Attempting to try and forecast what may happen in the secondary property market over the next six months is about the riskiest thing I have done in my 40 year career! With the ever increasing risk of a “no deal” arrangement from the Brexit negotiations it would seem that markets and Industry are now starting to plan for this eventuality. Plan for the worst, hope for the best seems to be the best phrase to sum up the current mood.
Whilst some industries/companies will undoubtedly suffer from a “no deal” scenario, for many it will be business as usual. Brexit is being blamed for all the Country’s problems, but in truth we believe much of the slowing economy and particularly changes in High Street retailing would have occurred in any event. With high levels of personal debt, low income growth and increasing penetration of internet shopping, it is not surprising both the high street and online retailers are under pressure.
In the latest Bank of England inflation report GDP Growth for 2019 is projected to be 1.7%, CPI inflation at 2.1% and interest rates to rise to 1%. These projections are fairly similar to 2018.
In the general investment market, returns are still weak with UK Government Bonds currently yielding around 1%. The FTSE which started the year at 7,671 is currently around 6,900, just over a 10% reduction for the year, with an average dividend yield of around 4%.
The regime of historically low interest rates looks set to continue, which enhances the appeal of the Real Estate sector as an investment medium. Private Investors, whilst becoming increasingly risk averse, will continue to invest in property for the higher income returns which can be generated and increasingly the perceived security of “bricks & mortar”.
Supply of investment stock continues to tighten with a reduction of lots being offered, not only in the Auction Rooms, but also in the wider Private Treaty Market. The principal reason for this tightening is likely to be due to the traditional lag between Vendors expectations and market reality. This may change as Vendors continue to adjust to the fluctuating market conditions, however in the short term we believe supply will continue to tighten.
Rental values in the retail sector continue to be under pressure. With the exception of a few locations rents appear to be, at best static or falling. Void periods and incentives required
by potential tenants are also rising.
Our Buyers Survey shows a continuing increase in the numbers of buyers purchasing in areas they are familiar with, a trend we fully expect to continue. Anecdotally we are being made aware of further tightening in the availability of debt from mainstream lenders. Conversely our Buyers Survey suggests that an increasing number of Investors intend to borrow to purchase, which suggests Challenger Banks and new entrants into the lending market are filing the gap from where traditional lenders have drawn back. There are still a substantial number of Investors (72%) who require no finance to purchase. A whopping 98% of Buyers stated they wish to purchase again in the foreseeable future which when added to the number of unsuccessful under bidders, suggests there continues to be no shortage of demand.
In conclusion the outlook for the secondary property market for the first half of 2019 looks uncertain; although we feel Brexit is having some effect on the wider economy and some Vendors in their decision to sell, it is, quite clearly not having an impact on Buyers, who continue to seek suitable investments in this low interest rate environment. Our December sale finished the day at a success rate of 79%, our highest of the year. This would suggest that once again if assets are priced accurately, significant levels of demand can be generated. We believe there will be a continued tightening of supply for the first half of the year which in turn will lead to further competition from Buyers, thus keeping yields fairly static for the best quality lots. Yields for more secondary and tertiary lots are likely to continue to rise.
We will continue to monitor the investments being termed “alternatives” to see their progress over the next six months. Again we suspect these will continue to be popular and thus yields are anticipated to remain static.
Geographically the demand for properties in London and the South East continues to be as strong as ever, with prices achieved to match. We see no reason why this position should change.
Properties situated in more secondary and tertiary locations or further away from the Capital are likely to continue to weaken where rental values are under increasing pressure. In the retail sector, local knowledge will continue to be extremely valuable.
Hopefully before 29th March 2019 our position in Europe will be slightly clearer and some of the uncertainty in the general economy will be removed. In the meantime in this continuing period of historically low interest rates, Real Estate continues to be an attractive investment and demand continues unabated for correctly priced stock.
Patrick Kerr, Partner.