The performance of any class of assets is always relative. It may have a strong performance simply due to the fact that investors view other asset classes as being unattractive. To a certain extent, that explains the UK commercial property’s recent strong performance.
The Investment Property Databank issued a report that was published in August that showed that over the last year, UK commercial property, which is comprised of office, retail, and industrial, returned 8.9%. and 6.3% yields at the all-property level.
We, of course, have our own issues in the UK. like rising unemployment threats, a stagnant economy, stubbornly high inflation, and unprecedented social unrest, as was witnessed in the riots in August. Despite all of that, our overall position, partially due to the robust deficit reduction plan of the Government, is seen as being fairly stable. Compared with government bonds and other equity asset classes, particularly within the Eurozone, commercial property in the UK is a fairly safe haven and its over-performance is a reflection of that. Investors purchasing it in droves, and skyrocketing the prices.
London and the Rest of the UK
“When discussing UK commercial property, of course, it is basically a two-tier market. First of all, there is the South East and London, which a much stronger local economy, as well as support from international investment and then there are the remaining parts of the UK,” says an estate agent in Woking.
Currently, there is a strong, nearly unprecedented divergence between those two geographical markets. Cluttons, in its most recent UK commercial property outlook, estimated that the disparity existing between the secondary and prime yields is currently at a record 400 basis points and the will widen even further during the third quarter as prices continue weakening in the poor quality markets that are located outside of London and have significant levels of occupier risk.
This reminds us, at the very same time, that this kind of yield disparity can also provide opportunities. After all, there will be exceptions to the rule always in the secondary market: that is, high-quality properties that are situated in good locations are very under-priced when compared to a potential medium-term recovery.
Mexican Standoff Seen by the Residential Market
A thesis could be written on this subject, and many people do, however, as we see the UK residential property market’s current state, it may be summed up by the following two findings:
In 2011 so far, according to figures that Rightmove, a property website, has released, 7 out of 10 properties that are listed for sale remain unsold.
The National Association of Estate Agents issued recent research that declared the number of unsold properties that are on the agents’ books are at a two-year high.
There are two key points that may be drawn from the statistics. The first one is that vendors, while they have slightly lowered their asking prices in recent months, still are putting properties up for sale at unrealistic prices. Second, demand remains very weak from prospective buyers.
Even in isolation, either one of the factors may cause all kinds of problems for the property market. However, when both of them appear together, then there is a grand stalemate, that has staggering consequences. Which is precisely what occurred.
Why Is There Such a Weak Demand?
There are plenty of reasons. The health of the economy is very poor, and has grown by only 0.2% in the second quarter; unemployment, despite slightly falling back over the summer, will once again increase after job cuts in the public sector really get started; given the high inflation consumers are feeling very cash-strapped and are very cautious; even if individuals want to by, many, particularly first time buyers are being denied the chance since they don’t have enough equity, flawless credit history, and big enough deposit that all lenders are now requiring; and finally, even when individuals have the finances for buying many people are holding back right now and waiting for prices to go down even more.