Public sector cuts pose biggest threat to property markets
Date : 08 July 2010
London, UK – Public sector cuts pose the biggest threat to commercial and residential property markets according to Knight Frank’s market outlook breakfast at its London headquarters.
The breakfast, hosted by Knight Frank’s valuations and research teams and attended by banking clients responsible for property funding, included an eight question survey which encouraged the floor to vote on topical commercial and residential property market questions. Knight Frank’s heads of residential and commercial research presented their property forecasts and provided market overviews.
Survey results highlights
Residential
- The vast majority of those who voted (63%) were most concerned by employment prospects regarding the outlook for the housing market
- The feeling that the volume of bank lending to the residential property sector would either remain unchanged or rise marginally over the next year was felt by the majority of the audience
- The overall majority of voters thought that the base rate in July 2011 would be between 0.5 and 2%. With a very small minority thinking it will go above 2%
- 38.7% of the audience believed that house prices in the UK will rise by between 0 and 5% over the next 12 months and 24.2% felt that there would be no change in house prices during this period
Liam Bailey, head of residential research at Knight Frank, commented: “The obvious headline from the budget was the seriousness of intent of the government to deal with government debt. To me the implication from this is the resulting huge requirement on the private sector to fill the gap left by the state.
“This implies a steady growth in bank lending to consumers, businesses and the property sector, as we have seen, in the short term this is unlikely, and this will undermine pricing in asset markets – including housing.
“London will be able to escape significant price falls, firstly due to continuing demand from foreign buyers and secondly less reliance on the public sector. Two key things to watch will be the widening differential between the South East and London and the regions in terms of housing market performance. The other will be the reaction of the mortgage providers and the government if house prices do begin to fall in earnest again.
“We stand by our forecast for house prices in the UK to fall 3% in 2010, implying a decline of 6% in the second half of the year. In London we believe that prices will rise by 7.5% this year, which implies some price falls in the second half, to partially offset the very strong growth we have seen since January.”
Commercial
· The majority of the audience (61%) believed a weak economic backdrop would pose the greatest threat to a steady commercial property market recovery
· However, during 2009, 45% of all office transactions over 50,000 sq ft outside of London and the South East were for public sector occupiers, far higher than the audience’s estimate of less than 30% of regional take up
· For this reason, and highlighting the Government target to reduce public sector spending by 25% with a consequent loss of an estimated 610,000 public sector jobs by 2016, Knight Frank expected that, for many markets, public sector cuts would be the most significant threat to market recovery
· The majority of the audience (63%) predicted total property returns would be between six and 10% in 2010, while a fifth of the audience anticipated a higher outturn of 10 to 15%, in line with Knight Frank’s own forecast for a total return to commercial property of 14.1% this year
· Looking further ahead, 60% of the audience forecast average total commercial property returns between 2011 and 2014 to be between five and 10%, in line with Knight Frank’s forecast return of 6.9% per annum
Claire Higgins, head of commercial research, commented: “Given the circumstances, it was a good Budget for business which, in turn, is good for commercial property. However, the outcome of this autumn’s Spending Review may prove more telling – if perhaps only for those markets outside London and the South East. How will the already struggling regional markets cope with the downsizing of one of their most important occupiers, rising unemployment and falling consumer expenditure? On balance across the UK markets, a strong first half to this year in terms of capital growth will underpin a healthy return to commercial property this year of just over 14%. That will then ease to an average 7% per annum as we weather the fiscal turmoil and make our way closer to the end of this parliament.”
For further information, please contact:
Liam Bailey, head of residential research, Knight Frank +44(0)7919 303148
Naomi Curtis, commercial PR manager, Knight Frank, +44(0)20 7861 1744
Davina Bell, residential PR manager, Knight Frank, +44(0)20 7861 1033
Ends
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 207 offices, in 43 countries, across six continents. More than 6,340 professionals handle in excess of US$886 billion (£594 billion) worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants. For further information about the Company, please visit www.knightfrank.com.