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
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 the
credit crunch, which is restricting lending, would last well into
2010. There are no dissenting voices among our
respondents."
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
soon."
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
possible.
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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