For many people property has been a key performer in their portfolio over the past two or three year...
For many people property has been a key performer in their portfolio over the past two or three years. Commercial property has provided reliable - above bank rate - yields while residential property has performed strongly. Throughout the UK, house prices have risen over the last five-year period. In recent years areas that were previously maligned and ignored have also begun to play catch-up and enjoyed returns of 25-30% per annum in capital growth terms.
The above hides much of the detail and differences between the two property sectors and their particular nuances. The detail and variations need consideration and in truth there is still much debate as to the direction of the market.
In considering the commercial market, there are many segments and varieties, both by sector, for example retail and office space, and regional differences. Many commentators have highlighted there is an oversupply of office space in many of the UK major cities, including London, Birmingham and Manchester however, looking forward, if the UK economy continues to grow, this will be taken up. In London, in the short term, this may well continue however recent reports are indicating the major city institutions will begin to build their staff numbers over the next 24 to 36 months by up to 10,000 people. These jobs will be concentrated in offices within the square mile and in Canary Wharf. This clearly will have a positive impact on the commercial office space market in these areas but will also have a knock-on effect within the residential market place with so many jobs being created in such an influential sector of the London and South East economy.
Elsewhere, other commercial managers report that smaller scale opportunities are proving more attractive than larger developments and it is the more specialist funds, such as those offered by Close, Glanmore and Premier Low Risk, who are finding the opportunities for tenants in smaller commercial spaces such as offices, high street retail outlets and warehousing, with many finding blue chip clients taking up long leases on these.
In the residential market place, after several years of strong growth there is a feeling that the housing market has boomed for too long and it needs to correct. However, it is difficult to see which factors are going to force this correction. A rise in interest rates is possible, however the Bank of England is well within its inflation targets and the pressure to raise rates is rescinding. The factor that is more likely to push a cooling in this market is the indebtedness of the UK population. Consumer debt is reportedly at higher levels than it has ever been in the UK's economic history. UK pension schemes are weaker than they have ever been due to both stock market trends of late and the burden being placed on employers leading to many schemes closing. These factors put more pressure on individuals to save and to provide for themselves. To do this, individuals need to have disposable income and lower debt ratios. To compound the debt issue many people have adopted the equity release approach to develop their lifestyle or to further their investments by taking advantage of the increasing capital value in their property and thereby increasing their debt ratio. While there are many among the banks and building societies who support this, we must remember these organisations profit from such levels of debt. If there is a cooling or correction in the residential property market the pressure will be on. It is interesting to see a larger number of independent economists and commentators begin to predict that a flattening of the residential property market, if not a correction, being likely within the next 12 months, contrary to the views of the banks.
Depending on your perspective, this could be a good or a bad thing. If you buy a property investment for its income potential, rather than its growth potential, than this is clearly a positive scenario. Flat prices or an easing in prices will provide a greater income yield and enable you to meet your income targets. If you are a buyer for purely capital growth then the attractiveness of property investment rescinds. Traditionally, property was bought as an income producing asset.
Where next? Affordability will drive where residential prices move to. If peoples' debt ratios are too great, prices will be driven higher. In the commercial market place, there are plenty investment buyers who are sitting with large cash positions awaiting the right property which can be developed or offer the right rental returns and so will attract good demand which will maintain and potentially stimulate values.
Property is and will continue to be a good segment for buyers purchasing on yield, not potential capital growth.
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