Behind the Mask: Central London Seminar

Well that’s another Central London seminar done. We entertained about 200 home team and clients at BAFTA on Piccadilly – an institution famous its annual distribution of awards in the shape of old Greek theatrical masks.

Behind the mask – is that a good analogy for the market, or just an old Eric Clapton song? Well, the messages yesterday were upbeat. There are concerns about the economy but UK plc seems to have done the right thing. Drawing parallels with early 90s Sweden and Japan underline this. It will be a bumpy road but we have made the tough decisions that will prevent “zombification” of our banking system – something that still plagues Japan.

In terms of the London office market, there are plenty of reasons to be cheerful (from a landlord’s point of view). Rents are growing and supply is falling. And then there’s investment. London, to paraphrase a colleague, continues to be the world’s mattress. There is a wealth of money seeking a home in London office product. And behind every super-rich individual willing to pay sub 4% for prime Mayfair there is an opportunity fund or institution with a different pricing point for other lot sizes and locations. There is money available from the Middle East for speculative schemes and money from far eastern pension funds seeking “scale”. Prime yields should be supported at their current levels by this demand.

Take this mask of positivity away and is the face lurking behind as horrific as those you see at the top of this blog? Hopefully not. Occupiers might be more willing to deal, but where is the replacement demand? And there is a longer term elephant in the room concerning the impact of (over) regulation on London’s relative attractiveness.

What seems most certain is the release of more stock from the banks. It has accelerated of late and our real estate workout team have never been busier. There may not be a flood but there will be a significant increase. What does this mean? Well, in our view, prime is prime – there won’t be a significant increase in the availability of the best stuff and there is no reason to suspect the demand for it will diminish. Secondary is more interesting, and this will make up a large proportion of the banks’ disposals, particularly non-UK banks. With less demand for such product and more supply, we think there will be pricing movement. And where there is pricing movement, there is opportunity to take advantage of mis-pricing. We think this will be the key play of 2011.

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