Notes from the Dick Fuld Survivors' Club
Having pulled back from the end of the world as we knew it two years ago, what will the next two hold? Here are a few thoughts about we think will be the main themes affecting the property market:
- Comprehensive Spending Review (CSR): how can this not have an impact? It could be the medicine we need to get UK plc back on its feet, albeit one that tastes pretty bitter. On the other hand it could be another nail in the coffin of consumer confidence, which is already pretty fragile. The fact is, however, that with interest on the national debt costing a staggering £44 billion a year (around £10 billion more than the post-CSR defence budget), something had to give. Apart from the inevitable public sector job cuts, government (whether national, local or quango) is going to get a lot smaller, and occupy a lot less space.
- North / south divide: coming back with a vengeance. Look at the relative public sector share of the economy of other regions in the UK; it makes you thankful to be based in our rather over-crowded and expensive corner of England.
- Prime is prime: sovereign wealth has become a major investor in UK property. In practice, these funds are interested in high value, prestige schemes with relative security of income. As a result, demand remains high and yields have become compressed, particularly in central London. You only have to look at the recent change in direction of Kuwaiti-owned St Martins to see the concentration of resources in relatively limited markets.
- Secondary is sexy: the opportunities for returns on well bought secondary property are increasingly exciting. This part of the market will continue to be attractive to well funded investors who know what they are doing. As always, the devil lies in the detail: what is the under-lying value of the asset rather than just the current income stream?
- Learn to love your tenants: worried about occupier demand in a sluggish recovery? Make sure you treat your tenants as customers and not cash-cows.
- The bank that likes to say “no”: are any of the banks likely to show any real enthusiasm for lending to property? All the indicators are stacked against it. And point 7 below offers little comfort.
- Repayment bubble: lots of loans are due to be repaid over the next couple of years, and we don’t expect any of the banks to be falling over themselves to offer re-financing options to the property sector. Some will no doubt be re-financed by their existing lenders, albeit at more expensive rates. Some, however, are going to find it extremely difficult. The problems will really start if the banks try to force the pace too fast on development land, where divorcing sites from the teams who understand them and the development proposition is a great way to put a hole in values.
Well-bought property continues to offer an unparalleled return. For those with enough cash to fund at least half of the purchase price of the bricks and mortar (or glass and steel) they want to buy, the next couple of years could see excellent opportunities.
For the rest of us, we can only hope that now some of the uncertainty has passed, the loss of momentum that has marked the second half of 2010 will be followed by more activity in 2011.
Published: 19 Nov 2010