It may be different for property markets this time round

'Good information does not, of itself, iron out price fluctuations'
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The Independent Online

"It really is different this time" is one of those fatal investment statements, as anyone who believed that the new economy boom last year was qualitatively different from previous investment mania will know to their cost. But property may be different this time - and partly because of the communications revolution.

"It really is different this time" is one of those fatal investment statements, as anyone who believed that the new economy boom last year was qualitatively different from previous investment mania will know to their cost. But property may be different this time - and partly because of the communications revolution.

In almost all previous downswings of the global economic cycle, the property sector was among the hardest hit. The UK experience of the early 1990s was pretty typical of the genre. At a commercial level there was the usual cluster of empty shops, office blocks and factories, just as in the early 1970s and early 1980s. There was also the added twist of a residential slump: the new expression "negative equity" entered the language of the housing market.

Given this record you might reasonably expect the same thing to happen again. High streets, aside from prime sites, are certainly under considerable pressure and factories in less successful areas are standing vacant. But there are several reasons to suspect that this next property cycle will be less marked than previous ones, probably here in Britain but also elsewhere in the world.

For a start, global property had a good year in 2000 relative to global equities. In Britain, returns on commercial property gave a total return of 10.5 per cent, against 8.8 per cent on gilts and minus 5.9 per cent for the Footsie index. So far so good.

Next, there is no grinding pressure from world inflation. Yes, it may kick up a little, but nothing like it has done during the last three cycles. So central banks will be able to cut interest rates to offset declining demand, bringing cheaper finance to the property sector.

Third, the experience of previous cycles has encouraged architects and developers to plan buildings that are either multi-purpose or easily adapted. True, there are many specialist properties still being built: it is hard to think of alternative uses for the dealing rooms of financial service companies. But most new developments in the UK are planned with change in mind. After all, buildings have a design life of at least 60 years and in practice stand on average much longer. It is impossible to see how buildings might be used two generations from now, so the only sensible approach is to plan for change.

The industry has also become better at thinking of new uses for buildings that have outlived their original purpose but are well-located. Turning warehouses into homes is old hat, but now even the least promising of buildings, like 1960s office blocks, are finding new life as flats and even hotels. (In Edinburgh, a newspaper office has been converted into a hotel.) Clever design is being used to conceal the deficiencies of mediocre buildings - and enhance the glories of great ones.

But perhaps the most interesting aspect of this cycle will be the way technology affects the property scene.

LaSalle Investment Management of Chicago has done some work on this, which it has published in its new annual investment strategy review.

The theme it develops is that while technology businesses will themselves have a pretty lumpy demand for space, there are new types of property that are going to see increases in demand (like server farms and co-location centres) and that the new technologies will make real estate services more efficient.

Ultimately the estate agency business is to match supply and demand. Now it has a technology that helps enormously in that task. Apparently the UK leads the world using online auctions to sell property over the internet. LaSalle expects, quite rightly, that techniques developed in one country to spread rapidly through the rest of the world.

Of course, it is not only the property industry that has to figure out how to apply the new technologies. Its customers, buyers as well as sellers, have to feel comfortable too. Good information does not, of itself, iron out price fluctuations, but the better the information, the smaller the scope for anomalies to develop. In theory at least, any downturn in demand for property ought to be reflected in prices more swiftly than in previous cycles. And that in turn should suck in the potential buyers more swiftly than before.

Equally important, better information means that companies can try to gain competitive advantages by choosing the right location. For example, one dominant theme of the world economy now is the fight for talent: the extent to which companies are forced to bid up wage rates for clever people. But suppose they can achieve a competitive advantage by other ways, in particular by siting their operations where these people want to live.

In Europe most new technology companies are in cities. US technology companies, which have tended to choose suburban sites, are apparently now looking at moving to urban locations because that is the best way to attract young people in a tight labour market.

Another way that better information will help smooth property prices is the way in which the industry can use predictions of job creation to create the physical infrastructure that the workers, and their families, will need. Of course this has been possible long before the Net existed, but development happened on a pretty haphazard basis. Now it is possible to look at the forces that create and drive growth clusters - good universities, magnet companies, sources of venture capital, etc - and judge the property needs and opportunities more precisely.

None of this means that property will escape unscathed if there is a really serious global downturn. There is still, in some parts of the world, a property hangover from previous cycles. You have only to travel to places like Bangkok to see the unfinished office blocks, beached by the Asian financial crash of three years ago, where work has only recently restarted. But the great speculative excesses of the last couple of years were not particularly in the property market, and that is unusual. So the place to look for trouble is probably in the cyber world - all those over-borrowed telecom companies? - rather than in the physical world.

So for the property market maybe things are different this time, but they are not different for some other large sectors of the economy.

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