gap between the best and the rest. Not any more. Investors are now generally much more conservative, in part because they have more of their own equity at stake. That points them towards big cities where it is easier to get into and out of investments and where demand from high-quality tenants is concentrated. Money that had been raised to buy distressed assets was also switched into safer ones when it became clear that bargain properties were not coming to market in great numbers (of which more below).
In a faint echo of the boom itself, this weight of money chasing “safe” assets carries risk. Some think that prices for prime properties have already bounced back too far. “The next bubble may be under way in some markets,” says Matthias Danne of Deka, the largest provider of open-ended property funds in Germany. Correlations also tend to go up when property companies chase the same sort of tenants and locations: a portfolio of city-centre office buildings full of blue-chip banks looked stable until the crisis. And the desire for secure, long-term leases can easily backfire if interest rates rise, which will make yields look much less appealing. “A real snapback in interest rates is the big real-estate risk,” says Mr Gray at Blackstone.
和繁荣时期有点类似，这些追逐“安全”资产的资金也带着风险。有些人认为顶级房产的价格反弹得太厉害。“下一个泡沫可能正在某些市场酝酿着，” Deka（德国最大的开放式基金提供商）的马提亚·丹纳(Matthias Danne)说。当房地产公司追逐同样类型的租户和地点时，关联性也在增加：城市中心一批满是蓝筹银行的写字楼看起来很稳定，直到危机的发生。而且如果利率升高的话（这使得租赁收益的吸引力变得大打折扣），对于安全、长期租约的渴望会很容易消退。“利率真正的好转对房地产来说是个很大的风险，” 黑石公司(Blackstone)的格雷先生说。
Blackstone’s strategy is to invest opportunistically: it looks for empty and run-down buildings that it can improve and sell. For less ambitious investors, the obvious way to find better-value properties will be to take on risk gradually. That might mean accepting shorter lease lengths, with a view to refurbishing a building on expiry and then increasing rents. It might mean staying in the biggest cities but plumping for lower-quality assets, or moving into the best locations in secondary cities. Or it might mean going for the very best assets in less attractive countries.
Some fund managers make the case for prime properties in Spain. In December Deka bought a shopping centre in Bilbao for