Content area
Full Text
1. Introduction
Commercial property has distinctive and unique financial features compared to other asset classes (Ball et al., 1998; Davis and Zhu, 2011). Specific characteristics include heterogeneity, durability, illiquidity, high transaction costs, lack of divisibility, limited buyers and sellers and high management costs (Ball et al., 1998; McAllister and O’Roarty, 1999; Jowsey, 2011; Crosby et al., 2012). The demand for space within the commercial rental market is driven by potential tenants with varying space requirements (Buttimer and Ott, 2007), grounded on economic factors that influence the mechanics of the commercial property market. Over the past decade, there has been growing interest in and ongoing research into commercial property cycles. The UK property market has historically been characterised by a cyclical behaviour of boom and bust periods, reflecting supply and demand peaks and troughs within the wider economy, and the inability of the property market to adequately adjust. Such recurrent and frequently asymmetrical fluctuations within the modern property market have profound impacts on all players in the industry and on the relationships between the economy, occupational leases and investment (Mulhall, 1992; Scott and Judge, 2000; Jadeicius et al., 2010).
Between 2002 and 2007, the UK property market witnessed substantial growth and was characterised by high levels of investment into fixed assets generally and property in particular, to an extent driven by investor concerns regarding equity markets in the aftermath of the “dot.com bubble”, and other high-profile market shocks. Despite relatively weak market fundamentals, UK property was viewed as a “safe haven” for footloose capital – limited prime product, low cap rates and temporarily high returns (Hutchison et al., 2010), of which the impact of covenant strength on cap rates was largely excluded in investment decision-making (Hutchison et al., 2010). This investment demand helped to drive strong property market performance – making the subsequent fall all the more painful. The shift in market conditions post GFC has profoundly changed the landscape of global property markets, as the crystallisation of risks associated with property assets have undermined confidence across all market players. The resulting seismic shift in investor demand, credit availability and uncertainty in pricing, coupled with reductions in availability and increase in the cost of short-term finance, induced a precarious climate...