UK Commercial Property market
The market offers an alternative to other investment markets, including stock and bonds. Historically, the commercial property market’s performance has broadly tracked growth. Interest rates also influence the market. For example, rising interest rates tend to put downward pressure on property values. This may be balanced by growth in rental values if higher interest rates are accompanied by a higher level of inflation.
The market is cyclical, particularly the London office market which currently accounts for 46.4% of our assets by value. The balance between supply and demand is the single most powerful driver of property values (see more on our market cycle|). Structural changes in a sector – for example, growth in online retailing or public investment in new infrastructure in London – also influence market behaviour and values.
To enhance returns, property companies use financial gearing, for example through bonds and bank debt. They also use operational gearing by developing or refurbishing properties, which carries more risk than investing in completed or let assets. Access to finance varies according to the market cycle.
Due to the cyclical nature of the property market, the timing of investment is critical to future returns. In development, capacity in the construction market is particularly key to property companies’ margins. Land Securities prefers to be an early cycle developer, acting when others find it harder to access finance and construction contracts can be secured on relatively favourable terms.
Across investment and development, costs and risk can also be affected by a range of other factors such as changing occupier requirements, the needs and views of local residents and other neighbours, the availability of natural resources used in construction and the effects of climate change on buildings, together with new regulation. Property companies are also increasingly expected to generate wider social benefits.