Some sectors have seen a 50 basis point rise in September

• The consistent economic bad news during the past few months has dampened real estate prices across the globe.  The recent movement in yields supports the notion that the relative pause in August was not a positive turning point.
• There is evidence that some investment deals are being pulled due to the lack of supporting debt.This is despite many investors having a significant level of equity, with the debt required well below average.
• For UK equivalent yields, we have compared the‘end of boom’turning points of early-1989 and end-2006.  From both points, the yield shift two years on has moved in a remarkably similar way, suggesting that valuers are behaving the same.
• The IPD All Property total return in August recorded a 17% fall over the preceding 12 months.  Since the end of 2007, total returns have fallen by 8%.This suggests that 2008 will show a 10-11% fall in total returns, the worst UK out-turn since 1974.

Property yields still rising; interbank lending remains volatile

• When property is out of favour as an asset class,such as during 2002 and 2003, the premium can reach 400 basis points.
• We expect the premium to drift out to 300 basis points during 2009.  This also supports the 8% ‘all property’equivalent yield discussed in the first section.
• The interbank market remains very nervous,reflected in the recent volatility of Libor margin above the base rate.  Despite liquidity being pumped into the system, fear remains about banks’solvency and need for banks to re-capitalise.  The property industry needs confidence to return to enable a more orderly property market.

Scale of investment downturn evident

• At some point during the third quarter this year, the level of UK property investment passed that seen during just the first quarter of 2007. Volumes are rock bottom as a “wait and see” approach is firmly in place due to the rising property yields.
• We estimate that UK investment volumes will be around £17.8 billion this year.  This would represent only a third of the investment activity seen during 2007.
• Overseas investors are the most significant buyers in 2007 and 2008.  In fact, over the past eight years, this type of buyer has been a net investor.UK institutions are the most significant sellers -redemption levels within the retail funds are partly responsible.  UK institutions have accounted for around 47% of sales so far this year.

Confidence is key

• The ‘will they, won’t they’debate of the $700 billion liquidity injection by the US Government has dominated the news.  The speculation, rejection and eventual acceptance have contributed to significant volatility in the global markets.
• The credit crisis, inflationary influences and the unprecedented level of intervention and failure of financial institutions is culminating into a ‘feeling’of a full blown recessionary environment.  However,consumer confidence improved during the past couple of months despite retreating house prices.
• Despite the financial meltdown, economists’models are predicting a growing UK economy in 2009.This supports rental growth and therefore income return for property investors.  An emergency cut in base rates by six central banks is certainly a positive step, but the effect, as yet, is unknown.

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