Commercial property rents poised to take off

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City Editor

The commercial property market is poised to enjoy its highest growth in rents since the late 1980s boom, according to figures from a leading property industry consultant.

Healey & Baker expects rents for prime buildings to rise by 7.5 per cent, twice the rate of increase in 1995 and the best performance for seven years.

David Hutchings, head of investment research at the firm, said: "We expect 1996 to see continued low interest rates, sustained economic growth and low inflation.

"The three together should produce a healthier level of tenant demand and increase the numbers of buyers and sellers in the investment market."

If the property market does pick up, it will be a welcome relief to the industry which has struggled to come to terms with plunging activity levels and lower prices.

Firms of surveyors freely admit that they have been slow to adjust their cost bases to reflect what pessimists see as a permanent reduction in business.

Mr Hutchings added: "Optimism that rents should see a robust short-term recovery is now shared by many property-owners.

"Occupier sentiment and viewings are improving. Average yields are close to borrowing costs and bank finance for new developement is becoming available as the supply of quality real estate continues to shrink."

The figures from Healey & Baker chimed with a recent report from UBS, the broker, which forecast total returns from direct property investment this year of between 10 and 11 per cent, rising to 15 per cent in 1997.

That, the firm said, would compare with returns of only between 6 and 7 per cent from shares and it recommended institutions to increase their weightings in property. For many reasons, including the fundamental illiquidity of the property market, pension funds and insurance companies have been reducing the proportion of their assets represented by property for many years.

Institutions have also been put off by the poor long-term investment returns that property has offered in recent years. In the 1990s, so far, the annual average return on equities has been 12 per cent compared with just 4 per cent for property.

Bears of the sector believe that even if rents do start to rise again, capital values could continue to fall as the yields demanded by investors continue to rise.

The negative argument claims that with 25-year leases a relic of the past, and little inflation, buildings are now much more affected by maintenance costs, depreciation and obsolescence. That must be reflected in a higher income yield.

Grimley, another property consultancy, contributed to the bull argument last week, however, saying headline rents for central London properties had increased by 16 per cent over the past two years with rises of over 30 per cent in the City and Mayfair.

It added that employment forecasts for the next two-year period suggested a shortage of prime space would emerge, adding upward pressure to the best buildings.

That is a trend that has been evident for some months now as a two-tier market has emerged in the sector.

Older properties, without the facilities that modern organisations demand, are expected to face increasing difficulties and Grimley expects permanent over-supply to be a feature of the market.

That has led to an increase in attempts to convert older office buildings for other uses. Peninsular Heights, a conversion by Regalian of a Thames- side office tower into luxury flats, is one example.

Britannic Tower, former headquarters of BP in the City, was recently acquired by Wates for conversion into a mixed-use site.

Adding to the bullish assessments of the market's prospects, property agent Richard Ellis said this week that the central London office market had experienced its highest quarterly level of take-up of space for more than two years.

It also pointed to high levels of activity in the investment market.

According to John Slade, head of City investment: "The improvement in the central London investment and occupation markets reflects continued economic growth, with decisions which have been put on the back burner for some time now being made."