Property’s been riding high for a few years, but has hit the buffers over the last six months. Is the end nigh, or are there reasons to be cheerful? Neil Tague reports.
Just what sort of state is UK property in right now? There’s been more than a few mixed messages. The professional optimists are saying that what we’re seeing is the market correction that they’ve long been not just predicting, but hoping for, while many point to the continuing woes of the US banking system as evidence that the sluggish investment market we’ve seen since summer 2007 is in fact the early stages of a longer slump than many would feel comfortable with.
Most are agreed that things won’t get as bad as they did in the early 1990s. Mike Mitchell, managing director of consultancy DTZ for the north, says: “The indices and studies that are done now are so much more sophisticated than they used to be. Buildings are valued more regularly and economic factors are all covered, which hasn’t always been the case. When things went wrong in the early 1990s they didn’t have up-to-date information. Now, you enter declines more quickly because you can see them coming. The hope is that you can exit them just as quickly.”
As the main regional cities have grown over the last decade – and as Professor Michael Parkinson told the Insider Investment Forum at MIPIM, cities would have had to be pretty stupid not to have cashed in on a benign era for growth – speculative development has become much more commonplace than was formerly the case. Not only are there more developers prepared to take a punt backed by generous lending from the banks, but also the strong economy has led to an era of occupier confidence. If business can remain bullish, it could see the property market through.
“The occupier market is still positive – that’s where it’s holding up,” Jonathan Mills, head of the Manchester office of consultancy Jones Lang LaSalle, told Insider in early 2008. “What could affect that is if the credit crunch continues and bites the consumer – that’s where we’ll feel the pain, if the service sector shrinks. But the government are pulling interest rates down and hopefully they’ll be able to hold it together.”
The banks are at the heart of all this, of course. In the age of globalised financial markets, most will have been exposed at some level to the woes that have brought suffering to big US names such as Bear Stearns. And although most cities will point to a host of tower cranes dotting the skyline, these are the fruit of long-term projects given the green light when times were good and credit easy to come by. There’s a fair chance some of the more ambitious cities will be left with serious over-supply.
In development-hungry Manchester for one, several leading agents have voiced concerns that the city is facing huge oversupply. Mike Ingall, chief executive of Allied London, disagrees strongly, saying “the city’s growth strategy over the next five to ten years means that it needs to develop more and better office space now”. Either way, with plenty of choice and a probably leveling off of rents, the occupier is in a decent position.
Leeds, on the other hand, has only three major grade A completions due in 2008 and agents are thus speaking of a potential upturn in rents that could put the Yorkshire city more on a par with Birmingham and Manchester. Birmingham has been described as a city in need of a second act and could time its comeback perfectly should the markets take a little longer to recover.
We are working on a global stage now and few people can afford to ignore the wider markets completely. Reports from consultancies like DTZ break down the key trends in the European markets. Tim Cameron-Jones, DTZ’s director of investment in Leeds, says: “During 2006 and early 2007, the overheating of the UK property market encouraged many buyers to look to a wider European market, seeking better value opportunities.”
The firm’s latest European Quarterly research paper says that European real estate investment activity will continue to slow through at least the first half of 2008, though performance will vary widely, dependent on local economic conditions and property fundamentals. Nevertheless, strong fundamentals indicate international investors are preparing to re-enter the European market at the right price.
Encouragingly, property yields in the UK are looking more attractive than the recent past and the market is seen as approaching fair value – although secondary cities are still seeing a correction in values. And, although deal volume in Europe will be down year-onyear, it is “very unlikely” to surpass the sharp drop witnessed in the last quarter of 2007.
Cameron-Jones says: “The whole of Europe has experienced the fallout from a global squeeze on credit. The resulting fall in prices has seen a number of buyers returning to their traditional UK market places and while the volume of transactions remains relatively low, investment activity is now returning to the Yorkshire market at least.”