Sunday Supplement – Is the market returning back to “Normal”?

Sunday is here again and the last one of the first half of this year! The supplement is in a “lighter” format this week…

The review of the first half of the year will need to wait until the June data is in (or some of it) anyway, so a summary of the macro news and property-specific news will tide us over for this week.

The US Federal reserve seemed to backtrack a little on their hawkish statements last week after committee – which calmed all of the markets right back down. The big picture here is quite simple – there is LOTS of false value out there in the world right now. I mentioned Zombies last week in terms of companies, and landlords, and this is part of the story to which I refer. Lots of things are viable with interest rates at extremely low levels – which may have a rocky or non-material future with higher interest rates. Arguably, one of the things that makes buy to let viable in this age of increasing costs is the very low interest rates. On significant senior debt, the cost may be as low as 1.5% over base, when dealing with loans in the 8 figure or more bracket, up to 60% LTV. At 0.1% base – the obvious statement is that is 1.6% cost of borrowing, making yields perhaps down to 3.25% or so viable, and certainly making yields of 4%+ look like investment grade.

The issue of course is that this is not the fixed rate of interest. It is variable – and right now, it doesn’t look like it is going down. For property investments to be meaningful, 5 years is a minimum time horizon, realistically, and at volume, the players are looking at 15 years all the way up to 80 years+++. Fixing rates is possible but not at those sort of rates for any serious length of time. Interest rate risk will always remain an issue for property investment with leverage at any level.

Our own Central Bank has also met this week and come to the same old conclusion – rates need to stay the same, and QE needs to stay the same at this time. The most hawkish (for those unfamiliar with the terminology – hawkish means wanting to get rates UP sooner rather than later, they want tighter monetary policy) member of the committee, arguably, chief economist Andy Haldane is leaving (this week was his last meeting), and so that makes rate rises a smidge less likely. AH had already voted to remove some of the QE in place, which always sends bond and stock markets into something that looks like a tantrum. The roadmap looks slow-ish and when you look at inflation averages over the last 5-8 years, there is scope for a couple of years at or around 3%-3.5% on average to still meet a longer term 2% average. I think that would be welcomed with open arms rather than needing a faster response.

Enough on rates and inflation, for the moment, anyway. London figures and prices hit the headlines this week as only 5% has gone on, across the board, in capital growth in the past 5 years. Post-inflation, this is actually a loss in real terms. A huge swathe of the country suffered from this in the whole of the 2010s, and, post-referendum, perhaps this is not a surprise. The capital could be well poised to go on the up and up again, or perhaps have a couple more relatively average years before kicking on – periods of 5-7 year relatively flat capital growth have been known in the past for London. Still, it may well contain some great value.

There’s also a huge outflow of money continuing from property funds like M&G’s property fund, which has seen around 40% of its value “cashed in” since re-opening for trading in May this year. Aegon have announced they are closing their property fund, as investors continue to punish those with poor liquidity, after a “reminder” – if it were needed – that property is not liquid, especially at the large levels. This looks a fairly classic mistake to me – if you are in property funds for fast cash or easy money to cash in on, you are making an error. What you want from them is diversity, and strong, good-yielding, long-term assets.

Blackstone look set to buy St Modwen, the developer, for £1.3bn. Blackstone have been heavily involved in residential property before, and this looks like a potential part of a larger play, to me. The other angle is that the UK market generally looks tempting from a US perspective, where there are many more arguments that stocks in general (property and non-property related) are potentially overvalued, in bubble territory or certainly fairly frothy. This is starting to be called the “post-brexit discount” in some private equity funds, it seems.

Lendinvest look set to cash in on the recent IPO trend, and the post-pandemic appetite for stock market listing, by coming back to offer themselves to the public at a lower value (£300m+) than was suggested 2 years ago (c. £500m).

A check-in on the city centres in general – Birmingham city centre still has 78.5% of rightmove-listed stock unsold. The comparable figure for “London” is not possible, because of geography, but Greater London by comparison has 53.5% unsold at this time, whereas Greater Manchester has only 31.3% unsold, and Manchester City centre has 68.6% unsold – which puts some of that into context. The county of Devon has 26.5% unsold, which indicates a little about the rush to the country that has been continuing, but with the stamp duty cliff looming – will this also change this pattern, or incentives in general? There must be plenty still sitting and waiting and seeing what September, or Q4 will look like from a work perspective. As a final stat, “houses in Solihull” (i.e. excluding flats) are 75% SSTC and 25% unsold – but doing the same exercise in Devon sees 77.8% SSTC and 22.2% so the ‘burbs are still behind, I would say.

I got the chance to speak with the best agents in the area this week over a property I am selling – and picked their brains. Their take was as follows – about 2.5 years of business has been done in the last 12 months, the stamp duty holiday is almost solely to blame – it has not been major relocations or similar – there has been a lot of crazy behaviour, and in the past 2 weeks things have started to come back to “normal” levels.

My observations were as follows – it seems as everyone is considering the stamp holiday to be “over” on 30th June, rather than coming down to £250k – where the vast majority of transactions in many areas of the country still take place at below £250k. It also seems that people are forgetting that first time buyers still get a break up to £300k anyway – as so often, people are not making rational decisions when faced with a market running away from them.

The return to something like normal will be welcome news to buyers, and seems to be a continued trend from the slower auction results that started at the end of May – the trend seems to be continuing with some properties transacting at reasonable levels at this point in time as the June auctions come in.

Bitcoin slipped below $30,000 this week before finding a bit of support back to $35k, and now all the commentary is about the slide continuing to $20,000 and below. Soon, surely, it will be time to buy you would think – there is very little out there in support of it in the press, and most of the hope has been broken – worth remembering that around 1 year ago the price was around $9250, so there is scope for things to move a fair bit just yet you would think. Plenty of learning and plenty to put into context, I’m sure.

I’ll leave that as the final thought for this week – next week, a look at the first half of the year figures that are in, and some more macro thoughts too!