What happened in 2019:
There was much political uncertainty in 2019 and as a result this had a major knock on effect on the property market and the finance that sat behind it. As a result completion times increased as the year went on. Heightened due diligence and a slow sales market meant there was less urgency to complete transactions.
To stimulate growth pricing fell throughout the year and the overcrowded bridging market drove prices down further. With the bridging and development market still providing an attractive prospect to new entrants the pricing remained low and created a race to the bottom. Consumers wanted lending at lower rates and higher LTVs, with some lenders now offering 80% LTV. Surely this is not a good thing for the long term health of the property finance market.
Down valuations of properties were a consistent challenge throughout the year and I personally witnessed a couple of occasions where properties saw a 15% reduction in market value. This made it more difficult to secure straight forward development finance. Bringing in the need for mezz and equity providers.
So how did that leave us at the end of 2019:
So what do we all think about the state of the global economy now?
The World – ‘the Macro Economy’
Here’s what I think.
As we move into 2020 there is heightened political uncertainty throughout the world and the US/China trade wars have muted the global economic outlook.
This stat on GDP Growth shows us there has been a slowdown in recent years:
As you can see 2020 has seen an upturn but it is still lagging behind 2017 levels.
As a result of this we have seen a lack of opportunities and low yields for property investors in their traditional markets. Investors have had to have become creative and target other areas of property investment including student housing and co living which have become more mainstream throughout the world.
However, despite the somewhat gloomy outlook the property investor appetite has not wilted and has shown little signs of abating. Even though global investment volumes in 2019 were down on the record levels of 2018, they were still the second highest on record.
2018 - $1,135bn
2019 - $1,120bn
And one must also remember the fall was not caused by a lack of capital but by a lack of assets which I am sure investors in the room can relate to.
In my opinion, if Brexit uncertainty is removed or there is an easing of global trade tensions, then there is a pent up demand to invest further into real estate. The comparatively attractive returns real estate can offer, as interest rates remain lower for longer, will continue to drive the market. It is important as an investor not to ignore the macro environment as trade wars, populist governments and climate risk are all influencing factors when it comes to our property investments.
London – The Micro Economy
So the macros are telling us there is a lack of assets in the market and the global outlook isn’t overly rosy but what is it like here in London?
In spite of short term Brexit uncertainty, London is forecast to still be Europe’s largest city economy in 10 years’ time.
With rightmove predicting an ‘active spring market’ for the first time since 2016’s EU referendum, a recent JLL study has predicted house price growth to be 1% this year, 2.5% next year, before jumping to 4.5% in 2022.
When talking to my clients it appears optimism has returned and the number of new enquiries I have seen at the start of 2020 is very encouraging. From what I have seen there are lenders wanting to lend and investors who want to invest in the UK and London. Coupled with the UK chief economist at Ernst & Young’s view that the MPC’s decision to cut interest rates on Thursday is on a ‘knife edge’ it must indicate a good time to invest in property.
Furthermore, it is difficult to predict what the response will be from foreign investors. Since 2016, it has been reported that the UK and London, in particular, still provide an attractive prospect for foreign investment; some have argued that the uncertainty has actually provided more opportunities than ever before. Nevertheless, until there is complete clarity around the Brexit conditions, investors may continue to ‘sit on their hands’.
However, despite this we are due to see an increase in domestic investors and a number of regeneration projects are on our doorstep:
The Greenwich Peninsula – 15,000 new homes, shops, cafes etc - £8.5bn project
Barking Riverside – 10,000 new homes, shops and restaurants - £3.5bn spend
Old Kent Rd – The Cantuim Development 48 storey landmark tower with 113 new homes - £600m spend
So what will 2020 bring us? We hope for a positive environment for property investors and indications are that London and the UK will be at the forefront of this. The regeneration projects and optimism in the London market may be seen as good news for investors but be warned the fragile macro-economics of the World may throw us a few curve balls along the way.