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Buy commercial property, the City folk said.
Commercial property’s a sure thing. Rents can only ever go up the way, after all. And London is the centre of the Universe. Everyone wants to live and work here. We’ve got financial acumen, great culture, fantastic restaurants, and a congestion charge that keeps poor people from clogging up the roads with their squalid little white vans and cheap cars.
How could demand ever fall?
Well, we all know now that the London bubble was yet another offshoot of the credit bubble. And now that it’s popped, the property market for both business and leisure just isn’t looking such a sure thing anymore…
Demand for commercial property fell at its fastest since 1998 during the second quarter of the year, reports the Royal Institution of Chartered Surveyors (Rics). A full 50% more surveyors said they saw demand falling rather than rising, down from 31% in the first three months of the year.
Rics’ chief economist, Simon Rubinsohn, said it was “the sheer negativity” of the survey that struck him. The idea that tenant demand is now falling, as well as investment demand is the worrying aspect. “There are no positives out there right now,” he told The Telegraph.
On top of this, retailers in particular – where the market and demand are at its weakest – are starting to get bolshy. According to weekend press reports, big players including Boots, Argos, and Sir Philip Green’s Arcadia empire, are getting together to try to put an end to the practice of paying quarterly rental payments in advance. They’d rather pay monthly.
The big commercial landlords of course won’t like this. Getting that kind of money up front is a valuable safety precaution in a downturn. And the retailers have signed contracts after all. One told The Sunday Times that “the idea that we will roll over and let our tummies be tickled is way off target.”
But from a retailer’s point of view, having to pay that money upfront is a lethal threat to cashflow during a downturn. And the reality is that of all the types of commercial property out there, retail is arguably the most vulnerable to both the downturn and to structural changes in the retail market. Why keep all those expensive high street shops open at all when consumers have demonstrated that they are more than happy to shop for most things online?
Whoever wins this little spat, the pressure on both sides is going to continue. Britain is starting to wake up to the fact that we are facing much harder times. Until a couple of weeks ago, those of us forecasting a recession were still very much in the minority. Now recession seems to be the base case for a large number of commentators.
The Ernst & Young Item Club for example, reckons that unemployment will climb to two million. While the group believes that Britain will narrowly avoid a recession next year, its latest report is the gloomiest for a long time.
This of course is also bad news for the other property market – the one that most people really worry about. According to RightMove, even asking prices have now finally started to fall year-on-year. The typical asking price has fallen by 2% on last year, apparently.
Of course, the property bulls are still trying to find ways to ‘accentuate the positive’. The latest wheeze is to suggest that renting is a boom industry. The Association of Residential Letting Agents (Arla) and National Federation of Property Professionals recently commissioned some research which – surprise, surprise – found that rental prices will grow by 10-15% a year during 2008 and 2009.
However, as David Smith notes in The Sunday Times property section, this is assuming that there isn’t a “sharp recession.” That’s a big ‘if’. We’re looking at a future where jobs are under threat, living expenses are rising, and disposable incomes are flat or falling. So where is the money going to come from to pay for these stupendous hikes in rental prices that will keep landlords in clover while the rest of us go under?
And as Kathryn Cooper pointed out in last week’s Sunday Times, estate agents in Canary Wharf are already knocking back new lettings instructions. What the bulls conveniently forget is that as well as rising demand for properties to rent, there’s a corresponding rise in people trying to rent out homes that they simply can’t sell.
What to do? If you have a property to sell, drop your price and get on with selling it. And if you’re still invested in commercial property funds – don’t expect things to get much better any time soon.
Turning to the wider markets…
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UK shares bounced another 1.7% as the FTSE 100 index gained 90 points to 5,376, registering a 2.2% net rise over the week and a 6% recovery from the intraday low last Tuesday. Banks were in the forefront, with Barclays, Lloyds TSB and Royal Bank of Scotland all up 10% and HBOS climbing 5%, though Bradford & Bingley dropped almost 4% after disclosing a sharp rise in arrears for July. Resource stocks suffered as oil and metal prices eased over Chinese demand worries, with ENRC sliding 6% and Ferrexpo down 8%. Reflecting the market rally, London Stock Exchange picked up 10%.
European markets also did well, with the German Xetra Dax and the French CAC 40 both gaining 1.7% to 6,383 and 4,299 respectively.
US stocks broadly managed to maintain their rally after Citigroup announced better-than-expected results, with the Dow Jones Industrial Average advancing 50 points, 0.4%, to 11,497. The wider S&P 500 was flat at 1261, but the tech-heavy Nasdaq Composite lost 1.3% to 2,283.
Overnight the Japanese market was closed for the Ocean day national holiday but in Hong Kong the Hang Seng jumped 3.2% to 22,569.
Brent spot was trading this morning down at $129, while spot gold was at $960. Silver was trading at $18.25 and Platinum was at $1872.
In the forex markets this morning, sterling was trading against the US dollar at 1.9920 and against the euro at 1.2560. The dollar was trading at 0.6306 against the euro and 106.68 against the Japanese yen.
And this morning, the UK’s biggest mortgage lender HBoS has confirmed that its rights issue has been among the most disastrous in UK history. It managed to sell a mere 8% of the stock on offer in its rights issue. The issue was fully underwritten, so the bank has received its £4bn, but it leaves the underwriters Morgan Stanley and Dresdner Kleinwort lumbered with 1.38bn shares. Needless to say, that raises the question of how willing underwriters will be to fund any future capital raisings.
Our recommended article for today:
Why we must learn from history
Today’s credit crunch will have come as no surprise to students of economic history. And history says if things are to get better, we must relieve debt first – and that may take some time