Nov 08 - What will be the most powerful influence on pricing?
Property prices have fallen steadily since the middle of last year but in recent weeks we have seen pricing moving out more rapidly than ever. Whilst the CBRE monthly index reports a 4.6% drop in values in October alone and 17.6% over the year to date, the situation is perhaps more severe as buyers assess the combined effects of the credit freeze and the recession.
However the recent efforts of major governments on a global scale to underpin the financial position of the banks may see some liquidity starting to flow through the system.
Earlier this month the Bank of England reduced base rates from 4.50% to 3.00% and LIBOR continues its steady downward trend down to 3.99% at the time of writing. One analyst suggests that banks may hold on to their cash so that they can demonstrate cash reserves at the year end, then resume lending in January. This could see 3 month LIBOR move back towards its traditional alignment with base rate. (But how much difference does it make? Someone ventured recently that LIBOR is the rate at which banks currently won't lend to each other!).
With SWAP rates also at very attractive rates (3.32% for 2 year SWAPs), surely even high lending margins make current pricing seem like good value. Whilst some vendors appear wedded to yesterday's pricing there are sufficient well priced deals - and also a few ready buyers - to give us a market place, albeit a thin one.
Indeed perhaps we can envisage that with a freeing up of the liquidity paralysis, and a return to lending from a few more Banks, prices paid for property investments may again harden. Is this the window of opportunity for those seeking to buy at the bottom of the market?
Ongoing economic recession could well take its toll on rental levels, occupier demand and void levels. It is critical that the appraisal of any opportunity factors in realistic assumptions on voids and rental levels. Many rents will fall back, but we are also aware of a small number of "hotspots" where we feel rents will not only hold firm, but may also move forward in the short term. Examples include Righead (left) in Bellshill on the crossroads of the Scottish roads network, where we feel industrial / distribution rents are too low.
If these robust rents can be combined with an historically high yielding entry price, then the prospects are very good for some excellent investment performance in the medium term.
So, there could be a sort of tug-of-war on pricing emerging in the New Year. On the one hand lower borrowing costs, increased availability of debt can offer investors a significant margin. On the other hand an economic recession will hit returns through increasing voids and falling net income levels. If the former influence comes out on top then perhaps we are very close to the bottom of the market.
Righead Industrial Estate, Bellshill