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Aistair Russell, Investment Director of Dunlop Heywood calls the bottom of the property investment market

wantspacegotspace.co.uk - Aistair Russell, Investment Director of Dunlop Heywood calls the bottom of the property investment marketThe UK property investment market is currently experiencing very sharp internal differences in activity and pricing. The reasons behind this are complex, but include the old cliché of the “north/south” divide where in times of market recession the south, with the economic driver of London, fairs better.

In property terms, a market in recession displays rents falling as occupational demand weakens; and yields rising reflecting the investors’ perception of increasing risk (rents falling and tenant failures). The gap between the top and bottom quartile yields can therefore be used an indicator of the spread between prime and secondary yields.

That gap has never been greater in recent times.

This polarisation is further reinforced by the sources and characteristics of investment demand. The market is dominated by equity-based investors seeking security of income. Availability of credit for property investment remains limited with reducing players in that sector and those that are prepared to participate, lending only on secure assets. This lack of liquidity in the market adds to the outward re-pricing of secondary property.

A further factor that adds to the north /south divide is the attraction from overseas investors to the liquidity and perceived safe haven of London market, which continues to attract the largest share of international capital flows into the UK

Doom and Gloom or a "Once in a Lifetime Opportunity"

Looking at these factors it goes a long way to explaining the prime-secondary yield gap in the UK property markets and the "north/south" divide that exists between the regions and London. The question is, “is this it" or will we follow the trends of economic cycles in the past with the gap between prime v secondary; and north v south, closing as we move out of recession.  

So what are the factors that will influence the future?

•    Investors perception of opportunity. The market has over reacted and relative pricing is wrong. Secondary property (as defined by location or asset type/quality) is cheap. Investors start to look at the regions and see the opportunity that the differential is too great. The market has over reacted on the way down. Buy at the bottom of the cycle.

•    A change in debt markets to produce greater availability of finance for property investment to include the regional markets and higher risk assets.

•    The ultimate driver is, of course, the economy as the trigger to reduce the polarisation between prime and secondary property, and the north/south divide. A narrowing in yield spreads will take place with economic growth and the confidence that will bring to UK Plc to step up occupational demand for commercial property.

Alistair Russell explains

"Unless you believe we are doomed, at some point the market will come back. Despite the current economic problems we face, such as the euro zone crisis and the deficit, the world is still turning and UK Plc is getting on with facing the daily challenges of business. The challenges that have been faced by countless generations before us.

Occupational demand is down, but not gone. Bank lending is constrained, but not over. Investors want to invest in property seeking it's qualities of high income returns and growth opportunities. The doubt is the timing. No one wants to buy to find it is worth less in 6 months time.

BUT at some point we will look back and with the accuracy of hindsight point to the bottom of the market. Today supply is constrained with limited development, but development costs will continue to rise; so rents have to go up at some point. The current yield spread between prime and secondary, or north and south shows relatively good value in our market.

Investors who have confidence in the prospects of economic recovery may see the present yield spreads on secondary property in the UK as a major opportunity. My sense of it is that we will look back in two years and see the present as being the opportunity which we either took or missed. Our markets are undervalued.

We have in our markets major drivers of the UK economy, namely the cities, towns, people and businesses in our region. We need to have confidence in ourselves plus we will have a general election in 2015 which Mr Cameron will want to win. I think we will look back and see 2013/2014 as the years of opportunity and fortune favouring the brave.

I think we are at the bottom of the market. We may even be on the way up. Although I appreciate it doesn’t feel like it......yet!"

Posted by The Editor (wantspacegotspace) on 8th March 2013 (updated 15/03/2013)

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