Where From Here?

"Where do the property markets go from here?" was the topic of discussion at the LAI London Chapter luncheon, November 20, 2008, presented by guest speaker Ed Stansfield, head of property research at Capital Economics, an independent macroeconomics research consultancy based in London.

If it hadn’t been for the good company and excellent food, our Lunch on 20th November would have been a depressing affair. Our President had chosen for our speaker one of the more bearish commentators, and Ed did not disappoint!

His answer to the question set was simple: down -– considerably down. Our commercial property market has fallen an average of 30% and he could see this extending to 40/45% in fairly short order, where it would remain for 2 years or more. Residential will be no better; he pointed out that the earnings/house price ratio still remains high by historical standards and he argued for a further fall of 20% before a floor might be found.

Unfortunately, as well as bringing such a depressing message, Ed was able to convey his views with demonstrable skill and logical support; few would have left unconvinced.

The core of Ed’s rationale lay in his, now universally held, belief that the world, and particularly the UK and US are faced with a deep and extended recession. In response to a question, he suggested that the Euro-zone problems may be less, but he was sceptical of their ability to agree on and organise effective and timely counter-measures, thus making a manageable crisis worse than it need be. In a bid to limit the degree of recession, central bank interest rates could well be brought down close to zero, but Ed argued that this may have only a limited effect. Whilst the banking crisis may have been contained for the present, he thinks that further failures remain more likely than not. Whilst that is the case, the appetite for lending by banks will be very constrained and low central bank lending rates will not transfer to the real world. Further, the prudential barriers to lending will remain high. On the other side of the equation, the appetite of businesses to borrow will be pretty weak. Tumbling profit (?) margins will threaten business viability and discourage new investment. There are bound to be extensive worker lay-offs (perhaps 3.3m unemployed in the UK). Ed therefore painted a gloomy downward economic spiral as a virtual certainty.

This basic scenario had inevitable financial investment consequences. Equity dividends would be extensively threatened, making a mockery of backward-measured dividend yields. In a similar manner, effective economic demand for commercial property will evaporate across the board, if it has not already done so. He argued for falls of around 25% in rental values. Such a view of rents would undermine any view that property yields looked cheap compared to Government bonds of 3%, or perhaps less. Ed argued that this depressing property picture would extend across sectors and geography; there will be no safe niches!

On BBC TV there is a brilliant, but gloomy, current dramatisation of Little Dorritt. Ed would have fitted in well, save that he offered no Amie to make things right. However, he did just manage to squeeze out three positive thoughts. He had kind economic words for Finland andGreece. He doubted if the UK Government’s likely borrowing and spending spree would be inflationary even in the long term; any borrowing would be a tiny proportion of the wealth destroyed. And, when asked how we would repay those debts, he reminded us that, although the reputation of many parts of the City was in tatters, the UK offered wider and still valuable financial skills.

Michael Mallinson, Scribe