Do you believe we are at the bottom of the property investment market?
For the sake of clarity, there are three sectors we are referring to: Residential and commercial property and property shares. The answer to all three is no, but the one closest to an upturn is property shares.
It’s been some time since the first two have represented any value over cash and as such we have had them as a sell for over two years.
Enough has been said about residential property and I won’t go over old ground, but all my previous comments remain intact and you can expect continued downturn for a few years before we hit bottom.
Commercial property also has a potential for double dip falls. We have had considerable falls in any event, and with valuers valuing property on the basis of the quality of the tenant rather than capital value, added to the tightening of the credit market, the price can only go one way.
If we move further into the recessionary world that we already have, offices and retails are going to become more and more available. Demand will fall, and as a consequence, with an increase in supply (empty properties), rents will be under pressure to decrease which in turn creates the double dip in the capital values.
It seems the government are happier to focus externally on inflation than locally on the worsening domestic situation, so you can probably expect the above to occur as companies are choked to death by rising costs, high borrowing and plummeting consumer confidence.
Property shares are normally the first to bounce back and as an asset they are easy to get in and out of. They key will be a return to confidence and a view that the bad news is all on the table. I don’t believe we are there yet, but when it happens the bounce is significant and we can expect the large vulture funds to play their part.
There are large amounts of cash waiting, and given the lack of buying in many good key property companies, one can only assume they see what I see and what the media talking the sector back up again don’t see.
In June, the IPD derivatives market (a future value of property using future expected pricing) priced in another fall of 10%. Somewhere around here, there could be real value in property shares and at this point we may expect the herd to return. Let’s see.
One of the strong indicators will be the actions of the government as they close in on an election. Clearly now is a sure fire loss if they went for it, but most expect the next election to be in May 2010. If this is the case, much of what is being talked about today will have its full impact in approximately 18 months time as this is how long financial decisions typically take to make their way through the economy.
If that’s true, November this year is when we will begin to see changes to fiscal policies.
Let’s not forget that many of the large property shares are currently trading at large discounts to their net asset value with Hammerson at 42%, BL at 43%, Brixton estates at 51%, Segro at 42%, and all have with well covered dividend yields of 5-6%.(1)
Property shares are generally considered to be interest rate sensitive. Five year SWAP rates are currently extending outwards to 5.75% and with that in mind you can see why the general investor is ignoring why these property shares may well be good value today.(1)
If our greedy commodity investors get burned and that bubble bursts, the inflationary pressure from oil and food will disappear, followed by pressure easing off interest rates and in turn property shares looking much more attractive. The signs are there so keep a close eye.
The value of shares and investments can go down as well as up