There was nothing particularly unexpected in the decline in the value of MEPC's net assets per share, but what a depressing picture of Britain's commercial property market the figure painted. The upturn in demand and rents at the beginning of last year is beginning to look like a blip in an otherwise relentless downturn of the sector's fortunes.
The property market has three main problems. First, investing institutions who own most of the country's stock of commercial properties are selling more buildings than they are buying. Actually this is nothing new: since the 1960s, when property's attractions as a hedge against inflation and an alternative to equities were first recognised, insurance and pension funds have been steadily reducing their exposure to bricks and mortar. The rate of disinvestment has accelerated recently. New rules and actuarial methods mean that pension funds need to increase their weightings in liquid investments.Property is the most illiquid asset in the best of markets - at the moment it can be completely unsaleable.
The second issue confronting the sector is the malaise afflicting the property agents who broker deals and value portfolios, culminating recently with the receivership of Colliers Erdman Lewis, one of the better known names, and the widespread view that many more firms will go to the wall. Struggling just to survive, no agent is likely to take any risks with a valuation. And with so little agency business available, the temptation for an agent is to cut the price of a building ever lower to try and stimulate trade.
Problem number three is arguably the most severe and the least well understood. Currently most buildings are valued on the assumption that they will be let on a 25-year lease with no break clauses. This is no longer the case and, with a two-tier market emerging in which many secondary properties will never find tenants again, investors are rightly demanding a greater premium to compensate for the higher risk of shorter lease terms.
All of which leads to the biggest problem of all from the investor's perspective. With capital values and rents in all but the ritziest of new properties in the doldrums, dividends won't grow for years. Little wonder that the sector has underperformed the rest of the stockmarket by more than a third over the past five years.