Non-Residential Property Markets in the United Kingdom Andvolatility Variation - Example

Running Head: NON-RESIDENTIAL PROPERTY MARKETS IN THE UNITED KINGDOM ANDVOLATILITY VARIATION A Report On Why Non-Residential Property Markets In the United Kingdom Display Rental Volatility and Why the Amplitude of This Volatility Varies Student’s Name Professor’s Name Subject Code and Name University Date Submitted Introduction A non-residential property refers to various uses of property which include industrial uses (shipyards, manufacturing plants and mines, commercial uses (banks, offices, retail outlets, hotels and restaurants), and other special uses such railway lines and water pipelines. For tax purposes, these properties are also regarded as commercial real estates (Bird & Slack, 2004, p.13). In the United Kingdom property markets are regulated by the British Property Federation. The law that governs non residential property is totally different from the one that governs residential property. Nature of the Tenants The nature of the tenant in addition to the bricks and mortar determines the value of the property. The investor gets income in form of a rent for a fixed period which is determined by the length of the lease. With changes in rent reviews, the rent may increase or decrease. The rate at which the rent or the prices of non-residential areas moves up and down may be determined by various factors. These include changes in tax rates, productivity of the property, the discounted present value of future rents, economic cycle, changes in interest rates and risk premium. The Role of the Tax Rates Tax rates play an important role in rental changes. In UK, non-residential properties are charged high amounts in tax as compared to residential properties. This interferes with land use decisions and favours non commercial use over industrial or commercial use. This interferes with the rental charges of non-residential properties. The burden of non-residential properties may be caused by high dependability of market conditions by consumers in regard to the products produced by the property. Effects of General Levels of Output or Industrial Activities The general levels of output or industrial activities may also affect the rental charges of commercial properties. This affects the demand and supply for industrial commercial buildings which may be highly cyclical, for example, it may affect the availabilities or shortages of industrial space or office vacancies resulting to fluctuations in rents and investment yields or swings in rental cycle (Brown & Matysiak, 2000, p 2). Changes in infrastructure also lead to constant changes in rental values in non-residential properties. For example, construction of new roads and railways could attract many customers in the area (increase in the movement of the people in the area). This may lead to higher demand of office spaces in the properties. If there is a close down of an infrastructure, for example, an industry, many businesses that act as suppliers of raw materials may close down. This would in turn lead to low demand in commercial properties since the people operating those offices may relocate to another area or close to another industry to continue with their business. An important feature of non residential properties in UK is the ability of properties to undergo prolonged contractual phases, most probably in the manufactured products. When the supply of manufactured products exceeds demand, manufactures may reduce the output which in turn forces the merchant to reduce the inventory to balance the supply and demand. However, the owners of non residential properties do not reduce the amount of space available for rent in their buildings. If the space which was constructed to maintain both consumer and business needs remain vacant rates climb and the downward trends become very severe Natural Vacancy Rate The other factor is natural vacancy rate. This concept is related to the natural rate of employment in labour market. The main aim of the existence of natural vacancy rate is that property developers and owners are aware of the length and the binding nature of office leases. Office owners claim that if they would withhold the vacant space in inventory, they would capitalise on opportunities to supply or provide at higher rental charges during the periods of high demands. Deviations from the natural vacancy rates may lead to volatility in rental charges. If the demand for space may be high and the level of office vacancy is below the natural rate, upward pressure may be exerted on rents and if the total number of vacancies is higher than the natural vacancy rate, the pressure on rent charges may go down. This implies that rental charges move upwards or downwards with changes in natural rates in either direction. This is the concept used to examine the London office markets. Effects of Gross Domestic Product (GDP) Gross domestic product also determines the various changes in rent in regard to non-residential properties. This mostly affects the office sector which has the strongest cycle in rents. In comparison to industrial property, the period of planning and construction of office properties takes a longer time. In the short term, office properties therefore take a long time to adjust to changes in market conditions. For example, increase in demand since they are still not well equipped. This in turn leads to a sharp decline in rents. GDP represents the economic condition of a country as does the un-employment rate. GDP is an important is regarded to be a significant influence on rental markets since it displays the level of office activity including service and manufacturing sectors of an economy. Since many activities related to office sector take place in an office environment the demand for office space may be related to the level of changes in the employment. When the level of employment rises, it may increase pressure on rental values (D'Arcy, McGough & Tsolocos, 1994). 73% 70.5% rate of employment 2008 2009 2010 Cluttons (2010) In UK, the rate of employment has declined from 73% to 70.5% in year 2009. It then increased from 70.5 to 71.5% in year 2010. Interest rates are also very important in influencing the movement of rental values. High interest rates may lead to a decline in investment opportunities or discourage development decisions. If this is the case, there may be an increase in rental values. Property yields also affect the growth of rent. If there is a low yield on property as compared to other assets, there is a high chance of rental growth. High rents may be likely to maintain investors’ confidence in income growth. This would in turn move the assets prices up and yields down. The Management of Non-Residential Properties The management of non-residential properties may also determine the constant changes in rent in the UK market. Property management is not only about rent collection. It involves other aspects such as cleaning the property, waste management, repairs. If the rues of property management are not well enforced, there may be changes in the amount o rent that the customers may be willing to pay. Lease agreements or length may also lead to rental volatility in non-residential properties. In UK lease agreements normally have similar rules and regulations. The law protects business owners from exploitation by the owners when the leases expire and they would want to renew them. The owners are supposed to renew the leases based on current market value and at the end of the lease. As the market conditions keep on changing, the rent charged in different commercial property are also subject to changes. Rental changes are also influenced by influx of foreign workers in the UK market. An increase in foreign employees in the UK market leads to increase in demand of non-residential properties. As the housing needs for commercial activities increase with increase in foreign workers, the expected rental yields keeps on changing. The rental market for non residential properties in UK may take six months to an year because the commercial leases are longer and require more time to reflect the current market conditions. Making Investment Choices For investment purposes, one is supposed to understand the performance of UK commercial property market. In the recent past, the retail sector has been struggling since year 2008 due to increase in competition from global markets. Household spending has been decreasing due to high rates of unemployment and fears over job security. Many businesses are trying to increase the sales volume by increasing the discounts on food stores, for example, clothing stores and footwear stores. In year 2010, more than 10 % of UK shops were declared vacant and the condition may worsen with increase in internet competition (Cluttons, 2010). In regard to offices, the reduction in supply has caused a recovery in rental values in central London. In other areas such as west end offices and those in overspill places such as South bank and Paddington, there is expectation of moderately rental values in the near future. However, West end offices may face weak rental values due to nervousness in the financial markets. The government is trying to improve confidence within the banking and service sector to increase greater activity in the West End and City markets. In regard to industrial property, the demand from distribution and manufacturing occupiers is improving gradually even though its weak. Leasing has been growing at a slow rate with occupiers getting good deals more so on speculative developments. The demand for the occupiers has also remained strong in places where the existing stocks and land supply are limited. There has been a strong correlation between lease length and unit size which gives various suppliers chance to buy units with vacant possession if they have enough finances. However the demand is still weak with rental values expected to fall. Conclusion In conclusion, if one would want to invest in United Kingdom, he or she should understand the main causes of rental volatilities in different sectors. The market for non residential properties is normally accustomed to that of the business economy which moves in cycles and may extend for many years. The investment decisions in non residential properties vary with different sectors or businesses, for example, those in retail business may be affected by the level of employment in the area of business. With increase in employment the many residents may have enough income to spend which would in turn favour or lead to increase in sales in retail businesses, for example, shopping malls or clothing businesses. Bibliographies Bird & Slack 2004, International handbook of land and property taxation. Northampton: Edward Elgar, Brown G. R and Matysiak G. A. 2000, Real Estate Investment: A Capital market Approach, Financial Times. London: Prentice Hall. Cluttons 2010, Commercial property market outlook. Retrieved October, 2010, from http://www.cluttons.com/clientUpload/researchIssue/CPMO%20April%202010.pdf D'Arcy E., Mc Gough T. and Tsolocos S. 1994, Modelling the Determinants of Office Rental Values in Major European Cities , Discussion papers in Urban and Regional Economics, Series C, Vol. VII, No. 99, Department of Economics, The University of Reading, Reading. Read More