Magazine article Real Estate Issues

Focus on the United Kingdom; the State of the UK Property Market: Key Drivers

Magazine article Real Estate Issues

Focus on the United Kingdom; the State of the UK Property Market: Key Drivers

Article excerpt

THIS IS THE FIRST OF A SHORT SERIES of four articles with my personal perspective on the state of the property market in the United Kingdom. Initially, I will focus on some of the key drivers and the macro-to-micro picture, then look at the commercial and residential property markets before mopping up the remains of the marketplace, with some clues for lenders and investors (the seeds of doubt) in the final article. Things will inevitably change over the course of the year between the start and finish of the publication of these articles, but I hope they will be of interest to the international readership especially if you, as reader, are able to compare and contrast my views with your own thoughts about the marketplace in which you ply your trade.

It was, interestingly, a CRE who kick-started my current thought processes. My chum, Ken Riggs, said in the winter of 2005: "Something has to give; or does it?" Many other experienced commentators and players keep saying, privately and in the media, that we must be approaching the peak of the market's values. The key word is must. Seeing it written down does not show the emphasis that, when said aloud, implies we must, mustn't we? Note that they do not say are at the peak. Is this a fear that they might not be asked again if they get it wrong, or a concern that they do not want to be seen to be merchants of doom?

A long time ago, a very experienced property player said to me that one should always "leave something in the deal for the next owner." What a wise and pragmatic phrase that has turned out to be. His thinking was that we operate in a very small world, and that treating people well on the way up will pay dividends on the way down, when paths inevitably cross again. Squeezing the pips from a deal generally leaves a bad taste in the mouth of the other party.

However, I feel that the same maxim also applies to the actions of market players who successfully navigate the peaks and troughs of our usually volatile market environment. After all, if there is a good profit to be taken from a deal now, why wait until the market has moved along, maybe up or maybe down. In the past, very few have called the market exactly to the moment. One or two superstars got it right last time round; sold all their property and went liquid until the storm abated sufficiently to wash up fresh opportunities on their shore. Alternatively, perhaps they were lucky.

BANKS SEEM EAGER TO FINANCE SPECULATIVE DEVELOPMENT

For a year or more, I have been saying to those who ask me what I think about the market, that "if you can't make money when interest rates are at this (historically) low base, when will you ever make a profit?" Milan Khatri, the chief economist at the Royal Institution of Chartered Surveyors said earlier this year: "Low interest rates have been the primary fuel for a surge in property demand, though by the end of 2006 these will rise."

So, what will we do if interest rates do rise? By how much will the rates have to rise for demand to slow, or even stop? These are difficult questions to answer. Each reader will have his or her own view, but I am influenced by the growth in speculative development over the last few years, driven not only by developers' desire, but also by an increasing willingness by banks and other funders to be more aggressive in their lending terms.

A survey by de Montfort University, in Leicester, England, has shown that in 2005 there was [pounds sterling]23 billion of development finance out of a total market size of property lending in the UK thought to be between [pounds sterling]164 billion and [pounds sterling]175 billion. Six years earlier, though, at the turn of the millennium, there was only [pounds sterling]9 billion of development finance. In that year, [pounds sterling]3 billion was for residential development for sale, and [pounds sterling]6 billion was for fully pre-let commercial real estate development. …

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