Oct 6 2006
Across the world concerns have been raised over the strength of the property market.
High oil prices squeezing budgets coupled with rising interest rates have drawn many away from the property market as returns fall.
However, few experts predict an outright crash. Most foresee the UK market slowing, although not uniformly, but opportunities springing elsewhere in the world.
Alex Watt, managing director of Property Investments at Standard Life Investments, finds in [Report] that the UK is increasingly looking more expensive.
He suggests Europe and South East Asia are becoming more attractive options as UK returns for investors are expected to stay in the single figures for the coming year, after recent good figures.
His report finds that UK property income yields are now on average lower than medium-term debt funding costs.
Furthermore, the UK is more exposed to rising interest rates than other regions and, clinching the argument, several international markets offer more attractive yield margins over bonds, as well as the prospect of considerable rental growth.
The advantage of property, that continually brings investors back, is its low volatility of returns. An improving demand/supply balance in the office sectors is also encouraging investors.
In the retail sector, there are some concerns, as consumer spending might be drying up off the back of rising oil prices.
It is predicted that capital values will continue to rise in the near future, but growth rates will be down on recent quarters.
SWIP Fund Manager, Nigel Bolton [Report] looks at the effect of REITs (real estate investment trusts) on the property market, allowing private and institutional investors to put money in property in an easier and more efficient way. With Germany set to establish REITS in 2007, a pan-European property market could come into being, reducing currency risks from investment.
In Germany, the depressed property market - caused by the glut of property entering the market with the post-reunification construction projects - is now creating some opportunities. As the German economy improves, the property market is improving with better yields than the UK, in both commercial and residential markets.
[Report] Update from SWIP Property Trust sees the trust focusing attentions on the service sector and central London. In the last six months retail warehouses have also done well, particularly around Brighton and Huddersfield.
The expectation is that the higher of returns of recent years will not continue, but investors should have higher returns than from bonds. Over the next 12 months returns are expected to be around the eight per cent mark, before dipping to six per cent in the three-to-five year cycle.
In the US investors are also being advised to consider the long-term, as the Federal Reserve's recent campaign to counter inflation saw interest rates rise for 17 consecutive months before this August.
In the last quarter US property prices rose by just one per cent ? the lowest since 1999 ? and annual capital growth rate in September stood at nine per cent, down almost four per cent.
Assetz managing director Stuart Law advises UK investors to concentrate on the long-term growth potential and the possibility of increasing rental income.
He said: "The US is definitely in the danger zone, but we're not currently certain how severe the downturn will be.
"The big question is whether the US will see the same soft landing that was seen in the UK."
However, figures this month from the Wachovia Corporation Economics Group on construction spending found that the effect of the housing market slowdown has been mitigated by growth in non-residential projects.
The report found non-residential construction jumped 2.3 per cent in August and rose by 17.1 per cent in comparison to August 2005, with growth led by manufacturing construction.
It stated: "Spending on new construction projects bounced back in August, and rose 0.3 per cent after three weak construction months this summer. In comparison to last August, total construction growth is up only 4.4 per cent, and has shown a significant deceleration over the last several months.
"The moderation in the headline continues to be the story of diverging trends between the two major segments of construction markets ? residential and non-residential."
Wachovia data on sales of new homes showed it was down 17.4 per cent in August than a year ago. Figures on existing homes revealed sales were down 12.6 per cent compared with a year ago and prices fell for the first time since 1995.
Standard Life Investments fund manger Andrew Jackson [Report] describes the backdrop for the global commercial and residential property markets as being encouraging.
Excluding Germany and Japan, residential markets are being put aside in favour of commercial property. The UK commercial market is seen to be at the end of its cycle, with Mr Jackson saying as returns will continue to diminish he will reduce the fund's exposure.
He explained: "We will also target those countries that exhibit improving growth fundamentals and those will be the reflating economies of Japan and Germany but also the strong growth fundamentals that are coming through the Singaporean property market."
The fund would also continue its exposure to higher yielding targets such as the Australian property markets and the United States property markets
Looking forward, talk of a property crash is far from founded. While some areas may be facing a slowdown in growth, widespread falls are not even being considered. Around the world growth is expected in some countries, particularly Germany and Japan, while the UK and the US should see markets firming.
