Property: Office landlords ride high on rising rental values

Foundations shift when the underlying clay, granite or global finance starts to rumble. Prosperity abroad brings prosperous foreign investors to these shores. Conversely, problems over there - the stock market in New York or Hong Kong, car manufacturing in Japan or the banking industry in Korea - create ripples here. Robert Liebman spoke to Londoners who analyse commercial property and to a former miner who is in the process of buying a property in Nottinghamshire.

Among its many privileges, the City of London provides omens regarding property throughout the entire nation. Ted Hartill, City Surveyor for the Corporation of London, cautions against generalising, not least because different pictures are emerging based on region and type of property. And reading tea leaves is hardly an exact science. But, as Mr Hartill notes, "historically, if business activity is high in the City, it spreads to the rest of the country eventually."

Business activity in the Square Mile has indeed been high. "The market came alive in September last year, and it has remained active both on the investment front and with prospective occupiers," says Mr Hartill. Even with the recent turbulence in Asia, confidence remains strong.

Central London is also booming, according to John Stephen, Investment Partner at Jones Lang Wootton: "We are seeing record levels of commitment and pre-letting activity in central London. By September 1997 investment turnover had reached pounds 3.2bn, already in excess of the full year total for every year since 1989." For the nation as a whole, JLW anticipates that, like last year, 1998 will see returns in excess of 15 per cent.

The office sector spells good news for landlords, not so good for tenants and occupiers looking to buy. "The oversupply of good-specification new and refurbished office accommodation has turned into a severe shortage of grade A space," says James Prowse, senior surveyor for Chesterton. "Few freeholds are available. Supply is likely to become increasingly tight on the back of planning restrictions governing development."

Similarly for renters, "the office market is now seeing the highest rents since the 1980s boom and they are set to climb higher in some areas," notes Mr Prowse.

Despite occupier optimism regarding space availability, "the reality is that new speculative development is limited, which precludes discounts," according to Chesterton's Simon Lloyd. "Although an occupier might be able to negotiate a cheap deal on an existing building, good-quality second- hand space is also rare," says Mr Lloyd, who is national director of industrial and warehouse property at Chesterton.

Retail property is monitored for Chesterton by Martin Crossley, who notes that this sector "is buoyant with numerous multiple and local retailers looking to take more and more shop premises. As a result, rents are being driven upwards and premiums are once again being paid for existing leases."

Crossley introduces a cautionary note, however. "The last strong period of rental growth and consumer spending was followed by a major recession and without the benefits of windfall payments and suchlike, the current consumer boom may be short-lived." For tenants, the wisest course might be short leases or break clauses.

The Jones Lang Wootton report for Central London Offices for the third quarter of last year is also upbeat but cautionary. "Activity in the central London leasing and investment markets during the closing weeks of the third quarter was extraordinary, even by the standards of the 1980s." There is, however, a downside: "If good quality accommodation continues to be absorbed at the present rate, current supply could be exhausted within six months. This would be a highly unsatisfactory situation for occupiers and potentially for the competitiveness of London's economy."

Chesterton's Mr Lloyd notes that "some companies are exercising a degree of caution as profits are damaged by exchange rate levels, rising interest rates and general concerns regarding the Far East." But to Peter Evans, head of research at DTZ Debenham Thorpe, "anticipation of good performance, with the potential for the sector to outpace equities in 1998, is causing institutional investors and property companies to lift their commitment to commercial property. In parallel the banks are showing an increasing willingness to lend on property. To date there is no significant evidence to suggest increasing money flows will destabilise the market, at least for the foreseeable future."

In Mansfield, west Nottinghamshire, Kevin Braithwaite, 33, married with one daughter, started repairing scooters in his family garage and garden shed. Two years ago, he rented a 15-by-23-foot industrial unit from the council for pounds 50 per week including rates. A larger space was for sale, but at pounds 50,000 the freehold was beyond his grasp.

"Coming from an 8-by-12-foot garage, my council space looked huge. Now I've outgrown it." Luckily, the property he originally wanted to buy was still for sale.

Mr Braithwaite has purchased it, subject to planning permission. With approximately 1,000 sq ft (76ft by 15ft) he will have a showroom separate from the repair shop. Near the town centre and enjoying heightened visibility by being sideways to the main traffic, "it is on a road which gets lots of passing trade, and lots of traffic jams, so people have to notice me." Stuck in traffic, they may also pine for the traffic-eluding qualities inherent in the product he sells.

For Mansfield District Council, "I had to draw a ground plan showing all of the rooms and doors. I also prepared a plan showing road sizes and accesses. I already have permission for change of use, even though no one knows what the previous use actually was. I still have to submit plans for windows, shop signs and outside lights. If I knew earlier, I could have done all the plans at once. I may have to wait another eight weeks."

Mr Braithwaite wants to "make it look dead smart, but no grants are available". He will be reimbursed for some of his solicitor's fee, however. "If I run into difficulties, I can let out some of the rooms in the back."

Meanwhile, back at Chesterton, Mr Lloyd maintains that "rents are likely to rise over the next 12-18 months from current levels, so it would be advisable to take the plunge now before leasing becomes more expensive."

Kevin Braithwaite, Two-Wheeled Engineering, Unit 2, Highfield Way, off Quarry Lane, Mansfield, Nottinghamshire NG18 5DF; 01623 427232

Chesterton, 54 Brook Street, London W1A 2BU; 0171 499 0404

Jones Lang Wootton, 22 Hanover Square, London W1A 2BN; 0171 493 6040

DTZ Debenham Thorpe, 44 Brook Street, London W1; 0171 408 1161

Corporation of London, Guildhall, London EC2P 2EJ; 0171 332 1906.