It is worth remembering that Residential and commercial property are cyclical assets. ‘Cyclical’means they have their day, then they don’t, and so on. Take a comparison between the FTSE all share, money market cash and property since the last downturn in the market from 1990-2000. Who would have thought the cash account would have outperformed property by over 257%? The FTSE all share over the same period outperformed by 1309%.1 The next five years were very different with the FTSE taking a battering and property soaring.
I am hearing lots of noise relating to property taking ‘a year off’ and back with a vengeance next year. Apologies, but I cannot see that will happen. The reasons markets have spikes and lulls are the basics of fear and greed. Whatever the reason used to say they have ‘corrected’ themselves is little more than an excuse for dumping bad news. If any asset becomes attractive with enough noise and momentum, it surges beyond the point the elastic band is comfortable, and pings back…without exception.
Many people become trapped at the top end. I listened to some politician on question time last night blaming what has happened on the USA without any ridicule from the floor. It is almost like they believe it! Thankfully I found the remote control.
I won’t repeat a previous article but a number of key issues exist: According to the Organisation for Economic Co-operation and Development, UK mortgage debt was 126 per cent of gross domestic product at the end of 2006, against 104 per cent in the US; total UK household debt was 164 per cent of GDP, against 140 per cent in the US; and, not least, the UK’s ratio of household debt to GDP jumped by 50 percentage points between 2000 and 2006, while the US ratio rose by just 37 points over the same period.2
This was before the numbers bit into the economy and the pain in the US is widespread. The UK is always at the end of the US tail and the issues are hitting us here bang on time.
With every crisis, there follows a straight forward logical solution that doesn’t scare me in the slightest.
Crisis hits (whatever excuse is needed after an inappropriate surge in prices), followed by denial, marketing talk to keep it up, media noise to cover their bad reporting and use the excuse to dump the blame, acceptance by the public and in turn negative momentum and the view that the asset is now ‘bad’. The market turns to another asset and in a few years, after another bubble goes, it comes back again with slow acceptance as journalists don’t want to be that wrong again, followed by the inevitable surge. Simple.
The commercial property market will do the same but the pain comes with any double dip as prices fall, followed by an increase in supply (people sell, businesses go out of business). In turn, rents fall which means the asset price falls further.
I sat with the ex manager from the highly successful Aberdeen Property share and we were in agreement when he also pointed out that the derivatives market (where you can buy a future price on an asset) has priced in a further 13% fall in commercial property.
As with every pain there is also the potential for gain but it won’t be in the purchase of the actual fixed assets, it will be in the companies that own property. Shares in such companies fall further than the assets they hold until there is a natural bottom in the market until it’s realised, and there is typically a surge back into the market. That’s a nice surge to be in. We are a little way off what I would call a natural bottom but 10-15% from now would be perfect.
For a fact sheet on the better property share funds call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our section on Investment.
Sources:
1Lipper
2OECD
The value of shares and investments can go down as well as up
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