Matthew Vincent: Serious Money

Readers of The Economist set great store by its "Big Mac Index" of global hamburger prices. But I think readers of FT Money would gain more from an index of warehouse prices in which Big Mac ingredients are stored.

What our sister publication aims to achieve with its exercise in "Burgernomics" is to show which global currencies are under or overvalued - by comparing how much a Big Mac costs in 120 different countries. Its most recent analysis concluded that the price of a burger on UK high streets is benefiting UK exporters. A year ago, the pound bought a quarter more Big Mac than it did in the US (or does that make it a Quarter Pounder with Cheese?) - suggesting the currency was overvalued. Now, sterling's burger-buying power is close to parity with the dollar and looks cheap against the euro, making UK exports more competitive and burgers relatively more expensive. Good news if you're a Midlands manufacturer - or, like me, someone prone to an upset stomach.

What my index would aim to achieve is to show whether UK commercial property is under or overvalued - by comparing how much a warehouse full of sesame-seed buns costs in different parts of the country. My recent blog posting at www.ft.com/ moneymatters concluded that the price paid by F&C Commercial Property trust for a warehouse in Daventry might not benefit UK investors. A few months ago, fund manager Richard Kirby bought the property for £17.25m at an apparently attractive headline yield of 9.05 per cent - but suggested that "capital values could come under further pressure if rents and income streams are further affected by economic weakness". Now, though, some commercial property values look as low as they're going to get, following news on Monday that the IPD index has recorded its first price increase in 26 months. Good news if you're a Midlands warehouse owner - or, like me, someone prone to upset Daventry's chamber of commerce (if the comments on the blog are anything to go by).

It was meeting someone who actually owns a warehouse used by McDonald's that prompted these ruminations. Don Jordison, managing director of Threadneedle Commercial Property, recently bought a retail warehouse in the south east for £9.7m, let to tenants including the burger chain, Halfords and Staples office supplies for 12 and a half years. It offers his fund a net initial yield of 8.75 per cent.

But it was not so much those figures that whetted the appetite, as Jordison's analysis of why UK commercial prices have fallen so far. In his view, the 2007-09 commercial property crash has been as multilayered as a stack of beef patties on a soggy tomato-stained bun.

At the top, there was a forced sell-off, caused by fund redemptions between August 2007 and early 2008. Investors realised that commercial property yields had fallen below the yield on long-dated gilts and redemption notices flooded in to the managers of UK open-ended funds. Unlike their closed-ended counterparts, they had to sell property at the prevailing market price to repay investors, or lock investors in. An ensuing 15 per cent price fall "seemed rational".

Then came the debt market freeze of 2008. According to Jordison, "a complete liquidity vacuum took a 15 per cent fall and pushed it into freefall" - sending prices down 2 per cent a month. Next, the global financial shocks of autumn 2008 bit further into the sector. A "relentless writedown in value" saw UK commercial property prices 38 per cent below their peak by the end of the year.

And the soggy bun at the bottom? Real estate investment trust (Reit) refinancings in the first quarter of this year. By launching deeply- discounted rights issues to restore balance sheets, UK Reits "soaked up all the liquidity". As a result, UK commercial property prices have collapsed 44 per cent in just over two years - twice as fast and nearly twice as hard as the 1989-93 crash. To Threadneedle, however, there are some key differences between prices now and back then.

First, UK prices have fallen disproportionately further than the negligible drop in Germany, and the 7 per cent fall in France. For a country with a system of binding 10-year leases and upwards-only rent reviews - rather than the three-year French leases - Jordison deems this anomalous.

Second, default rates are much lower than depressed prices imply. Jordison calculates the overall rate attributed to tenant insolvencies at 0.4 per cent.

Third, there is not the level of oversupply seen in the late 1980s. Appropriately enough for a McDonald's landlord, Jordison uses a measure that sounds like it belongs in a burger preparation area: the Gherkin-ometer. He, of course, refers to the iconic London office building - of which another 13, in floor-space terms, will be constructed in 2008-11, compared with the 40-Gherkins worth built in 1989-92. What, therefore, is his strategy? To buy up properties from "open ended funds in a pickle".

Investors, or economists, seeking an 8 per cent yield could get a taste for that.

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