Taking into account the way that the economy is at the moment, both the residential and the commercial property markets are facing challenges, however, such a volatile market certainly creates exceptional opportunities when it comes to being a buyer.
Regardless of the asset class, performance is always a relative thing. This means that it can have strong performance simply because alternative asset classes are not looking so appealing at a given time. In some ways, this provides an explanation for the strong performance that we have seen in the UK property market of late.
A report by the Investment Property Databank which was published in August noted that UK commercial property, that being retail, office and industrial have returned 8.9% and that yields have been at 6.3% at an all-property level. This is good news for the UK commercial property agencies.
Here in the UK, we do have our own issues to deal with, such as the threat of increasing unemployment, the stagnant economy high inflation and social unrest which hasn’t been seen at such a level before. Regardless of this, our overall position, which is partly thanks to the Government’s solid deficit reduction plan, is seen to be stable for the most part. When we make a comparison with other asset class equities and government bonds, in particular, those in the Eurozone, we can see that UK commercial property is a safe place to be, relatively speaking and we see this in its out-performance. Investors have been buying a lot which has sent prices in an upward direction.
A Look At London And Other Areas
When we discuss UK commercial property we tend to be talking about a two-tier market. London and the South East have a much stronger economy and get support from international investment, and then the rest of the UK fits into the second tier.
At the moment we are seeing a divergence between these markets which has pretty much never been seen before. Cluttons latest outlook regarding the UK commercial property market gave an estimation that the disparity between prime and secondary yields is at 400 bps (basis points), this has set a record and is going to get even wider during Q3 as we see prices weakening even more in markets outside London where the market is poorer.
This also reminds us that this type of yield disparity will create opportunities. Exceptions to the rule will always exist within the secondary market: properties which are in great locations, offer a quality dwelling and are under-priced when viewed as a medium-term recovery scenario.
Mexican Standoff Seen In The Residential Market
It would be easy to write a whole thesis on this, in fact, a lot of people do, however, what we are seeing in the UK residential property market can be summarised in the below two findings:
Up until this point in 2011, figures by the property website Rightmove show that 70% of properties which are put up for sale still have an unsold status.
The National Association of Estate Agents issued research which shows that the amount of unsold properties listed by agents is at a two-year high. Two clear points can be taken from these findings, firstly, while vendors may be slightly reducing their prices in recent times, they are still listing properties too highly; secondly. there is still a weak demand from prospective buyers.
Even when these factors are seen alone they can create significant issues in the property market. However, when you have both occurring at the same time, it is a recipe for disaster, a Mexican standoff that will create a lot of bubbles. This is exactly what we have seen.
What Is The Cause Of The Weak Demand?
There are many reasons for this. The economy is not in a good way, it has only grown by 0.2% in Q2; even though unemployment has improved a little over the summer, we will see it increase again when the public sector job cuts really get underway; high inflation has made consumers extra cautious in general; even people like first-time buyers who have the desire to buy will find themselves without the sufficient equity to proceed, as well as the lack of an adequate deposit and perfect credit history which lenders now require; finally, even people who do have the finance to buy seem to be holding off and waiting for prices to crash even more.