I have been a pessimist about UK commercial and residential property.
Values of commercial property have been falling for months. Commercial rents are weak. There is a substantial overhang of space. Retailers have gone bankrupt, leaving empty shops. Considerable new space is being completed in the City when tenant demand is weak. Businesses under pressure find it difficult to meet rising rent demands, and are often looking to reduce their floorspace as an economy measure. There are some brighter spots, and there are some buyers about seeking to find bargains now there has been a sharp fall.
Residential prices have also fallen, though less dramatically than commercial prices. Some estate agents now say there is a shortage of supply, and think prices might now stabilise or even rise from here. Normally it takes rising real incomes, stronger mortgage provision and an end to rising unemployment to provide good upward momentum to house prices, but these are unusual times.
There are two arguments the bulls put forward that are worth examining. The first applies mainly to central London. The apparent fall in sterling prices can be doubled for a an investor coming in with one of the stronger foreign currencies. To the overseas buyer London property looks a lot cheaper than it does to sterling based buyers who live here. There are cash buyers around who have always fancied smart London base who think now is a good time to take advantage of the apparently cheap prices in their currencies.
The second consideration applies more widely. The supply of homes onto the market is very limited. Many people do not think they could sell their property for a decent price, expecting the market to be poor. Trading up is being delayed by people worried about their job prospects or expecting lower prices for the bigger home if they leave it for a bit. You might expect more distressed sales. With interest rates very low more people can mange the mortgage. More institutions so far are seeing through customers with temporary difficulties. This could change for the worse as unemployment climbs.
We have probably seen the biggest part of the falls in both commercial and residential property. There will be some who buy at a discount to current prices where there are distressed sellers or properties with potential and take advantage of current lower levels to find longer term value. We need to remember, however, that the existence of some foreign buyers for London property and the existence of some hotter spots within commercial property does not overnight solve the difficult credit conditions, the falling rents and the poor outlook for tenant demand. If the economy grows more slowly this decade as we fear, and if there is less credit around, we have to adjust to a different level of property values overall relative to incomes.