The future … boom or bust?
Property is a rollercoaster ride for everyone involved – investors, occupiers and individuals alike. Heady boom times peaked in 1973, 1989 and 2007, quickly followed by vertiginous descents into the pits of recession which lasted for years as banks went bust and investors lost their shirts. Gradually, shoots of life would reappear in the property desert to be nurtured by the economy, by banks and by brave, pioneering investors. Then almost before we knew it, we’d be off on another boom which (this time!) would never end…
The key to success and fortune is judging when to jump off the rollercoaster and bank your winnings until the next time. So now, in the second half of 2016, should we be going all out to invest more money in the market or are we on the edge of the cliff?
Perhaps the best way to decide is to look at what causes booms in property and then to decide which way these factors are pointing us. Some of the most important factors for growth in the past have been:
- The demand/supply balance in the property market
- A ‘wall of money’ coming from investors eager to buy property
- A strong economy, increasing the demand for space
- Finance – banks keen to lend, at rates and on terms borrowers can afford
- Property as the best game in town – offering better returns to the investor than the alternatives
Property market demand & supply
Sheer demographics has resulted in the present housing crisis – with net migration in excess of 300,000 and a rising birth rate (from 1.64 to 1.9 2000-2015) the statistics in the residential market speak for themselves. Coupled with an annual housing supply flatlined at around 175,000, well below the 2007 peak of around 230,000, the demand/supply equation does not appear likely to reverse any time soon.
On the commercial side, demand for new office, retail or industrial space has picked up, especially in London and the South East (including Oxford) and while supply has picked up from the very low base of 2008-13, banks remain nervous about funding speculative development so a boom seems unlikely. Overall, therefore, the commercial demand/supply balance does not appear to be subject to any immediate change, though local factors can affect individual markets.
Investors 'wall of money'
Investor enthusiasm has driven the UK commercial property market over the last 5 years, and it’s investors from outside the UK who have led the charge. According to figures from CoStar, investment in UK commercial property totalled £67.5 billion in 2015, 46% above the 10-year average, and 45% of this came from outside the UK. It’s a similar story in the residential markets, especially in London and Oxford with many eager overseas purchasers willing to buy investments off-plan while never intending to occupy the properties themselves.
Will these trends continue? Much has been made of the ‘Brexit effect’ but with Sterling now much lower against the € and $, UK property looks more attractive than it did before 23 June to the overseas investor. However, the future will be influenced by the relative strength of the British economy, speaking of which…
Effect of strong economy
The economy is the real unknown. We have had a couple of months since the Brexit vote during which things seem to have carried on remarkably unchanged, with a silence from Government as to its future intentions. The Armageddon prophesies of the ‘In’ campaign seem to have proved over-pessimistic but will the future be ‘steady as she goes’, or a glorious return to the days of an all-powerful Britain, or perhaps a slow, insidious decline? All this humble surveyor feels capable of prophesying is that, for the foreseeable future (which for property people is no more than 2/3 years), we seem to have avoided the abyss, and that a period of relative economic stability seems the most likely outcome.
Banks are keen to lend
The market peaks of 1973, 1989 and 2007 were all powerfully influenced by the banks who on each occasion became over-enthusiastic (to say the least) about the property markets and lent excessively to developers, investors and speculators, creating a frenzied spiral of rising prices. While banks have returned to the market from 2013 after the 2008-12 wipe-out, so far at least the strong arm of regulation, introduced from 2008, plus an element of hindsight, have checked excessive lending.
A greater danger lies in the level of interest rates – after years of being told that the only way is up, the base rate fell in August to 0.25%. And after such a long period of record low rates, the fact is that a rise back to a long-term average would be disastrous to those with big mortgages and therefore catastrophic politically.
Property as best game in town
Is property the best alternative? With money in the bank yielding less than 0.1%, long-term gilts at around 1.25% and many leading equities not much higher, it’s not surprising that, even at present record low yield levels (prime West End offices, for example, being around 3.5%), property seems attractive. Could this position reverse? Well, of course it could, given, for example, a significant rise in base rates or a falling-off of demand from overseas……see comments above!
So after stirring the tea leaves and examining the runes, can we come to any firm conclusion? Well, I remember well the excitement of the boom years in the late 1980s and from 2005-7 and the feeling, if one really gave it any thought (which few dared to do), that we were riding furiously for a fall. This time, none of the issues considered above seem to portend imminent disaster so perhaps the property industry is safe from a dramatic collapse for a year or two, beyond which I personally would not care to look. But there again disasters always come from left-field – who predicted the 1973 OPEC oil price hike which tipped western economies into sudden recession? Or the collapse of Lehman Bros, precipitated by rash lending to too many small-time house buyers in the States, that ended up nearly bringing about the demise of western capital structures?
In a complex and uncertain world, sometimes one has to rely on gut instinct, which should be the instinctive product of education, professional training and, ultimately, years of experience.
Paul Batho | September 2016