In September 2008, Britain’s property market began a precipitous collapse which saw the steepest fall in commercial property values ever seen.
Lehman Brothers’ collapse, precipitating the bailout in Britain of Lloyds once it had disastrously bought HBOS and RBS led to the biggest ever collapse in UK property values – 44% between September 2008 and March 2009.
Almost all Britain’s biggest Real Estate Investment Trusts (REITs) had to stage deeply-discounted rights issues to shore up their balance sheets and the sector was in headlong retreat as even famously long-term overseas investors began to bail out. Now, as we approach the 10th anniversary of the Lehman collapse, the picture could not be more different. While Brexit is seen by some as a possible omen of doom, others believe the current property upswing still has some years to run.
One of the great strengths of the UK property market is its transparency underpinned by the professionalism of its valuation profession and this collapse allowed bargain hunters to return and values to begin to recover over a long period. In 2017, investment activity totalled more than £50 billion, far outstripping the £40 billion achieved in 2016, when the second half of the year was blighted by uncertainty over the European Union referendum and Britain’s subsequent decision to leave.
Maxine Fothergill of Amax Estates says that this leaves many people in the UK property market more confident than at any time in the last three years. For optimists the argument goes as follows: the worst impacts of the EU Referendum have been absorbed, interest rates are likely to remain low, occupier demand for sectors like logistics and residential far out-strips supply and London will remain a major financial centre.
The upbeat mood was underpinned last week when leading property adviser Knight Frank unveiled `The London Report’, an upbeat prognosis which showed that leasing activity in the City and West End had soared in 2017 compared with 2016, with even financial services occupiers on the rebound. Knight Frank also showed that London remains a global investment capital, with inward investment from the Far East in particular soaring over the last 12 months, partly fuelled by a weaker pound.
Pessimists, on the other hand, still believe that leaving the EU will leave Britain forever poorer, UK GDP has already slowed behind Eurozone competitors, the City of London will lose its pre-eminence to Frankfurt or Paris and we are also staring the prospect of a hard-left Labour government in the face. To understand why the optimists are now in the ascendency, let’s examine the UK property market in detail. Logistics and industrial are the sectors investors are clamouring to get into.
SEGRO, the UK logistics world’s flagship, replaced shopping centre landlord intu in the blue-chip FTSE-100 in summer 2017, and has powered forward to the extent that it is now valued at more than £6 billion. SEGRO’s elevation and intu’s demotion were seen as a symbolic changing of the guard, where old-style shops have been replaced in favour by urban warehouses used for home delivery, and investors continued to clamour for industrial property.
E-commerce as a share of retail spend has almost reached 20% in the UK, compared with 5% in Spain and Italy and developers can barely build enough warehouses to meet soaring demand. Anecdotes swirl around the London property market about warehouses changing hands at yields below 4%, while Mayfair office buildings trade at a less premium level – such is the enthusiasm for all things e-commerce and urban logistics.
Investors are frightened off retail property by the prospects of the continuing growth of e-commerce, although some landlords like the FTSE-100 British Land and Capital & Regional have done an excellent job in re-shaping their developments for a new wave of customers with a local, community feel.
And in early February some saw the first signs of a revival of interest in retail property when British Land paid more than £100 million for a large slice of Woolwich, a formerly downtrodden town in south-east London which is forecast to rocket in value with the arrival of the new Elizabeth, or Crossrail, Line. The office market is another conundrum. Doom-mongers believe that the City of London is holed below the waterline and British buyers for offices in the capital are few and far between.
Global investors, however, have a different point of view. To them, a Referendum on whether Britain should be in or out of what they see as a peculiar concept of the European Union is immaterial – at least in Britain we get to vote on such issues. To Far Eastern, Middle Eastern and other international investors, Britain’s long history of democratic elections, stability and rule of law (not to mention capital appreciation over decades notwithstanding the odd blip) is a compelling prospect.
Combine that with the 20% fall in sterling since the Referendum and London in particular becomes very appetising indeed. In the last 12 months, oversea buyers have dominated the London office market, with Far Eastern groups buying The Leadenhall Building aka The Cheesegrater, and 70 Fenchurch Street, better known as The Walkie-Talkie.
The only fear now surrounding overseas investors is that the Chinese government will clamp down on speculation by Chinese companies abroad, but agents insist that this will only shift the emphasis on to other buyers tempted by Britain’s weak exchange rate. In fact, while some mainland Chinese investors have cooled their interest, Hong Kong buyers have largely replaced them as London buyers.
In the residential sector, Britain’s housing shortage is fundamentally underpinning supply. UK listed house builders – after seeing their share prices plummet by 40% on the morning after the EU Referendum – have been among the strongest stock market performers ever since.
So much so that there is current widespread anger at the £100 million-plus bonus which the chief executive of Britain’s biggest house builder Persimmon has earned as part of a Long-Term Incentive Plan introduced in 2012. Fothergill notes that although house prices in London have drifted down slightly in the last year, the national performance continues to be strong. And, while the highly-regarded nationwide house price index sent tremors across the UK with a fall in December, prices rose again in January to calm homeowners’ nerves.
The biggest doubts surround Prime Central London, where Stamp Duty transaction tax rates of up to 15% have suffocated the market since late 2015 and seen volumes fall away. In London’s outer boroughs, however, activity remains strong, again driven by population growth and a shortage of new homes.
Build-to-rent is the new kid in town in UK property, with many people unable to raise the money in the short term to buy their own home. Modelled on US `multi-family’ living, with amenities geared to 20-30-somethings, the sector is seeing a boom in Britain. At money.cnn.com they note that new blocks built at outer London transport hubs are soaring across the capital, with the boom now spreading into regional cities like Manchester. There are some murmurs about over-supply, but for now investors and lenders are seeing solid, consistent returns.
The other sector which continues to perform well is student accommodation, where growing student numbers not only in London but across Britain’s big regional cities drive values and the performance of sector giants like Unite. Again in the wake of the EU Referendum there had been some worries that overseas student numbers would fall away, but the weakness of sterling has balanced this argument, with overseas students continuing to arrive in force.
The shock of 2016’s Referendum result has now worn off and most people in Britain are looking ahead to a future outside the European Union whether they voted for it or not. The prospect of a transitional deal with the EU has calmed nerves in recent weeks and for many in property the mood is improving as we head into 2018.
With Britain due to leave the European Union in March 2019, the mood has now switched to a more positive tone. There are fears that the second half of the year may see a cooling as people adopt a `wait and see’ approach, but overall the mood in UK property is more upbeat, with confidence recovering after 2016’s seismic shock.