Property Value: Sitting on our Assets

Architecture creates wealth, not for many architects it seems, but certainly for the property sector. Buildings crystallise property assets, with their location and quality determining value. Half of all fixed capital formation annually is in buildings and it is written down only slowly compared to plant and machinery. The end result is a national capital base which is predominantly in the built environment.

The Office of National Statistics recently quoted the capital base as £5,000 billion, about five times the current GDP (£1,043 billion in 2002). Of that amount, over half is in our beloved houses, at £2,744 billion; all other buildings are worth £565 billion with infrastructure at a similar level. That’s a total of 77% in built environment and only 23% in plant and machinery.

Historically the property industry invests in the private sector’s non-residential stock and creates assets we buy to fund our pensions. Performance has been good and safer than equities over time. We hold most of our housing property assets directly, purchased from housebuilder developers. Now public buildings and infrastructure are entering the world of property through PFI. Securities backed by the income streams of hospitals, schools and roads will soon be in the market.

It has been a specialised business to invest in property up to now, limiting the accessibility of this type of asset other than in housing. This month however the chancellor is expected to approve the launch of a UK equivalent to the US tax-transparent Real Estate Investment Trust or REIT. This creates a far more liquid form of property investment. REITs in the US have attracted massive funds into property and in an equity-wary Britain this could happen too. The funds available to build both public and private facilities will swell, meeting financial demand in more economic ways and allowing the state to pay for services and space delivered rather than to finance buildings itself.

There is some evidence that it is wiser for companies to use commercially developed space than to build for themselves. The British Property Federation reckons that UK companies spend £18 billion more than they need to each year through undermanaging corporate real estate.

Architects have always valued the owner-occupier client, knowing that they usually require more interesting, higher quality buildings. However, developers will only build once they have a pre-let and that letting allows the tenant to modify the base building to suit their needs better. The developer’s architects and the tenant’s architect collaborate to get a result for both their clients.

So property can only increase as our customer in the years ahead. The emphasis may change, with offices in decline and public buildings in the ascendant. The property company may change a lot. But there is a wall of money coming and no shortage of good investments for it. It only remains for architects to develop ways to be paid for the value they add rather than only the costs they create for this trend to benefit the profession.

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