riders. 12 it would, however, be rash to conclude that the market is now unambiguously healthy in all respects. there are still several factors which will continue to pose challenges to the investment, banking and valuing communities. for example, while lease lengths may have temporarily stabilised, break clauses exercisable by tenants are becoming more common. and despite the positive tone of the recent cbi / grimley survey, it is clear too that many occupiers will continue over the long - term to reduce their needs for space and to demand greater flexibility. privity of contract has disappeared on new leases. all of these factors are making it less straightforward to form a view of the quality of cashflow likely to stem from a particular building. 13 there is a sizeable overhang of unlet secondary property. the pool of such property increases every time that a major user of space moves into new offices and releases its former premises. while some of the better quality secondary property can be refurbished at an economic price and relet, much of this stock may never again be relet for its present use and may not lend itself readily to conversion for alternative uses. this will continue to exert a dampening influence on the market, and imaginative solutions will be needed. the future 14 so, the market may be improving but it is still not easy. how is the market likely to develop over the next eight years? what will i be saying if you invite me back in the year 2005? 15 as we all know, the property market has, historically, moved in cycles. some, notably rics, have done work to develop our understanding of these cycles. the economic cycle itself is clearly one of the driving factors, though it is clear too that property is subject to its own fluctuations and its own step changes. contributing factors include the strength of tenant demand, the activities of developers and the willingness of lenders to finance investment and development. 16 my story in the future could be similar - perhaps depressingly similar - to my review of the recent past. many of the ‘ ingredients ’ that contributed to the last cycle are certainly present now. institutional investors are attracted to the sector in the short - term but they could easily resume their longer - term departure from property in a couple of years. this could happen if property ’ s performance runs out of steam as the economic cycle progresses and other asset classes begin to look more attractive. it is conceivable that the banks might

the regime called the “ matching adjustment ” ( or “ ma ” for short ). it ’ s usually at this point in any speech about insurance regulation that most people switch off, but bear with me while i try to bring the issue to life. first, what is this “ ma ” and what does it do? it allows insurance companies to recognise as capital up - front a part of the income they expect to earn on their assets in the future, but only as long as they can show that the cashflows they expect to receive from those assets closely match the payments they have undertaken to make to their insurance policyholders ( hence “ matching ” adjustment ). this is therefore most relevant for the annuity business, where insurance companies promise to pay individuals ’ pensions far into the future. you might ask why the regulator favours such an arrangement, which is not common in other bits of regulation, when perhaps it would be more prudent to make insurance companies wait until those returns ( for instance, interest payments on corporate bonds ) are actually paid to them before recognising them as capital which could be paid out to shareholders. the reason is that we think it protects policyholders if insurance companies are incentivised to invest in assets which will produce cash at the right time, so that insurance companies are not scrabbling around for the right assets when they have to make payments to pensioners in the future. [ 2 ] however, you would be right to think that if we allow such an arrangement we must operate it with a very high degree of confidence that those future returns will in fact materialise – in other words that insurance companies do not recognise up - front returns which then later don ’ t show up. second, why does the ma matter? for me there are two reasons. first, the nature of the business for which it is primarily used : pensions provided by insurance companies. when an individual puts their life savings into an insurance company in return for a promise that the company will pay their pension right up until their death ( potentially decades later ), we need to be very confident that the company is going to be able to make good on that promise. the same is true when companies of all sorts pass their pension liabilities over to an insurance company, which is happening in very high volumes – for those pensioners too we need take care that the foundations of that insurer are robust. we estimate that over 8 million policyholders are served by this sector. and second