Land Securities – the second biggest property investment trust in the country – released a grim annual report earlier this month that disappointed capital markets.
In the year to March, the property group wrote down its £10.3bn property portfolio by 11.6 per cent or £1.2bn, following a slump in retail property valuations.
Of course, the current economic hibernation worsens the situation, but this accounted for fewer than half of Land Securities’ asset revaluations.
As investors in UK open-ended property funds know only too well, the Brexit referendum accelerated commercial property’s structural issues.
Perhaps most visibly, the move towards online services had already weakened retailers, robbing owners of high street shops and older shopping centres of crucial rents.
This has been offset by more virtual retail services, meaning strong premiums on new fast fulfilment warehousing.
Industrial property had been a brighter spot and did not suffer much immediately after the Brexit referendum.
But last year proved more difficult. Widening trade conflicts outside of Europe coincided with the potential Brexit cliff-edge to hit confidence, and slow demand for employees and factory space.
Up until 2016, the financial services industry had recovered enough from the 2008-2009 crisis for London to enjoy an old-style office construction boom.
Staring out at the City and Canary Wharf vista five years ago, you'd have seen cranes seeming to pull up vast office towers, with 76-floor apartments built on the footprint of old pubs.
The referendum halted this construction boom and caused office landlords to offer reduced near-term rents to fill the new space. By the start of this year, older office valuations were clearly under pressure.
Still, outside London, city office space was in much greater demand, thanks to burgeoning UK service sector growth. Indeed, we only need look at the striking rise in UK employment to know that employees must have been working somewhere.
The question of 'safe' assets
This highlights the age-old conundrum about property investment, particularly when it comes to the commercial sector.
It takes a long time and a lot of capital to build it. You need rents to be high for a reasonable number of years in order to have enough reserves before moving to a renovation cycle. Slow change is ok, but fast change is really damaging.
This is where the pandemic has thrown a spanner in the works.
It's unclear whether the current experimental work-from-home model we've been forced into will lead to a significant reduction in demand for office space in the post-pandemic world.
But if that is the case, it would suggest falls in office commercial property are not temporary.
The gyrations of the property market present a conundrum for investors.
To most people, it seems common sense that ‘bricks and mortar’ property is a safe investment.
After all, unlike the complex financial instruments traders deal in on a daily basis, property is really ‘there’.
But it is crucial to distinguish between property and the land it gets built on.
The two things are of course linked; property values are higher in better locations and land prices vary depending on what you might be able to do with it.
That said, property's value is more tied to its specific use. Sometimes land can be worth even more without any buildings on it. So if property isn’t itself a ‘safe asset’, how safe is the land it's built on?
What safe really means
Unfortunately, this is where it gets complicated. It depends on the exact definition of ‘safe asset’.
One influential definition is that safe assets are those taken at face value with ‘no questions asked’.
That is, the intrinsic value of safe assets is so widely agreed that they are immune to the costly production of information about that value. They are, in other words, immune to speculation.
Usually this comes with some other defining characteristics: safe assets are a store of value that can readily be converted into cash without significant loss.
They must have low volatility and low or negative correlation to the general market. Because of this, safe assets stabilise investment portfolio values in times of capital market stress.
When other investments take a turn for the worst, investors prioritise staying solvent, keeping cash flows stable enough to meet their payment needs and (if possible) having a little spare cash around to capitalise on opportunities.
Real, physical assets can be very useful in achieving these aims – but not all such assets are equal.
Land and property cannot always be quickly turned into liquidity. Property in particular is heavily tied to consumer confidence, itself tied to job security, and is cyclical. In times of growth, property prices benefit and vice versa.
Land itself is less cyclical. But it doesn't tick all the boxes you want from a ‘safe asset’.
Since there is finite supply, land does have some intrinsic value. This value is backed by the fact you always have the option to do something different with it.
For example, if Tesco and Sainsburys disappear, you can always build apartments or even grow food on that same land instead.
But land is also difficult to sell and not transportable, making it illiquid.
Crucially, there is still some cyclical element.
Land prices are, to a certain extent, always tied to what can actually be done with the land. In times where demand for building or agriculture is high, the land where you can build or farm will increase.
When the French government introduced plans to expand what could officially be called the Champagne region some years ago, the value of the new Champagne land immediately rose from €5,000 per hectare to around €1m.
As another example, over the last decade rural land seems to have risen in tandem with central banks’ quantitative easing measures, as more and more capital piled into alternative investments.
Land clearly offers some security and store of value, but it is still tied to the property market.
However, real estate itself does tend to have longer cycles than the typical business cycle.
Since land is even less cyclical, and ownership tends not to change often, it can be a viable long-term investment.
But due to its inherent illiquidity and the fact its value depends on the health of the economy surrounding it, land still isn't quite the ‘safe’ asset some may think.