I read your article on house prices last week with interest and wondered if you had a view on regional and rural areas as opposed to the overall market as a whole. Could you also give me your view on commercial property funds post their announcement to impose an exit penalty?
There are clearly differences in the market depending on whether you are dealing with a major city or a rural area. The impact will naturally have an effect depending on how the drivers of supply and demand are dealt with.
One of the major issues with rural housing however, is the fact that house prices tend to increase more than wages to a much greater extent than the urban counterpart.
Whilst the average UK house is valued at near seven times earnings (1), Carrick in Cornwall is over ten times earnings and is deemed the least affordable rural area in the UK.
In any market downturn this will have a greater impact as affordability will naturally affect demand. For those who have overstretched there is the sad fact they may lose their property and add to the supply. Excessive supply and low demand leads to only one thing.
Urban areas are less affected in that employees need to live close to the city to work so demand is maintained to a higher level.
A rural area that is a high retirement destination is also less affected due to an ongoing consistent demand.
A common (and misleading) point that is made is that there is a shortage of housing and that demand will always be there. It is not that there is a shortage of housing; it’s a shortage of affordable housing that’s the real issue. How else can you explain the fact that a number of new builds are struggling to offload whilst we apparently have numerous people who still need property?
Another factor to consider, however, is the monetary policy committee’s stance on inflation. Whilst the target is clearly a 1% variance on 2% inflation, it seems they have forgotten this and are solely focused on a 2% target. Their view is that consumers will become used to inflation over 2% and are taking a strong stance to drag it below this figure. It’s well documented that inflation is cooling and it seems peculiar that they don’t wait to see the rate rises having their true effect but their aggressive stance is sure to have an effect on spending and the economy. Those with a job that is under pressure due to cost cutting may consider insuring themselves now before they become under pressure.
As for the commercial property funds… It was over a year ago I advised they shouldn’t be purchased given the fact the potential for return over and above cash was non existent. It didn’t stop the launch of real estate investment trusts or the abundance of new property funds however.
As is well documented the slide began over a month ago with the canny institutional investor believing they have had their best returns, selling out, and moving to a different investment sector.
The fund managers saw this and moved to protect themselves in whatever way they could, most notably by hitting those exiting with a hefty penalty.
Some of the largest penalties were nearly 7% with Axa in their life and pension funds with standard life slapping a 6.7% exit charge. (2) This follows suit with Prudential, Norwich union and New star who have all applied a penalty varying from 2 – 4.2%.
As they are having a net outflow of cash, the funds simply change the pricing of their units to a minimum valuation basis. It is standard practise amongst managers but rarely have I met an investor who understood it and its potential. The simple reason is to stem outflows and to avoid the inevitable where they have to begin selling properties which would be disastrous. Already many of the funds have a net outflow of cash rather than inflow. If this continues the potential for loss increases further.
For advice on a property fund you own call 0800 0112825 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
(1) bbc website http://news.bbc.co.uk/1/hi/uk/6963270.stm
(2) Sesame research bulletin R07-052
The value of shares and investments can go down as well as up
Follow us on Twitter
Become a fan on Facebook
Subscribe to the RSS Feed