21/05/2012

The property investment market stuttered into 2012 in less than confident terms. Good news is a scarce commodity at the moment, but there are some sectors that remain buoyant including overseas investment in London properties and a demand for properties that have tenants with long secure leases.

The power brokers returning from Davos after their annual "World Economic Forum" arrived home in a sombre mood. This negative Global sentiment, when mixed with the more mundane, home-grown issues of poor tenant demand, the high cost of empty building rates and an almost total lack of bank finance, has produced a sterile environment for business.

In Europe, the IMF announced a substantial reduction to its 2012 global economic forecast and the underlying problem is how to improve growth in the Eurozone. Confidence needs to be restored and this will only come with the ending of the crisis which is sweeping through the countries perceived to be vulnerable. Most consider it inevitable that Greece will default on its loan repayments and the only real question is under what circumstances and who else?

For the UK, the initial estimates of GDP growth in Q4 2011 suggested a contraction of 0.2% with a total growth during 2011 of a meagre 0.9%, less than half of the 2.1% recorded in 2010. This has heightened fears that the UK is either heading towards, or already in, another technical recession. In February the Bank of England left interest rates unchanged and decided to increase its Asset Purchase Programme via Quantitative Easing, probably for the last time now that the inflation beats appears to be tamed.

George Osborne remains totally committed to the Coalition's policy of austerity as UK public sector debt reaches £1 trillion. Despite the big number, there are signs that public sector finances are coming under control but austerity is a marathon not a sprint, so there are probably five more years of belt tightening ahead. Rumours also abound that the UK's "AAA" credit rating is under threat.

By contrast, the US economic growth was robust in Q4 2011 and on top of announcing that it will hold rates until 2014, the Fed has set a specific inflation target of 2%. But the overall assessment of the economy was downbeat. GDP growth picked up in the final quarter but this is probably the light at the end of a very long tunnel.

These are not good omens for the UK property investment market in general as rental growth remains a distant prospect with patchy tenant demand. Against this background of general poor market sentiment, there are some sectors that remain extremely resilient. 

  • Prime central London property remains at the top of the shopping list for the ever increasing list of cash rich overseas investors seeking both a safe haven for their wealth and a trophy asset. This applies equally to both commercial property and residential assets. 
  • Any property let on a long lease to a tenant of undoubted covenant strength is sought after. This category of property is in demand from high net worth individuals seeking a rate of return above the paltry interest rates available. 
  • Multi let south east industrial estates. These are perceived to offer a higher than average yield together with asset management opportunities and the prospect of capital growth. 
  • Apart from these bright spots the rest of the investment market is in the doldrums. Areas of particular difficulty are 

  • Offices. This is principally due to general oversupply, poor tenant demand and obsolescence. 
  • Speculative development. This is virtually non existent, except in some isolated markets where there is a real shortage of the right sort of building. 
  • Any property where there is the slightest doubt of the tenant's ability to pay their rent or the prospect of a void, because of the ever present threat of empty building rates. 
  • The conclusion is that the market has entered yet another difficult phase with micro and macro uncertainties conspiring to cause investors to do nothing except sit on their cash, however meagre the returns at the bank. 

    The good news is there is still a lot of money looking for an investment home which will at some stage find its way into the market.