In this article, Oliver Spero, Investment Director at Hartnell Taylor Cook, cuts through the noise to examine where the UK property and investment markets genuinely stand today. From interest rates and inflation to debt availability, investor appetite and shifting capital flows, Spero explores why prediction is less useful than perspective, and why cautious optimism, paired with decisive action, may be the most valuable strategy of all as the year unfolds.
It is now just common parlance to describe the investment market in terms of great storms – whether that be turbulent, rocky, or otherwise. Though useful descriptors, it is important not to get too ahead of ourselves and put out extreme weather warnings before they are due. There are things to hope for and to work with; we just need to be adequately agile and aware to stay calm and ward off chaos.
There is little use and sense in making predictions to live by and transact by. Rather, weighing up where things do and might lie will prove a more helpful gauge as we set out to navigate the next year. Now a few months out of the Budget and with interest rates cut by 25 basis points, as voted at the last MPC meeting, what everyone is asking is whether this will positive reflect in the market over the long term. The issue is, everything could change again come the next meeting, as rates are dependent on what inflation is doing. This sees us always bound to a cycle of watching, waiting and responding, which means no consistent bullet-proof armour can be designed to protect the market. So, what can we be attentive to?
Getting the market going
Stimulating the market is a priority, heading up the to-do lists of everyone concerned, and the banks are largely agreed to be the stimulant in question. Now rates have fallen, confidence has gone up, but this status quo is never the case ad infinitum – things can change overnight. More than this, though, is the fact that the debt market is locked to valuations and the reliability of cash flow. To reach renewed liquidity, we’ll need trust in asset valuations and debt transparency. And as we progress into the year, we’ve seen some early signs of a renewed appetite for lending.
We are also dealing with higher returns and lower pricing as a result of raised buyer equity requirements, though we also need to be mindful of the need to balance this with realistic expectations on the part of vendors. Areas of the market are reasonably seen as dark spots, given the struggle of attaining debt. Where the £7-12 million single let market is above the usual private lot size but below that of the institution’s, and at the same time too dry for any asset managers, is a good example of one of these shadowy zones. This renewed, albeit embryonic, debt market should also see these core assets come back in vogue.
Striking the balance
Returning briefly to the question of inflation, this is likely to be stickier as we handle higher business rates and minimum wage increases, though arguably the former may undergo some imminent changes that provide some relief, as we’ve now seen with part of the hospitality sector. But ultimately, there has to be, yet again, balance. This time, it’s a balance between inflation and interest rates. If you get this right, you get growth. Rate cuts have a bigger impact on growth than they do the stickier inflation we have at the moment, which is also something to bear in mind.
From a recent conversation I had with a fund manager, it became very clear that there is, simply put, a lack of core money for real estate – there is, of course, a strong pool of operational assets and residential development, but the core money pool is shallow to say the least. Where once real estate was seen as a “bond-esque” investment, this attraction has now diminished. Conversely, “equities style” returns are still attractive. As per the debt-based ‘recovery’, if the bond-style buyers returned, the market would simply follow.
The nostalgia factor
The market and any overseas buyers within it may well be nostalgic for the time when passive investors roamed in abundance, with a lower borrowing rate and drier opportunities. The thing is, unless the yield is attractive, these passive investors are now few and far between. What’s more, the market thins dramatically when a lease event extends beyond the three-year mark. But the UK is now viewed less favourably by those who used to be keen on this part of the market. The hope, however, is that lower interest rates or bond yields will trigger a comeback for drier assets, which occurs via those who were once keen – namely, Far Eastern, Middle Eastern and South African buyers.
To focus on the positives, the asset management-driven sector of the market is popular. Equity is coming in from America, which is seeking equity returns on offer, and the multi-let industrial and prime to super-prime office market, in many cases, not just maintaining but gaining ground, respectively. There are also new entrants to the market: family offices, who are looking to profit from these equity-like returns.
Perfection as distraction
Shortened transaction times would be welcome this year, as we are now used to even well-prepared sales dragging on. High due diligence and regulation have elongated timeframes, with transactions therefore only feeling tougher and being of no help to the industry. We need to do away with stagnation, and that requires we let go of striving for perfection in every instance. Instead, we should understand that every asset is unique and viewed differently, too. This could help us get away from the current timescales we call standard, but at the same time, it does make one wonder whether the use of AI, blockchain and digital units is just an inevitability.
It is easy to forget that when deal volumes go down and the market feels on pause, that actually the fundamentals of health are still there. Being cautiously optimistic is a good thing, then. But at the same time, there is an urgent need to be a risk taker – to be blunt, there is no point in taking an asset or the money you have to invest to your grave. If we want a changed market, pressure needs to be built on the buy or sell side, because sticking is simply not going to cut it, and it is certainly not a strategy.
Oliver Spero, Investment Director at Hartnell Taylor Cook