By Angus McIntosh
The near financial catastrophe of 2008 is receding into history, but the sunlit economic up-plans are some distance away. In the property market, there are mixed fortunes but some extraordinary opportunities.
The global economy
The global economy is dominated by China; it is unlikely to revalue its currency. It will force the USA to consider yet more quantitative easing which will have the overall impact of keeping long and short interest rates lower for longer.
The UK will repeat the 2010 performance. Economic growth will be lower than +2% in 2011 but the manufacturing sector is likely to continue growing by 3% in 2011 as the government sector shrinks.
By the end of 2010 world food prices were up 20%, non-food agricultural such as cotton up 60% and world oil prices up around 10%. Add to this the UK Government's objectives to raise National Insurance, VAT and CGT and the overall impact will be cost-push inflation in 2011.
Unemployment will remain stubbornly higher in the UK; 2011 will be a year of stagflation.
Interest rates and finance
The bank base rate is likely to remain almost unchanged for most of 2011 at around 0.5%. However, it is the cost of the bank borrowing which will remain relatively high. Margins will remain between 200 and 300 basis points above the base rate, with a loan to value ratio of 65%; this is on much lower valuation than 80%+ back in 2005.
Commercial property market
The outlook suggests that, with the exception of offices, retail and industrial rents will remain almost unchanged for the next two years. Only in central London will there be some extraordinary office growth.
In the retail sector, the extraordinary expansion of major food store brands including Tesco, Sainsburys, Morrison, Asda, Waitrose and Marks and Spencer will continue.
The industrial and logistics markets will follow the trends in retail. Food stores will be seeking newer and better space.
Property investment
After the extraordinary surge in capital values, in both the stock markets and the property market between 2009 and 2010, the bounce is now over.
It is widely predicted that by end of 2011, average capital values may have fallen back into negative territory. The total return is likely to remain positive, but only because it will depend on rental income in the region of 6%.
Equity investment money is king. The UK life funds and pension funds, as well as some of the overseas high net worth individuals and sovereign wealth funds, will have the pick of the market. But they will be seeking prime, well-let with long income stream, investments.
The outlook suggests, across the UK as a whole, house prices will remain unchanged for the next three years, with the exception of central London. Here we expect house prices to rise on average by 5% per annum between now and 2014.
The outlook
The outlook for 2011 suggests that there will be two economies, those employed and those unemployed. A north versus south divide has well and truly returned and may take some years to be reversed.
In the commercial market, prime property will command much excitement from equity investors, secondary and land markets will continue to wither in value.
In the residential markets, most of the interest will focus on central London.
The bargains are for those with cash. Brand new vacant standing buildings will be cheaper to purchase than newly constructed buildings. But building costs are rising faster than inflation and with capital values falling, land values are heading south and new development looks un-viable in many places in 2011.
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