Property still sound despite credit crunch

Jan 9 2008 by Graeme King, The Journal

BATTEN down the hatches, were the words of a respected property investor I spoke to in early September last year as he jumped out of his Land Rover and excitedly showed me around his new office and industrial scheme in rural North Yorkshire.

I had a feeling he wasn’t referring to the hurricane about to hit the North-East coast, but what the property market had in store for us all.

As a newly qualified chartered surveyor, 2007 was a rollercoaster of a year. The fall in investment yields, and the subsequent rise in capital values over the past 10 years is at an end. A true reflection of this is evident in recent auction results.

HSBC Bank sold properties in Whitley Bay, Alnwick and South Shields on a sale and lease back basis. The sales reflected initial yields of 5.4%, 5.3% and 6.24%.

As a comparison, Barclays Bank sold properties in Gateshead, Durham and Seaham a little over nine months ago on similar lease terms. The sales reflected initial yields of 4.46%, 3.63% and 4.55%.

While a correction had been forecast for some time, very few would have predicted the velocity or impact at which it would shudder the property market. The growth of CMBS (Commercial Mortgaged Backed Securities) and banks striving to lower their costs of capital to remain competitive in the property loan market, has ultimately contributed to the tightening of debt and reluctance to lend.

Despite the 2007 credit crunch hangover, the fundamentals of the economy, economic growth and employment growth which create demand for property look sound. The true extent of the credit crunch is slowly filtering through, as banks report their annual figures. While most have reported losses the extent of which was certainly not in line with what some had first feared.

Some have already called the bottom of the market, Schroders believe the £700bn market will have lost about 12% of its value between September and the New Year, but expects no further fall in values after that due to the strong occupational demand across the country.

With economic growth and inflation remaining under control and the bank base rate forecast to fall further, commercial property remains a good investment. In my first year as a qualified surveyor the investment market witnessed price reductions for the first time in a decade. Very few would have predicted the last five months but with a new year, brings a fresh market and new opportunities. Some experts predict further falls while some see a good buying opportunity and you can’t help but take notice of the some of the personalities involved in the new opportunistic funds which have been set up to capitalise on the drop in values.

Personally I foresee a slow start to the year which will improve in Quarter 3 and 4 once the correction has reached a plateau.

James Thompson is a surveyor in the investment department of King Sturge in Newcastle.

PAGE TWO: Predicting what will happen in the office sector proves risky