Property
Unfreezing vital funds
John Foster
It is estimated that there are between £3,000 million and £4,000 million of bank and institutional monies temporarily loaned on development and investment of commercial and office property. This large amount is frozen with the result that, unless it is recycled, property companies in difficulties will be forced into liquidation. This would have a domino effect on the smaller and weaker insurance companies and on members of the secondary banking system. There is no investment market in property at present, because these £3,000 million to £4,000 million loans to the property sector are virtually immovable, as business rents are fixed at the amount payable on November 5, 1972. In many cases these rents were fixed twenty years or more ago. Unlike prices and pay, existing commercial rents have not been allowed to rise. This has meant that there is no market in commercial properties and because there is no market, high rates of interest have caused serious problems for the borrowers. What is required is that the first steps should be taken to remove the control on business rents. When this is done the institutions, insurance companies and pension funds which have large funds available, will be in the market again. The first requirement is to fix a date, say August 1974, as was proposed by the previous government, when business rents would be allowed to rise gradually over the next twelve months to the market level of November 1972.
An initial advantage would be to restore liquidity to a banking system which is overstrained by the various rescue operations undertaken by the clearing banks and other institutions. It would be done without any government subsidy being involved, but would achieve favourable results and boost foreign confidence. It would enable buyers and sellers to deal in the commercial property market and foreign investment would be encouraged in a market which would provide a fair return with a high degree of security.
Continuing control could lead to a shortage of office accommodation and the supply may cut off or at least massively diminish. There no doubt that in a modern industrial society the office management side of production is of the greatest and increasing importance. More office space is required as the gross national Product grows. If there is an ar
tificial shortage created, grow th and mobility of business Will be impaired. Rent control of houses has been one of the main causes of disappearance of homes for rent. The distortion arising from rent control, whether residential or offices, has led to anomalies which are uneconomic and self-defeating. . By allowing business rents to
rise, funding, which was Previously provided by institutional investors, could take place again. The building of necessary new offices would be restored. The limit to the market level in November 1972 would prevent Speculation, but would allow for recycling in the banking system of Monies which are on the one hand immobilised in the commercial P, roperty sector and on the other nand consist of other funds which are ready to be invested. There is a need to get back to the time a few years ago when the hulk of the money for the property market came from institutions Other than banks. Of course, the Money got into the banking system either through the vendors or leasors of property or through contractors and architects in the case of developers.
Should commercial rents be unfrozen but perhaps linked to some cost of living index, then the Whole property sector will get going. It will be unnecessary for the Bank of England or the government or other stronger property Companies to prop up the companies in present difficulties. The fact that one or two companies have to be helped soon creates a queue of other assistance seekers. It is a mistaken and wasteful system for individual property comPanies to be helped ad hoc. The Bank of England will find that it is going to be pressed into saving these afflicted property
companies in order to safeguard the £700 million devoted to under-pinning secondary banks. It is, I believe, agreed on all sides that to put into liquidation all banking, insurance and property companies who are squeezed by current events and cannot dispose of their property assets would be disastrous for the morale and reputation of the City of London. At the moment the Government has chosen a method of saving individual companies by injection of funds to keep the companies afloat. This has all the disadvantages of piecemeal rescue. Some general measure, as recommended above, is necessary. It is not desirable to pursue this difficult and onerous operation of getting together the clearing banks, institutions, pension funds and property companies in order to provide the necessary financial infrastructure. When one operation is concluded others appear ton the scene.
In contrast, the Government should adopt the case recommended above, viz, to unfreeze commercial rents, peg or index them if desired. One obvious result is that it will be possible to value office property. At the moment rents are frozen, but it is anticipated that this cannot last for ever; rising costs and interest rates make it impossible for office property to be commercially viable for long if it remains frozen. Consequently valuers are unable to fix precise valuations. The formality of valuing business properties will in itself be an important factor in restoring an orderly property market. The trade unions' pension funds as well as other pension funds and the investment funds of insurance co,rnpanies all have large investments in property. By making these properties unavailable and in a sense worthless, i.e. whose worth is unascertainable, the security of policy holders and the pensioners of trade unions among others are jeopardised. If within two or three years this solid block of liquid funds has got moving then the banking system will have extra funds to lend to 'ndustry. The building societies could benefit from the increased amounts of deposits in the clearing banks and, given other favourable factors, interest rates could be affected downwards. What is needed at the same time is a realisation that profits are desirable, that it is profits which increase production. Excessive profits are dealt with by taxation.
The system of restricting office development permits should also be lifted. Developers build to satisfy needs for leasing offices and factories. The high value of land was a result and not a cause of inflation and developers have had to pay exaggerated prices.
If the banking system can be made more flexible, it would be possible, without distorting it, perhaps to make compulsory loans to housing associations on some other form of low-cost housing. This is not possible where the clearing banks are overpressed — it requires free moving in the property investment market. Restoring liquidity should be the aim of the Government — it may mean the abandonment of some mistaken but firmly held views on the property market but it will cost nothing of government money, thus relieving the taxpayer of another burden.
Sir John Foster, the barrister and former MP, is a Fellow of All Souls, and a company director with wide business interests.
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