Timing ousts location for canny property investors

Only three things matter in the property market, they used to say, location, location and location. That may be true in the long run, but in the rollercoaster markets of the past few years the canny investor would have done better to concentrate on timing, timing and timing.

Between September 1992, when sterling tumbled unceremoniously out of the ERM, and the first quarter of last year, share prices in the sector almost trebled in value. Since then, they have fallen by almost 30 per cent.

Stock market investors are not alone in wondering what has gone wrong over the past 12 months. The surveying profession is nervously looking over its own shoulder as it struggles to get to grips with the new reality of over-supply, low volumes and a vicious price war to hold on to the little business that is available.

Surveyors are salesmen, whose stock in trade is talking up their own book, so it is perhaps not surprising that much of the research they produce suggests the market is poised for recovery. But it has been poised for a long time now, with little evidence that the light at the end of the tunnel is anything but a distant pinprick.

A rising property market needs either rising rents or falling interest rates, but preferably both. It appears that neither is likely this year.

According to Legal & General, which said recently it planned to reduce its exposure to commercial property, the outlook for yields is gloomy.

Although not umbilically linked to base rates and gilt yields they do tend to track those two indicators closely and the fight to restrain inflation means the trend for both is more likely upwards than downwards over the next 12 months.

David Shaw, at L&G, believes the long-run differential between property and gilt yields of about 1.5 per cent is reasonable in a low-inflation environment. With gilts offering 8.75 per cent, investors will accept the current 7.25 per cent available from property, because it offers the prospect of income rising eventually, but probably no less. Hillier Parker reported recently that yields have been rising for two quarters.

As far as the second component of a property's value is concerned - rents - a two-tier market is rapidly forming with demand for top-quality space driving higher the cost of occupying the very best buildings in prime locations.

For the rest, however, the supply overhang from the last development is expected to keep rents in the doldrums.

Legal & General thinks the greater depth of the recession compared with the slumps of the mid-1970s and early 1980s means the rental growth of perhaps 20 per cent that would normally be expected at this stage in the economic cycle is more likely to be just 5 per cent overall this year.

Other depressing effects on the market include the increased focus of investors on the real cost of depreciation and obsolescence on buildings in the absence of inflation pushing nominal values ever higher.

The Chancellor's decision to phase in the otherwise highly beneficial impact of lower business rates on occupiers in the South-east has also removed one hoped-for catalyst for higher rents.

That is all bad news for investors, both direct and indirect through quoted property companies. But it is worse news for the surveying industry, which is only just coming to terms with the fact that current market conditions are normal and the boom of the late 1980s the aberration.

Share prices of the handful of quoted surveyors have slumped over the past year or so as the reality of loss-leader tenders for valuation and agency work has dawned on the market, adding fuel to the already feverish speculation about possible takeovers in the sector.

Like the accountants before them, surveyors accept that the industry is moving towards a far-reaching consolidation that will leave a handful of large, global players able to service increasingly international clients.