Inflationary concerns, the US property market, and UK interest rates all figure highly among the factors determining whether 2007 will be a good or bad year for investors and homeowners.
Starting with property closer to home, Smartnewhomes.com is predicting interest rates will go up again in the spring before stabilising. Overall house prices will gain 6% to 8% over the full year, with new home prices rising between 2.5% to 4%.
Pressure to ensure supply of more affordable housing in urban areas will renew pressure to build closer to functioning transport links, according to David Bexon, Managing Director.
Max King, investment strategist at Investec Asset Management, believes the property picture is more complex than that.
He says the IPD All Property index has returned close to 13% annually in the past five years, and close to 11% annually compounded over the past 25 years. The return in the first three quarters of 2006 was close to 14%, well ahead of the FTSE All-Share index.
By contrast, the Barclays equity-gilt study suggests returns over the past quarter of a century are not all that different to those for property above. But, King says, for those similarities to continue in the case of bond returns, capital values would have to quadruple.
“Over 20 years, property has out-performed both equities and gilts.”
The problem is single digit returns from property were forecast for both 2005 and 2006.
Instead, the UK property market has seen retail investors, overseas buyers and institutions combine to create a still strong wall of demand in the face of inadequate supply.
Some suggest looking to European markets is the answer, but this is not necessarily so, King suggests: for example, where commercial property is concerned, the standard UK lease is 25 years, with five-yearly upward only rent reviews. European leases are generally shorter and indexed to inflation.
King says in the short term investors should avoid taking profits. Although valuations may appear overdone, there position of commercial property still looks good in the long term. The risk is inflation, but even if this were to jump to 1980s levels, it would hit all asset classes, not just property.
Tony Dolphin, director of economics and strategy at Henderson Global Investors, includes property in his analysis, but starts from the point of view the global economy has seen growth of 5% for the third year running – the longest such stretch since the early 1970s.
This, then, would suggest growth next year would be somewhat cooler because inflationary pressures will remain high.
Inflation has already been higher than expected, mainly because of energy prices in the past couple of years, but now that trend has spread to other parts of economies, leading central banks to tighten up monetary policy.
Dolphin sees three issues determining further monetary policy changes through next year: non-Opec supply increases will keep the oil price from rising; figures from the OECD (Organisation for Economic Co-operation and Development) suggest manufacturing growth will “soften”; and the US is already in a housing market recession.
The latter point is already resulting in lower investment in residential property in the US, and this will remain the key determinant of overall economic growth there and in other countries, Dolphin says.
“It is fair to say that opinion on this subject is widely divided,” he adds.
Ewen Cameron Watt, head of the strategic investment group, Europe, Middle East and Africa at BlackRock Merrill Lynch Investment Managers, takes a slightly different view of prospects in the US.
He sees it ripe for a “soft landing”, because any reductions in earnings growth are “largely already priced into the market.”
“The outlook for equities is good, though volatility is likely to increase as investor uncertainty over interest rates, inflation and earnings growth makes itself felt.”
Watt is more certain than Dolphin global economic growth will remain high because of inflation being under greater control. Largely this is down to falling commodities prices, Watt says. That said, interest rates are unlikely to fall anytime soon, and if anything will maintain a slightly upward trend.
Equities will continue to do well, despite current prices: investors have learned their lesson from the tech bubble collapse, and are more realistic about expectations, Watt says. Mergers and acquisitions meanwhile are being driven by real cash rather than paper, as was the case back in 2000. Private equity will continue to seek deals. What will change is volatility of prices, which will increase because of increasing uncertainty over factors such as the state of the economic cycle and economic growth rates in Asia.
Asian consumption will grow as a proportion of total global economic activity, although Watt does not expect a collapse in the dollar – despite its current weakness. There are still enough Asian investors looking for US assets to support the currency.
One interesting new play Watt sees is in so-called ‘soft’ commodities. Water, especially, will be in demand: Watt sees a shortage amid rising demand to support crop production expansion driven by increasing demand from China and India.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Jonathan Boyd on 020 7484 9769 or email [email protected].IFAonline
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