Two years ago he wrote that Mipim was a waste of time, energy and perfectly good booze. This year, he’s looking forward to it. So, what changed?
It is time for some commercial Viagra. Those of you with good memories may recall that I wrote a column a couple of years back decrying the whole Mipim property event as a rather pricey party. Well, I have to tell you that the big top is back in town, the clowns are primed and – believe it or not – I will be joining them.
So is that the gurgling of humble pie you hear being digested? Well, not really. For me, this year is different and Mipim is a vital and much-needed barometer for us all. I predict that it will be busier, more relevant and, frankly, better value, despite warnings that agents may not attend in as large numbers as usual owing to a seemingly lacklustre property market.
When so much talk is of recession, the credit crunch and the possibility of a return to the problems of the late eighties and early nineties, it will be good to have an injection of reality. Those attending Mipim will be operating against the backdrop of a UK property market that has suddenly been forced to realign and face the fact that inflationary prices could not last for ever. Indeed, with the tightening of credit, we have had to take stock – and this isn’t a bad thing.
The whole market has been affected by the doom-mongers who see recession in every headline and downturn in every profit forecast. I am not surprised that the pioneering Turner & Townsend has pulled its flotation and other QS consultancies are coping with dropping share prices. The market has never been comfortable with consultancies. The City does not see us as exciting, high-tech communications business, so for a flotation virgin to forecast a price-to-earnings (P/E) ratio of 17, as T&T did, is as optimistic as Jade Goody imagining she’ll win Mastermind. A far more realistic P/E for our sector is nine or 10. Last year, Stewart McColl of the SMC Group was purchasing architectural practices with a P/E of six. While these kinds of evaluations won’t cause hysterical excitement, they are grounded in the City’s view of our performance – whether we like it or not.
Consultancies are usually regarded as solid, safe performers. They are like the construction market’s equivalent of your local vicar – dependable, trustworthy and always there with the economic equivalent of tea and biscuits in a crisis. The fact that Erinaceous has not fared too well is a bit like saying that Northern Rock is typical of all banks.
I was in our industry at the time of the last recession. Then, we had interest rates of about 15%, rampant inflation, and unemployment was a big problem. Confidence died, the banks panicked and repossessed houses and negative equity sucked all self-belief out of the market.
This is far from the case today. The Middle and Far Eastern, Chinese and Indian markets are buoyant, and central Europe is hungry for expansion. We live in a 24/7 global village, which means we are well positioned to benefit from work in these areas.
If it weren’t for the credit crunch and the fiasco of sub-prime mortgage lending, there wouldn’t be this much nervousness. While the correction we are facing is harsh, it was needed and in the long term may well be a good thing. The UK property market was in danger of overheating. Bloated land and property values were causing an unhealthy distortion and there needed to be a realignment. It is no coincidence that both British Land and Land Securities disposed of larger elements of their commercial property portfolios last year – they could see the market was due to dip and in that situation, cash is king.
The common word is that property prices are likely to decline for the next two quarters and already funds are emerging ready to buy up distressed property portfolios. For instance we have seen Helical Bar coming back into play and it is noted for its counter-cyclical strategy.
What we need is a short, sharp realignment. We don’t want a long drawn-out and painful dip. The last time this happened hundreds of thousands of the skilled labour force left our industry, the crafts courses emptied and we are all paying the price now in the form of inflated labour costs.
I can therefore announce that I will be returning to Mipim this year because I believe that events of this type act as a kind of commercial Viagra when the market is fragile and in need of stimulus. I expect the mood to be one of caution rather than catastrophe and the talk to focus on mid to long-term growth rather than short-term “hit and run” deals.
One thing is sure – the bars will still be full, the events packed with architects, developers, contractors and consultancies and who knows, maybe we will all have to work that little bit harder to do business.
Richard Steer is senior partner at Gleeds.