How much more uncertainty can be created by our Political Leaders negotiating our exit of Europe, World Leaders threatening trade wars and a cooling domestic Economy? How would the economy be faring without the looming BREXIT deadline? Answers to these questions will only be answered with hindsight.
In the meantime there is little doubt that the cooling we observed in our market at the latter end of 2017 has continued into the first half of the year, but only for the more secondary lots. Those properties let on the longest leases to the best covenants continue to sell for some of the sharpest yields seen in living memory. A flight to quality perhaps? Demand for these “prime” lots remains as strong as ever. With increasing risks on the downside for much of the general market we believe these “prime” lots will continue to sell for very sharp yields, even following the recent interest rate rise.
In the wider secondary and tertiary end of our market we feel yields are likely to continue to soften as the number of voids increases on the High Street, as a result of further Administrations, weak economic growth and continued evolving competition from online retailing. The small rise in interest rates is likely to cause a further small shift outwards for yields at the weaker end of the secondary market, this notwithstanding, rates are still at historically low levels. As we have seen consistently when asset prices were rising, the economy reacts more slowly in a low growth, low inflation and low interest rate environment. Thus we believe the same phenomenon will be experienced in reverse as interest rates slowly rise.
Despite the downside risks, demand across the whole market continues to be driven by low interest rates and the low returns available elsewhere thus continuing to make real estate an attractive investment, despite increasing risk.
Supply has tightened witnessed by the reducing number of lots coming into the auction rooms. There seems to be little change in the number of potential vendors asking us to “price up” a property for sale. However there is an increasing gap between what some Vendors are hoping to achieve and what the market is prepared to pay. This gap is unsurprising, bearing in mind we have had nearly a decade of benign pricing conditions and potential sellers have grown used to achieving their asking prices.
Rental values in the retail sector with a few exceptions are static or falling again. Particularly in the regions north and west of Birmingham. As observed from our Buyers Survey, location is once again influencing investment decisions. Buyers are once again keener on buying in locations “closer to home” where their knowledge of local condition will be greater.
Debt conditions are relatively benign. There is no question that borrowing money is still challenging with lenders requiring so many hoops to be gone through. However there are an increasing number of lenders coming into the market offering favourable terms resulting in an increasing number of our Auction buyers borrowing. Let us not forget however, a substantial majority, 73% of our buyers, are still buying with cash.
In conclusion, for the remainder of the year we see demand for the best quality lots continuing and prices being maintained, partly due to the limited supply of these lots. Mixed use properties continue to be sought after with demand increasing as a number of buy-to-let investors have come out of the pure residential market. The more secondary and tertiary lots are likely to continue to see a gradual softening in yields, likely to be more pronounced in weaker geographical regions of the Country, where due to an increasing number of voids rental values are falling. Good local knowledge will become invaluable.
Supply of properties across the Auction Market is likely to remain tight until there is some certainty in the economic direction of the UK post Brexit.
Demand however will, we believe, be as strong in the second half of the year as it has been in the first, for correctly priced stock, with low interest rates continuing
to make real estate attractive.