Tim



SPR Newsletter October 2007

Forthcoming Event - SPR Annual Dinner and AGM

COME AND CELEBRATE THE SPR’S 20TH ANNIVERSARY!

Thursday 1st November

The Cumberland Hotel

Great Cumberland Place

London W1

Sponsored by:

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Annual Dinner

The premier social event of the year for SPR members is this year being generously sponsored by Cobalt and the CoStar Group.

Drinks at 7pm will be followed by dinner, and then a bar extension for the enthusiastic.

AGM

Whilst the main event of the evening is undoubtedly the Dinner, we would encourage as many of you as possible to attend the AGM, which starts at 6pm at the same venue. Drinks – kindly sponsored by Bloomberg - will be available at the meeting.

Pre-dinner drinks sponsored by

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This is your opportunity to find out what is being planned for next year, and provides you with a chance to have your say about SPR. We really do welcome your views.

This meeting is now fully booked. Contact Fiona Trott for details: 01206 298205 or ftrott@

Contents of this Newsletter

Click on titles to find the article that interests you:

Recent Events:

Conference

IPD RealWorld, in association with SPR

IPF/SPR Joint Research Meeting

Outlook for European Real Estate Markets

Site Visit

Kings Cross Development Tour

Coming Events:

Debating New Research seminar

Office Space Supply Restrictions in Britain

October 25th 2007

Research Briefing

Derivatives and Property Researchers:

How do they change my job and what do I need to know?

October 30th 2007

Research Briefing

Sustainability and the Bottom Line

November 28th 2007

This newsletter is edited by Tim Horsey. Please send any comments or suggestions to timhorsey@

Eratum – article on Quartermile Site visit in July newsletter

This article on the first SPR site visit to be held in Edinburgh was kindly provided by Vicky Watson of Scottish Widows Investment Partnership, and not by Vicky Law as was stated. Apologies to both Vicky’s!

Recent Events

IPD RealWorld, organised in association with SPR

September 19-20th 2007, Keble College, Oxford

Appraising the appraisals: property models laid bare

Conference report by Wayne Saville, IPD events

The third RealWorld Conference 2007 held in association with the SPR built on the success of previous years. The event provided nearly two hundred delegates from the research and fund management community with both a theoretical and practical programme on the appraisal of individual real estate assets - and rose to the challenge of laying bare the components of commercial property modelling.

Keble College, Oxford provided a stimulating setting for leading researchers involved in the asset allocation process to present their views on the major components of property evaluation in the UK and European markets. At a time when UK return profiles are changing and European yield convergence is making investment decisions more difficult, this theme proved particularly relevant. In line with one of the main ambitions of the RealWorld event, a great deal of discussion and debate was sparked from the floor.

Held over two-days, the format provided a logical walk through each of the main issues, with sessions devoted to rental value forecasting, depreciation impacts, forecasting exit yield, assessing the rate of investment return, and finally evaluating risks to the income stream.

After proceedings were set in motion by conference chair Tony Key of Cass Business School, a state of the art framework for forecasting rental values was described by Paul Kennedy of INVESCO. Andrew Smith of Goodman Property Investors followed by examining the practical process of forecasting and provided case study material showing the supply side issues that influence rental growth prospects. The subsequent discussion emphasised the impossibility of accounting for everything in the modelling process and the key role of market dynamics. It was also underlined that, at least in the short term, globalisation has made the process more difficult.

With rental values being largely market led, the focus then turned to the property specific factor of depreciation and its impact on investment performance. Neil Crosby drew on the work undertaken by the University of Reading and the IPF, commenting that due to time series availability, it was easier to illustrate the consequences of depreciation in the UK market than in continental Europe. However, Mark Callender of Schroders was able to highlight the effect of capital value depreciation using office sector examples from major European cities.

The closing session on day one considered the importance of projecting exit yield, a crucial factor in the investment process. Nick Tyrrell of JP Morgan concluded that this is not an exact science due to continuing changes in the market environment, a view underlined by Michael Haddock of CBRE who examined the forecasting process and alternative approaches to arriving at market yield.

Discussion focused on the issue of absolute return investing on the start of day two. This area has recently attracted a great deal of attention in the market, especially with the activity of hedge fund investors. Having considered this type of approach Malcolm Frodsham of IPD and Peter de Haas of Protego tackled the issues of setting the hurdle rate of return, the latter looking at this from a European perspective.

The event provided highly research-focused critique of the processes which make up today’s best practice in asset appraisal. Looking ahead, future RealWorld events will seek to address developing concerns which emerged from this particular conference – such as the implications of alpha delivery and the impact of globalisation in setting strategy.

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Joint SPR/IPF Research Meeting

The Outlook for European Real Estate Markets

Crisis of Confidence?

Meeting report by Tim Horsey

The late summer joint SPR/IPF Outlook for European Real Estate Markets meeting was held on 27th September at the offices of Schroders in the City.

Joe Valente, Head of Research at DTZ, spoke on the implications of the credit squeeze for European investment markets. He proposed that in the prevailing market investors would see every reason to do nothing, and suggested that this would be “bad news for brokers, and a reflection of the way that emotion and sentiment have gained the upper hand in financial markets. But at least the talk is mainly about illiquidity rather than insolvency.”

Valente commented that the credit squeeze had inevitably hit demand for property and therefore prices. “Compared to the record transactions levels seen in Europe in the first half of 2007, I would not be surprised if activity was already down by 15-20% by year-end,” he said. “Securitisation and syndication will be less viable methods for raising finance, meaning that banks will have to fall back on their own balance sheets, and loan-to-value ratios will continue to tighten.”

And he did not think that equity will necessarily fill the hole left by credit in the short term, as many investors are now inclined to sit on their hands. “In these conditions prices are being renegotiated and deals delayed. We are seeing evidence of a flight to quality in terms of location, sector and covenant, while occupier markets are also suffering from the financial sector’s turbulence. Institutions are mothballing demand for new space as prospects for mergers and acquisitions activity are looking far from strong given current credit conditions.”

Keith Wade, chief economist at Schroders, speaking on the effects of the credit crunch on the whole economy, suggested that the banking system in Europe and the US was now working effectively to deal with the situation. Admitting that he was rather more positive than many of his fellow economists, Wade said “what we now need is greater transparency in the credit markets to build up confidence, continuing support for liquidity from central banks, and the US to avoid slipping into recession. Global growth continues to be strong with Asian economic forecasts being upgraded, as they have been in Europe. Housing investment in the US is still however continuing to fall from its very high level and this represents a big threat to the American economy.”

Schroders believe that UK interest rates are likely to fall in 2008. “Rising interest rates have now done their work in stabilising the housing market, as we can see from the recent RICS report,” said Wade. “The Bank of England should see recession as a bigger threat than inflation.”

Michael Ball, Professor of Real Estate at Reading University, speaking about European residential markets, said that the credit crunch was unlikely to have a direct impact on housing prices as long-run real interest rates shouldn’t be affected. “There has however been a house price bubble in some Eastern European countries. In Estonia, for instance, house prices have fallen by around 10% in the last year,” he said, “and this kind of trend may appear in other countries. And overall there’s likely to be some market tightening, but we haven’t had anything like the scale of subprime lending in Europe, given that the system for funding mortgages in Europe is different from that in the US. The weakest housing markets are now likely to be Central and Eastern Europe, and second home markets (mainly around the Mediterranean), where credit has been used and people are very optimistic about long-term values.”

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Site Visit

King’s Cross Development Site Tour

July 19th 2007

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SPR members question Argent about their impressive model

King’s Cross is one of the most important development sites in London, but has remained something of a backwater until now. Argent finally obtained outline planning permission for some 8 million sq ft of mixed use on the 67 acre site in July and SPR members had the chance to visit soon after. 

Stephen Peers, Drivers Jonas Head of West End Agency and King's Cross specialist kindly led the tour, which included a visit to the Argent model of the scheme at Regeneration House.

The 40 SPR members heard that the development will incorporate a number of unique heritage buildings such as the listed gasholders, the granary building and the transit sheds, many of which reflect the site’s role in London’s transport history. Argent’s plans allow for nearly 5m sq ft of offices, 1,900 homes and 495,000 sq ft of retail, which will be built around 20 new streets and three new bridges over the Regent’s Canal.

A view of the Regent’s Canal that will soon look rather different:

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Coming Events

Debating New Research

Office Space Supply Restrictions in Britain

Thursday October 25th 2007, 6-7.30pm

at the offices of CB Richard Ellis, Kingsley House, 1a Wimpole Street, London W1

Following the success of the first of these new SPR technical meetings in which leading property researchers discuss a piece of recent and innovative research with a group of their peers, the second ‘Debating New Research’ seminar will feature the research paper entitled:

Office Space Supply Restrictions in Britain: The Political Economy of Market Revenge

by Professor Paul Cheshire and Dr Christian Hilber of the London School of Economics.

This report was previously presented to the ERES Conference early this year, and looks into the ‘regulatory taxes’ affecting office space supply in the UK, arguing that these are greater than in most other office markets globally – and are one of the reasons why office space in Britain is the most expensive in the world.

Ben Sanderson, Director of Property Research, PruPIM, will introduce the reportand explain why this research was done, what the key findings were and their practical applications.

Plenty of time will also be given for open discussion and contributions from the audience. Refreshments will be provided.

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Research Briefing

Derivatives and Property Researchers:

How do they change my job and what do I need to know?

Tuesday October 30th 2007, 8.30-10.30am, at Bloomberg HQ, City Gate House, 39-45 Finsbury Square, London, EC2

This SPR seminar on property derivatives features leading speakers from the property research community and organisations active in the property derivatives arena.

With the support of Bloomberg, who are kindly hosting the event, the seminar is focused specifically on the impact the developing property derivatives market will have on property researchers and their roles. There are still places available.

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Research Briefing

Sustainability and the Bottom Line

Wednesday November 28th 2007, 6-8pm – venue to be arranged, Central London

This briefing is aimed at giving a general introduction for researchers to the basics that all need to know. We held a similar meeting on REITs earlier in the year which attracted 60-70 people and was completely booked out.

This meeting will look at the relationship between sustainability and profitability in the real estate sector, both from an occupier and an investor viewpoint.

The principal presentations will be:

The occupier view - Christopher Hedley, IPD Occupiers

IPD Occupiers is to launch its Environment Code in December. The Code is a standardised framework for the collection, measurement and analysis of environmental performance information. IPD says this is needed because “no accepted approach currently exists for organisations to measure and report on environmental performance.”

The investor view – Angus McIntosh, King Sturge

King Sturge recently set up its Environmental Sustainability Group (ESG), and states on its website that “King Sturge recognises that because of the pervasive, all encompassing nature of sustainable developments and its implications for the built environment, there is virtually no activity that our clients undertake when sustainability is not of some potential relevance.”

The presentations will be followed by the opportunity for discussion and then drinks.

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Paul Cheshire, Professor of Economic Geography at the LSE will introduce the report and explain why this research was done, what the key findings were and their practical applications.

This presentation will be followed by responses from four leading UK researchers:

• Kevin McCauley, Head of Central London Research & Consulting, CB Richard Ellis

• John Henneberry, Professor of Property Development Studies, University of Sheffield

• Kim Politzer, European Research Manager, INVESCO Real Estate.

• Christina Burbanks, Associate, PMA

8.30am: Registration. Coffee and refreshments

9.00am: Welcome by the SPR and Martin Sampson from Bloomberg

9.05am: Property Researchers and Property Derivatives: The Past, Present and Future? - Ben SanderSanderson, Director Fund Management, PRUPIM

9.25am: Pricing, Trading and Value: A Bloomberg Perspective - Martin Sampson, Bloomberg Real Estate Application Specialist & Mirko Filippi, Bloomberg Swaps Business Manager.

9.50am: Panel Discussion: What do property researchers need to know and how will it change their jobs?

Chair: Paul Kennedy, Head of Research, Invesco Real Estate

Panellists:

Philip Ljubic, Director, Property Derivatives, ABN AMRO

Michael Haddock, Director, EMEA Research & Consulting, CBRE

Malcolm Frodsham, Head of Research, IPD

Caspar Cook, Vice President, Property Derivatives Research, Merrill Lynch

10.30am: Briefing closes

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