This time last year, we wrote “it was all going so well”. Following the result of this year’s general election there was a sense of déjà vu! Despite the uncertain political environment, the continuing Brexit negotiations and a weak currency, interest rates remain at historically low levels. Whilst we await the first increase since July 2007, interest rates are still one of the main drivers of the secondary property market. Investors continue to search for yield. Real estate continues to offer higher returns than elsewhere. A tight supply of suitable properties to invest in keeps a downward pressure on yields for the best lots.
Auction sales in the commercial sector have been buoyant in the first half of the year with many investors having previously purchased now buying again. In fact 86% of all buyers state they have bought at auction before. As a result, many buyers are becoming more adventurous in purchasing away from their ‘home region’. Lack of suitable stock available in their region may be influencing their decision.
Cash is still king, with 80% of all our buyers purchasing without debt. There seems to be no limit to the amount to be invested; we ask ourselves whether the money flowing into the market would historically have gone into the equity or bond markets. Alternatively, investors may be switching from the residential market as regulations and costs tighten in that sector. Only time will tell if this pool of cash continues to be available for investment in commercial real estate.
Comfortingly for us and the market, 80% of all buyers are looking to purchase again within the next 12 months, giving us further reason to believe that the current buoyant market will continue.
The wider economy may start to have an impact on some property prices. There is increasing evidence that growth in the economy is slowing, however to put this into perspective, the annualised growth is just below that of the growth in GDP in the third quarter of 2015, which proved to be a temporary ‘blip’. A slowing economy might have some impact on tenant demand which may, in certain weaker locations, feed through to lower rental levels being achieved or longer void periods for vacant properties. Nevertheless, whilst demand from investors remains strong, it is likely that any downside economic factors will be taken in their stride and will simply be a matter of pricing rather than a withdrawal from the market. As always, the tertiary properties are likely to be more adversely affected by a slowing economy. For this reason we feel the yield gap between the best quality lots and the tertiary/secondary lots is likely to increase slightly during the latter half of this year. Indeed, we may have already have witnessed that shift in the July sale. For confirmation though, we will need to look carefully at the last two sales of the year.
In summary, we feel that demand will continue and prices will remain at current levels for the best quality lots, whilst there is a chance that yields may move out slightly for the more tertiary lots.