Report of the Investment Committee 2008 - St James's Place

Report on the St. James’s PlaceProperty Portfolios 2008In common with most other types of investment, 2008 was a poor year for UK CommercialProperty. Few in the market expected that the fall in capital values starting in 2007 wouldaccelerate in 2008; most property investors thought the first half of the year would be difficult, withrecovery perhaps starting in the third or fourth quarter. How wrong that turned out to be. Thefallout from the credit crunch proved much greater than expected. The unavailability of credit,combined with falling residential values and the onset of a recession in the UK economy combinedto decimate the commercial property sector. These, together with valuation difficulties as dealsbecame few and far between and declining rents, led to a fall in capital value of 31.5% from thepeak in August 2007. In November 2008, IPD recorded the largest ever fall in one month of5.1% since the launch of the Monthly Index in 1987.Initial yields are now approaching 8% compared with 4.6% in 2007 and 9.1% in the early 1990’s.2008 investment volumes are down to about 55% of the 2007 total at £21bn. Development is at astandstill and occupier demand continues to fall. Surprisingly few property companies failed duringthe year but those that are heavily borrowed will struggle in 2009.In the midst of this turmoil one might have expected that the quality of the St. James’s Placeportfolio would have helped it to perform a bit better than the market generally. As it transpires, thishas not been the case, despite the inherent quality of the portfolio, longer lease lengths and lowervoids than average. Overall, the portfolio has fallen broadly in line with falls in market values.Despite the present gloom, there are some glimmers of light. Commercial property, as an assetclass, has been proven to be a sound investment in the longer term and, as the UK economyemerges from recession, returns will pick up. In addition to the longer than average lease lengthand low voids, the SJP portfolio has above average rental growth prospects due to the policy ofbuying prime stock in the period 2005 to 2007 which should benefit returns as the sector recovers.There are signs that private investors have returned to the auction room as a source of directproperty in response to the fall in prices. One consequence of the sharp fall in the value ofSterling is that UK assets are now more affordable for overseas buyers. In the short term, valuersare unable to accurately price property until the volume of deals picks up. It is also likely that, asthe UK recession bites, more businesses will fail, increasing the number of voids and exercisingfurther downward pressure on rents. However, notwithstanding the short term pressure onvalues, at current prices commercial property is becoming attractive and, whilst transactionvolumes are likely to remain low until credit and investor confidence returns, property is likely toreward patient investors over the medium to longer term.K.M. Goulborn FRICSDecember 200814