In both the residential and commercial property markets, headwinds are being faced given the state of the national economy; however, despite this factor, volatile markets continue to deliver fantastic buying opportunities.
The performance of asset class has always been considered relative. This means that the asset type will perform strongly based on the fact that alternative asset types appear unattractive to property investors. Curchod and Co explain this, is to some extent, the increased performance of commercial property in the UK market
According to reports from the Investment Property Databank released in August, activity in recent years within the commercial UK property market comprised of retail, industrial and office structures. Furthermore, these commercial properties presented a return of 8.9% with yields measuring a staggering 6.3%.
In the United Kingdom, we have certain challenges within the country including the threat of increased unemployment, a slowing economy, and high inflation costs and, as was seen in the August riots, a sense of unprecedented social unrest. Irrespective of these issues, the overall position regarding property based on the government’s deficit reduction plan is to become relatively stable. As compared to other government bonds and asset class equities, particularly in the Eurozone area, the UK commercial property market is considered a ‘safe haven’ reflected in the out-performance. Taking this into account, property investors have begun purchasing retail in droves increasing the level of property prices.
When speaking about commercial property in the United Kingdom, you will essentially be discussing a two-tier market – the London market and the rest of the UK. London and the South East area of the UK present with the strong local economy and tend to be better supported by international investments than the rest of the country.
Currently, there is a strong and potentially unprecedented divergence between the tiers and their property markets. In recent years among commercial properties, estimations indicated the disparity of secondary and prime yields standing at 400 bps or basis points. Furthermore, it is predicted that the basis points would widen as prices continue to weaken in the poor areas outside of the London region.
At the same time, yield disparity between London and the rest of the UK indicates the change in various property ownership opportunities. There will always be exceptions to the standard ‘rule of thumb’ within the second market where high-quality properties in prime locations are undervalued based on a medium-term recovery situation.
It is possible to write a full thesis on the topic of Mexican standoffs in the UK residential market; however, the existing state of the residential property market can be summarised in the findings noted below:
Firstly, based on the figures released by renowned property website Rightmove.co.uk in 2011, approximately seven of all ten properties listed for sale will remain unsold. According to research by the National Association of Estate Agents, the number of unsold UK properties is marked as being at a two-year high as of 2011.
The two core points to be deducted from this evidence is that agents while lowering the sales asking prices in later months, continue to list residential properties on the market at unrealistic and unaffordable prices. Secondly, it is seen that the demand for properties from buyers remains low. Even when viewed in isolation, either of the factors can cause difficulties for the UK property market; however, when placed together you have the cause for a Mexican standoff of outstanding proportions. This is what has happened in recent years.
The number of reasons for property purchase demands being weak is staggering – the poor state of economic health, increased unemployment, consumers experiencing high inflation and feeling cautious of purchases. In fact, even if a potential buyer wishes to purchase a property, such as the case of first-time buyers, it is likely that they will be rejected because they do not have adequate equity, a good credit history or a large deposit for the property. All the issues are stacked against a potential buyer, so it makes sense that no person wants to buy a property.