It’s time for my monthly look at the property market. As expected it’s not pretty.
The market remains flat – we have weak demand and so prices are flat. Average yields (from PropertyData) over the last year have remained almost unchanged.
Although these are very much average yields – they do provide an interesting overall commentary:
1 month – 6.42%
3 months – 6.19%
6 months – 6.24%
12 months – 6.18%
In fact you will see that in the last month the yield has worsened (a higher yield equals a lower capital value). Further the number of transactions – shown in the illustration are lower than the same period last year. It’s not getting much better?
There is very little confidence. The usual excuse that it is because everyone is on holiday has followed a long winter. I have no doubt Christmas will be starting soon?
In the last few weeks America has wobbled – suggesting it can’t pay the rent. I’m sure that these sort of headlines impact on how people feel…
Maybe we’ll see a return to great trading conditions in the Autumn? Then again….
Last week I wrote a report for a client in which I expressed a concern that we could be heading for a “perfect storm” in the property market. It doesn’t suit my business to talk the market down, but I have some concerns when people are starting to rely on sales for further investment.
In essence my concern is that we have not started on the Public Sector cuts yet and these are likely to increase unemployment. Unemployment generally has a negative effect on the property market as confidence wanes. Then in January VAT increases to 20% as one of the fiscal measures to reduce our deficit starts to bite. Inflation is currently above the Governments target and one short sharp shock way of dealing with this is to increase the base rate. If this happens the cost of borrowing increases hitting the residential market with a second blow.
These blows to the residential market generally then hit the commercial market. I hope they don’t.
And I also spoke to one of my friends who is a Banker. They are starting to look much closer at their customers – and the view is that some are likely to have the plug pulled shortly…
Against this rather gloomy picture my monthly Property Investor Bulletin arrived from PropertyData. Last month I blogged about it here.
Volumes of transaction continue to perform well against 2009 – with £18.3bn of property having been transacted as against £12.8bn in the same period last year. But we are still at about 40% of the 2007 figures!
Last month the average yield was 6.44% – but has crept up again to 6.00% this month. There were 72 deals in the last month.
Property was more expensive when compared to the 3,6 and 12 month comparable figures (which were 6.04, 6.25 and 6.61% respectively).
And in the last month there was a net investment in the property sector by the major Institutions – they sold £266m of property and bought £588m.
So, it’s a very mixed message – and I really do hope I am wrong about the black clouds on the horizon…
I blogged earlier this week about the latest news on commercial property lending. It’s not a pretty picture.
My copy of the Property Investors Bulletin arrived last week and this is a great barometer of the market. This for the period up to 31st July 2010 – and there is better news in part.
Firstly, the volume of transactions is up on the equivalent period in 2009 – £16.4bn against £10.8bn. But we are still some way off 2007 figures when we had £39bn of deals.
85 property deals were reported last month – and the average yield is now 6.43%. This has slipped very slightly from the 3 month average of 6.22%. So property has got a little bit cheaper.
I am also a member of the Investment Property Forum and they have issued their consensus forecast recently. The general prognosis is that property will recover well in 2010, dip again in 2011 and pick up in 2012.
I think there is concern about the employment market – this has a direct impact on consumer spending. If consumers don’t spend the property market gets hit – especially in the high value retail sector! Potentially unemployment could hit 3m – especially as the public sector cuts take effect.
Although the interest rates remains low, this won’t go on forever. Inflation is considerably above the Government target and there is a cure – in the form of increasing the interest rate. This could hurt the recovery. Inflation has historically been quite good for property, but I am not sure that this is the case now.
It’s not in my interest to talk the property market down, but I think it remains in quite a fragile state and if someone sneezes there could be a cold epidemic….
I blogged last month when I saw the latest figures from Property Data – they showed yields drifting down (pushing prices up).
Property - back in fashion?
And this months figures show a continuing trend. For the period to the end of June 2010 there had been 91 deals reported, totalling £2,890m – and the average yield was 5.78%. Last month was at 6.37%.
This may be a reflection on the rush to get stock sold ahead of the CGT increase. And it may be a settling down of the markets post election.
Locally there seems to be a lot of money chasing investment stock again, but these are people generally ‘in cash’ as there still seems little appetite for the Banks to lend, unless you have a significant deposit! The major investment funds are hungry for stock – although their entry point is well beyond the reach of most (but not all) private investors. The figures show they have divested £289m but invested £780m in the last month – a net increase of £491m.
It seems odd that the Public sector are facing massive cuts and a pretty gloomy future, whilst others seem to be riding the crest of a wave in investment terms. Certainly there are some more of my colleagues and competitors back playing the property investment game.
Some time ago a client told me he liked property because he could keep a photo of it and when everything else around was collapsing (shares, bonds and the like) he could drive out to it and touch it!
I blogged one month ago about the prospects for the property market – at the time we were in ‘hung parliament’ mode!
Average property yields - drifting back down
Yields were drifting down (making property more expensive) – and the May figures have just been published by the Property Investors Bulletin. The trend has continued. The quarterly all risks yield profile has hardened again – and is currently 6.37%. Or put another way thats 15.7 years purchase!
This is all very well, but is a national trend – and is the subject of averaging which can be misleading.
But I have been involved in two investment transactions in the last two weeks (one I was buying and one I am selling). It is very clear that there is a lack of product available – as the interest shown in the property is significant. My clients have decided not to purchase the property we looked at to buy – but I am aware that the selling agent had four bids – all at or about the asking price (you could argue that this was low to attract interest, but I think not on the basis of the evidence of similar transactions). On the property I am selling I have a number of bidders in a similar position.
These buyers tend to be in cash – as the Bank finance is still difficult to get.
But I have also been valuing some property last week – which I last valued in 2008. I had expected to find prices to be similar; but the evidence has shown some uplifts. Not much, but certainly not the marking down of values we had seen.
Perhaps the market is back on the up – there may be a blip in the short term as some investors try to beat the Capital Gains Tax inevitable rise as I blogged about before – but there is an air of confidence in property again.
This is great for my business – and long may it continue…
The latest figures for property investment have just been published. We subscribe to PropertyData which provides detailed analysis of Investment transactions month on month. The December 2009 figures have just been released – which also give us a chance to review the annual performance of the market.
The value of transactions over 5 years - from Property Data
The striking feature was that the value of transactions in 2009 was lower than 2008 – which we thought was the bottom of the market!
The general view is that the market improved at the end of the year – so perhaps 2010 will be better?
Property values are also published – and in the investment market we measure value by ‘yields’. This is simply the return of rent in comparison to capital value. It is no more complex than looking at returns at the Bank or Building Society. We like to make valuation something of a ‘black art’ though – by doing various adjustments for costs, tax etc. But the fundamentals remain – it is a return on value.
It is helpful to compare what you might get for your cash at the Banks. According to the ubiquitous Martyn Lewis the best you can get on instant cash is around 3.35% (worst is 0.1%!). If you lock your money up for 3 years then you could get 4.7%.
PropertyData calculate some average yields (and acknowledge the dangers of averages). But they show some interesting figures for the last three months, by property type:
West End offices London – 6.66%
Regional Offices – 7.75%
Unit shops – 6.7%
Retail Warehouses – 7.14%
Industrial Units – 7.65%
It is interesting to note is the bunching of yields – the average spread across the sectors is only approximately 1%.
Also, returns are higher than cash – there are some obvious reasons. The market is quite illiquid – i.e. the costs of entry and exit are high (Stamp Duty can be 4% on large value transactions). There are risks associated with the income – it is not note necessarily ‘gilt edged’. Buying with borrowed money is difficult too – although the Base Rate is low at 0.5% – this rate is not readily available!
But if you can find property to invest in – the current returns look quite attractive! And if you need help give me a shout!