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Comment: Emergence of multi-tiered secondary property market in 2011

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Charles Smith, Head of Valuation, London, at global real estate services firm DTZ, comments on the outlook for the prime and secondary markets in 2011.

Prime assets will continue to be the safest investment and, as a result, we anticipate continued high investor demand throughout 2011.  However, this strong demand will be frustrated if there is a continued shortage of prime stock on the market.  Investors may have to consider assets they have previously overlooked.
 
Emergence of a multi-tiered secondary market: Rather than the traditional ‘prime-secondary-tertiary’ divide, we are operating in a more multi-tiered market.  Within the secondary sector, the multi-layering can be articulated as comprising ‘good’, ‘mid-case’ and ‘poor’ assets. ‘Good secondary’, which constitutes approximately 20% of the secondary market, is commonly made up of assets in good locations, slightly dated buildings with average unexpired leases of sub 15 years. ‘Mid-case secondary’ includes buildings which are dated, have some functional obsolescence and unexpired lease terms of sub 10 years, while ‘poor secondary’ consists of assets that are often poorly located, are functionally outdated with limited prospects for letting to tenants.
 
Properties have a life cycle and it is possible for buildings to move between the prime and secondary bands.  For example, a new building let to a grade A covenant for twenty years would be classified as prime. The same building, with two years left on its lease and viable for redevelopment, would at that point be considered secondary.  Once refurbished or redeveloped, however, the building would be in a position to attract top-quality tenants on long leases.  On this basis, the same building would complete the cycle and return to the prime classification.
 
London is prime location, accounting for vast majority of the market: The status of the London market real estate has been demonstrated by the marked increase in cross-border transactions with more and more overseas investors snapping up assets in the Capital.  Overseas investors accounted for almost 60% of all transactions in London in Q3 2010.  In contrast, overseas money accounted for only 18% of purchases outside London during the same period.
 

This highlights the ongoing strength of the London market. Indeed, whilst many argue that it is London, the South East and the rest, the story is more about London and the rest.

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