If you’re thinking of jumping on the property bandwagon, don’t – you’re too late
Forget the residential housing market, the real excitement over the last six years has been in the commercial property market: offices, shops and retail parks. In that time, the FTSE real estate index has delivered total shareholder return – that’s dividends plus capital increases – of 210%, compared to a paltry 10% for the wider stockmarket. That’s been great news for people who own shares in companies such as Land Securities, British Land and Hammerson.
But following last week’s jitters in the global markets, it’s time to take money off the table. Higher inflation will lead to higher interest rates – and that’s bad news for property. Commercial property is valued on its rental yield and historically yields have tended to track ten-year gilt yields. But recently, that link has been broken. Gilt yields have started to pick up, but property yields have continued to fall. That’s left property looking expensive.
If property is tracking anything these days, it is emerging market shares, according to Morgan Stanley. That’s worrying, since it suggests valuations are being driven by the huge amount of hot money sloshing around the financial system. That makes the sector more vulnerable to a sudden change in investor mood. Nobody should rely on so-called “yield compression” to keep driving prices higher.
So what does this mean for property shares? True, yield compression is not the only thing driving the sector. Over the last year, rents have finally started to pick up after several years in the doldrums, driven by faster economic growth and a shortage of space. Hammerson recently leased office space in the City at £55 per square foot – the highest price since the late 1980s boom. Land Securities this week reported office rents in central London up 9% and retail rents up nationally about 4%. That gives some support to property prices. Some companies will also get a boost from their big new developments, with work started on several new City skyscrapers this year.
But that won’t be enough to drive another stellar year for property shares. The sector traditionally trades at about a 20% discount to net asset value – and it’s not that long since it traded at a 40% discount. Yet today, it stands at a premium. All the good news now looks to be in the price. That includes the introduction next year of real estate investment trusts (reits), which will give property groups juicy new tax breaks. The day Hammerson announced it would convert to reit status, its shares rose just 1.6%.
The Government hopes that reits will encourage more of us to invest in commercial property. My advice is to resist the temptation.
Can nuclear solve Britain’s energy problems?
Tony Blair has finally said what we knew all along: that he plans to give the green light to a new generation of nuclear power stations. We’ll see. He’s said a lot of things over the last nine years – often the same things over again – and we’re still waiting to see the results. And on energy policy, his track record is particularly patchy.
Take the Government’s announcement this week of new guidelines to encourage the building of new gas-storage sites. Too little, too late. The industry has warned for years that Britain urgently needs new storage as we increasingly rely on imported gas. But companies like Star Energy have been bogged down for years in planning rows.
That’s why we only have capacity to store 3.6% of our annual needs, compared with over 20% in Germany and France. And as a result, many firms had their supplies interrupted last winter and Ofgem is warning the situation will be worse next winter. But even if all eight sites currently seeking planning permission go ahead, Britain’s storage capacity would only rise to 16% by 2010. That’s totally inadequate, given we’re more dependent on gas than other industrialised countries.
If it’s taken the Government this long to grasp the nettle on gas storage, what hope for new nuclear power stations? The planning enquiry for Britain’s last nuclear-power station, Sizewell B, went on for six years. At the very least, the industry will want a streamlined planning procedure as well as clarity on nuclear waste, decommissioning and electricity prices. That sounds like a job for a prime minister at the top of his game. Not one on his last legs.
Portugal’s answer to pension crisis
Portugal is to let families with more than two children make lower pension contributions. The aim is to encourage people to have more children in an effort to avert a pensions crisis as a result of a falling birth rate. I like this idea. On current trends, the number of 65-year-olds in Portugal will triple in the next 30 years. Other countries are trying similar policies. France offers tax breaks and cash incentives to encourage people to have children and one town in Italy is even offering e10,000 per newborn baby. But in Britain, aside from some measly benefits, our main response to the demographic crisis has been to open our borders to mass immigration. In the current political climate, this is no longer good enough. How about transferable tax allowances for families? Now that would offer parents a real break.