The current market seems particularly ambivalent. When the mists clear a little, what will influence the new surroundings? No doubt there will be many things, but four issues strike me.

The Banks, Again!

It seems to be the fate of the banks to repeat, in enduring cycles, the same basic errors. Each time the recipe is temptingly different, thus leading them on, but their hopes are dashed. One might argue that it will be the same next time around; i.e. nothing will have changed. However, it seems that much of the re-financing of stricken banks may come from sources of a fundamentally different nature -- particularly, sovereign funds. Whilst having little knowledge of them, it seems likely that they will prove to have rather different priorities from traditional bankers when the good times return. What constraints will they then impose? How will this alter the lender/borrower relationship?

Debt, Redefined?

The second issue concerns the fall-out from the clever (?) packaging of debt. Putting to one side the folly of much of the underlying debt, we have all been damaged by the richly rewarded sleight-of-hand employed in selling it on. Will this experience affect attitudes towards all forms of 'derivative'? Being old, I have an innate distaste for gambling (à la Société Générale) by so-called investors. I see the benefits in transparent, self-correcting arbitrage mechanisms, but I see no investment merit in taking huge bets on short term movements in market prices. That is for gamblers, and Joe Public will not thank the managers of his funds for gambling with them. Where is the right boundary? When the lawsuits start, how will recent events affect views of that boundary?

Whither REITs?

Thirdly, how will retail property funds respond to their recent agonies? The REIT movement was successfully hijacked by the property companies, but will ingenuity use that structure to devise market-price driven rather than valuation-driven retail funds?

Energy: How Much? How Far?

Finally, what will be the effects of rising energy prices? As economies start to recover their steam, steam will be increasingly expensive. Throughout my career, we have built buildings in locations and in a manner that pre-supposed cheap energy. What will be the pains in rectifying that? Angus McIntosh produced an excellent paper¹ arguing, in précis, for the greater damage to value that will be endured by secondary property compared with prime: the latter has a higher proportion of site value, and site value will not be affected by more expensive energy. Whilst I see the validity of the latter argument, is it wholly true? Many sites of high value are very dependent upon energy for reaching them; remove the affordability of car travel, and how would some wonderful retail, office and industrial parks fare? It is easy to be Malthusian about energy, but I foresee that some profound adjustments are inevitable, and those changes may be closer than we think.

"Depreciation Delusion" by Angus McIntosh, partner and head of research at King Sturge, Estate Gazette (30 June 2007: pp 154 to 156): "Sustainability is high on the global political agenda, but how will the related costs affect investment. . . The goldilocks economy is over; days of very low inflation, low interest rates and strong capital growth are passing into history. The fundamentals of tenant demand that make property investment sustainable in the longer term are increasingly driving performance. Only astute asset management will reveal the best investment returns..."