Investment skills apply to both fields, says David Alexander
The 20th century ended on a business high with the office market going at a cracking pace – the rental rate for prime space on The Exchange in Edinburgh hit £30 per square foot for the first (and so far only) time. Two years into the new Blairite government, the economy was forging ahead, with the financial services sector in particular desperate to secure Grade A business space in the capital and in Glasgow.
How times change. Not only have rental rates fallen sharply, but speculative building on a large scale has also come to a halt and the banks are still trying to reduce their exposure to commercial property across the UK.
Clearly this has had an adverse effect on new construction and the lettings market and it has also affected property investment – a British professional skill which was unrivalled anywhere in Europe.
Commercial property will turn the corner as the economy returns to growth and expanding businesses search for accommodation. However, as this will be some time coming, can anything be done to utilise the existing pool of the UK’s investment property talent in the short term?
One potential outlet is the residential rental market. Despite the increasing demand, 84 per cent of Scotland’s privately-rented stock is concentrated in the hands of individual private landlords or small family trusts. There is, as yet, no corporate investment structure of any great size.
This situation cannot last for much longer if rented housing is to meet the demands increasingly being imposed upon it by a house-hungry population. While the draconian deposits being demanded of first-time homebuyers will ease off eventually, a return to universal approval of mortgages based on a deposit of 5 per cent or less is unlikely. Banks and building societies will scrutinise every mortgage application – those who are declined will have no option but to continue renting.
The other great driver of rental demand is the growing numbers of young people in higher education, which suggests they will start to earn and take out a mortgage later in life than their parents. And even if they qualify for a mortgage, some might conclude that, having reached 40 and never owned a home, it might make sense to stay with the rental market.
Although I cannot foresee much diluting of the desire of Britons to be homeowners, substantial numbers are likely to opt for renting on a long-term basis for no other reason that it becomes the most practical option. This is likely to be even more so if involvement in the market by financial institutions brings economies of scale with the result that renting begins to compare favourably with the overall costs of owner-occupation (ie, mortgage repayments, plus repair and maintenance, buying and selling fees, and so on).
This is where Britain’s under-used investment specialists who honed their skills in the commercial market might have a role to play – not only in making money for themselves (or their clients, or employers) but also in using their professional skills to add value to the stock of residential property available to let.
Following the Second World War, almost in tandem with the British becoming a nation of homeowners, there was a large-scale switch in the opposite direction by the commercial sector, with businesses moving from owner-occupation to renting. However, commercial property ventures are motivated not just by the level of rental income but also by the investment value of the portfolio, either as a book asset or something to be sold on at a surplus.
Therefore if the investment skills which helped grow and add value to Britain’s billions of square feet of commercial property could be applied to the private rented sector, two key benefits seem obvious: new job opportunities powered by the growing investment sector and a wider choice of housing tenure options for families, couples and individuals.
• David Alexander is managing director of the Edinburgh- and Glasgow-based estate and letting agency, DJ Alexander.