Confidence Crumbles - Smith & Williamson's Sixth Annual Property Survey

Focusing on economic, regulatory and environmental

issues, our sixth annual property survey reflects the current

pessimism in the UK real estate market.

Conducted a year after the credit crunch began, our annual

survey of confidence and business issues highlights the dire state

of the UK economy. We surveyed over 180 senior decision makers

representing the views of investors, traders and developers,

surveyors, architects, lawyers and other professionals in the

property industry.

The economy matters

Unsurprisingly, our respondents reported that UK economic

performance is by far and away the most significant issue facing

them. 93% said that it is one of the five most important issues

facing the property industry, and 60% of those believe it to be the

single most important issue. Given that economic growth is expected

to be flat to negative for the foreseeable future, this cannot be

good news.

Just behind UK economic performance, the next biggest issue

facing the property world is the ability to raise finance. Over a

third (37%) of respondents said their businesses will be

constrained in the next 12 months due to lack of finance. The

percentage of those looking to raise finance in the next 12 months

has decreased slightly (from 42% in 2007 to 39% in 2008). Of those

looking to raise finance, the majority regard clearing banks as the

best source (figure 1).

In our experience, property businesses sitting on the sidelines

holding cash are not yet willing to move back into the market.

Sovereign and BRIC funds are likely to be in a position to become

active in the market before others are ready or able to return.

Most commentators believe a market turn is some way off.

"Worryingly, almost all of this year's respondents who

intended to raise finance saw the banks as their primary source at

the time of the survey. At Smith & Williamson, we have seen

some bank lenders opening up for business again but on a tentative

and very different basis in terms of gearing, rates and valuations.

Banks are understandably uneasy that valuations are now coming in

with disclaimers due to market uncertainty, which is indicative of

the fragile nature of the market and the loss of appetite for risk.

Until economic conditions and the banks' own balance sheets

have improved, many banks cannot lend on property ventures as,

frankly, they need the cash themselves," said Nick Cartwright,

chair of Smith & Williamson's Property Group.

Confidence crumbles

Our survey confirms a widespread and growing lack of confidence

in both the commercial and residential property sectors. A telling

development in the property world is the number of property agents

setting up insolvency business. Recent movers Cluttons have

followed in the footsteps of Lambert Smith Hampton, CB Richard

Ellis and DTZ.

The residential sector is particularly pessimistic, with those

who are reasonably or very confident dropping from 86% in 2006, to

48% in 2007 and just 7% this year (figure 2).

"Market volatility means that it's a very challenging

environment in which to undertake development projects that can

take several years to complete. Many developers are not yet able to

get projects off the drawing board," explained Nick

Cartwright.

"Graham Beale of Nationwide has said that house prices

might end up falling by as much as 25% from their peak in the

autumn of 2007 and Andy Hornby of HBOS has predicted that...