Property Bulletin - A Briefing For Investors, Developers, Surveyors And Other Professionals In The Property Sector, October 2008

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


"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 the

credit crunch, which is restricting lending, would last well into

2010. There are no dissenting voices among our


Nick continued, "The Government has belatedly announced

measures to assist the UK real estate sector, including raising the

stamp duty land tax (SDLT) threshold and buying houses at knockdown

prices from builders through the Homes and Communities Agency.

However, the Government's proposals have been widely criticised

for being woefully inadequate. Gordon Brown and Alistair Darling

may have done enough to save the banks but they certainly did it

too late. We hope they can find some more time for real estate


Confidence in the commercial property sector has also dropped

dramatically in the last two years. In 2006, 91% responded that

they were reasonably or very confident, in 2007 this percentage

declined to 58%, and this year only 18% have said that they are

reasonably confident.

This year, not a single respondent said they are 'very

confident' about the outlook for either residential or

commercial property (figure 3).

Meanwhile, the tables have turned for house builders and

registered providers (RPs) ? previously known as

registered social landlords. Those RPs with strong balance sheets

are now in the unusual position of being able to strike hard

bargains with house builders anxious to do deals wherever


Furthermore, the number of newbuilds has fallen even further

behind the Government's targets, which begs the question of who

is going to fund the desired increase in housing stock. Seasoned

observers have noted that this under-supply is sowing the seeds of

the next speculative boom. Accordingly, how the Government supports

affordable housing now could be crucial for the UK residential

property market for years to come.

Nick commented, "The UK real estate sector, along with the

rest of the economy, is in a downturn. This, despite the compulsion

to lend enshrined in the banks' rescue package, is unlikely to

have reversed by the time our next property survey results come out

and, in reality, the most we can expect by the autumn of 2009 is a

few green buds of recovery."

Financial and tax issues

Tax continues to have a greater influence on business decisions

than is desirable and frequently acts as a barrier to property

transactions. This year, 88% of respondents reported that tax

influences their decision on whether to sell a property or not.

Last year the equivalent figure was 93% (figure 4).

"This slight decline may be due to market conditions

reducing the importance of tax on profits," Nick commented.

The Brown-Darling partnership has significantly complicated

property taxation and it remains to be seen whether they will come

up with any meaningful provisions to assist the ailing UK property

market directly in its hour of need.

"An indication of just how out of step the Treasury was

with the realities of the property market is the abolition of empty

property rates relief, which has led companies to demolish

buildings rather than suffer the tax. By doing away with this

relief, the Government expected to raise in the order of £1bn

per annum from the property sector, which is approximately the

amount it is proposing to put back in as part of its initial

'rescue plan'."

Our survey also reveals that the community infrastructure levy


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