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The property market has peaked and prices are on their way down.
This is official. Nicholas Pine has declared that the market has topped, based on widespread evidence over the past two months. This is not necessarily bad news, although it is if you are trying to sell and get out at the top. Very few people are able to sell within the last 10% of the market, most people once they realise the top has arrived put their property on the market too late, miss the peak and end up taking less. Such is life. It was ever thus and ever will be.
But if you have owned property for more than one year you will be showing a substantial profit and if you don’t need to sell then don’t. If you are earning a decent income or even if you break even (or make a slight loss), hold onto your property. Sit tight and eventually the market will turn upwards allowing you to make money again.
So, what is happening, and what sectors of the market is it affecting? Well, the worst fall is in secondary retail; so let’s take a look at that.
In the first half of this year, the prices being paid at auction and through agents for secondary shops, shopping centres and industrial units have dropped by approximately 10%. These exclude absolute prime property in the very best streets or newly built, which are bought by pension funds etc. on small yields. No, it is the prices being paid for secondary retail. Unglamorous shops away from the main streets have slumped and are likely to continue doing so in 2008, 2009 and 2010. Investment property is valued on the basis of its yield. On prime retail this had dropped to 4.5%; it has now gone out to 5%, indicating price falls of some 10%. I predict that the yields will go out by another full 1%, indicating a further price fall of 20%. Secondary shops sold at a 10% yield ten years ago. This has dropped to 6%–7% and I predict will go to 8%–9%.
We have seen the base rate rise to 5.75%, and it is likely to rise to 6% shortly. The percentage of properties selling at auction remains the same, high, but auctioneers have been able to make vendors see sense and lower their reserves. After all, auctioneers are not worried about how much a property sells for: all they want to make is a sale. In this respect, auctioneers and vendors have opposite interests in a sale, and this should always be remembered. The same applies to estate agents. As soon as you instruct an agent to sell your house at any particular price, they are working against you: all they want to do is sell the house; they are not interested in the highest price unless you agree the type of commission terms, which I do, which are to pay 1.25% on 90% of the price and 10% on the last 10%. This should be on the 10% above the projected sales figure they quote to you. Watch the blood drain from the agent as you propose these terms, which means they have to really work to make their sales: but do it.
But back to retail. Many investors pay high prices for retail shops because they believe they have potential for rental growth, but with many retailers struggling, landlords are also struggling to push up rents. Rental growth in the last twelve months has only been approximately 3%, its lowest level for a decade. The property market follows interest rates – it’s as simple as that. As interest rates have fallen during the last decade, prices have risen. Now, interest rates are rising and prices are falling, but this is not a time to jump in; it is a time to sit on your hands and wait as the market will continue to go down for the next two or three years, meaning that there will be plenty of opportunities to buy bargains later. If you want to buy earlier, then buy forced sales; buy at auction, where you set your own price to bid.
The same will be happening in the commercial and industrial market, but not quite to the same extent, because factories and offices are more resilient to current changing tastes and downturns than retail, which is suffering from consumers leaving their wallets at home, as well as from the Internet. In addition, tenants are less willing to agree large rent increases and so rental growth is essentially dead. For the first half of this decade, average rental inflation for retail ran at 7%: it has now halved and is going lower.
Added into this mix is availability. More retail units are coming onto the market, more are being built, landlords are holding a weak hand and retailers now have the bargaining power. More than 40 million square feet of new shopping space is currently being planned or under construction. This is a huge number and the biggest ever and once all of this comes on stream there is no doubt it will depress the market still further.
Nicholas Pine
©Government Auction News
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