Headwinds are being experienced by both the commercial and the residential property markets, much due to the way the economy sits at the moment, although such an environment does open up opportunities for buyers.
Regarding the performance of an asset claim, it is always relative. In other words, it can show great performance for the simple reason that other asset claims are not appealing options to investors. This goes a long way in explaining why the UK commercial property has performed so well in recent times. Curchod & Co explain more below.
Substantial Investment Growth
In the course of the past year, the UK commercial property market, that being office, retail and industrial has returned 8.9% and yields, at an all-property level have been at 6.3%, according to the Investment Property Databank’s report of August.
In the UK, we do, of course, face a variety of issues, these include our stagnant economy, the threat that unemployment will continue to rise, high inflation and social unrest at an unprecedented level. Regardless of these issues, we still have a stable overall position, partly thanks to the strong deficit reduction plan laid out by the Government. When compared to alternative asset classes equities, as well as government bonds, especially making a comparison in the Eurozone, it is seen that UK commercial property is a rather safe place to be, hence why we are seeing such out-performance. Investors have been buying up properties, hence why prices are on the up.
Looking At London And The Remainder Of The UK
When we are talking about UK commercial property, in essence, we are describing a two-tier market. London and The South East make-up one tier and have a strong local economy, as well as support from international investment, and then the rest of the UK make up the second tier.
Currently, we see a divergence between these markets which has hardly been seen before. Cluttons, when giving their latest outlook on UK commercial property, make an estimation that the disparity we see between prime and secondary yields, which is at 400 bps (basis points) at the moment, will get wider as we go into Q3 since prices in poorer quality markets outside of London continue to decline with the occupier risk being considerable.
This also reminds us that such yield disparity will give new opportunities. There are always exceptions to the rule within the secondary market: properties which are of high quality and in good geographical positions which are under-priced when related to a medium-term recovery scenario.
A Mexican Standoff Is Created In The Residential Market
You could easily write a thesis on this matter, in fact, people have done, yet, as it stands at the moment, the current state of the UK residential property market can be summarised as follows:
So far in 2011, 7 out of 10 properties which are ‘for sale’ are still ‘unsold’, according to the website Rightmove.
The National Association of Estate Agents has released research which shows that properties which remain unsold on agents’ listings are currently at a two-year high.
These two points show that while vendors may be slightly lowering their prices the prices are still unrealistically high; secondly, there is a remaining weak demand from prospective buyers.
Even when only one of these factors is in play it can create a host of issues. However, when we see both at the same time it creates major problems, a Mexican standoff with considerable implications. Of course, this is exactly what we are seeing.
Why Such A Poor Demand?
There are plenty of reasons to choose from. The poor state of the economy which has only grown by 0.2% in Q2; unemployment issues, even though they have fallen back a little during the summer, we will see them rise again with the public sector job cuts; consumers are more cautious in general due to high inflation; people who do want to buy, such as first-time buyers, are unable to do so since they do not have a sufficient deposit, flawless credit history or sufficient equity, as it currently required by lenders; finally, even people who are in a position to buy are holding back as they hope to see a further decline in prices.