Coalition government: friend or foe of the property industry?
In these troubled times, we ask ourselves with reference to the property industry, “What has the government ever done for us?” like John Cleese in The Life of Brian, when he asked his brigand band, “What have the Romans ever done for us?” The answers to both questions is quite a lot, actually.
From the George Brown ban in the 1960s, which at a stroke saved the office investment market by banning all new development of more than 10,000 sq ft, to holding off all attempts to revise our upwards-only FRI (full repairing and insuring) lease terms, to reducing capital gains tax (CGT) and the introduction of REITs. Indeed, successive governments have – with the possible exception of empty rates – assisted in allowing the property industry to prosper.
Are we done for?
Now we are asking what the government is going to do for us.
On the downside, it appears inevitable that government agency tenants may in future be conspicuous by their absence, CGT will be raised – but we all seem to have survived Margaret Thatcher’s increase to 40% – and swingeing cuts will take money out of the pockets of shoppers, exacerbated by an almost certain increase in the savings ratio. Rental values, except for active areas such as the City of London and the West End could stagnate, or even decrease, which will further affect reversions and therefore capital values.
On the plus side, any talk of “reforming” the standard lease looks far away, planning will probably become more oppressive, as it is decentralised, and building costs should level out.
Interest rates are a true enigma. Five-year swap rates, at 2.3%, are at a historic low and, at 3.3%, 10-year gilt yields are at a 10-year low. These lows are partly predicated on a view that inflationary pressures may decrease, and rises postponed, for at least a couple of years.
However, the Organisation for Economic Co-operation and Development believes base rates will increase to 3.5% by the end of next year. If one guesses that interest rates will stay low but yields stay put or rise over the next year or two, we might again have a positive yield gap of more than 6%. With borrowing continuing to be available – unlike 2008 and early 2009 – perhaps the next two years will be the best buying opportunity in a generation.
In the past few months, the market has taken a breather. Now, adverse fiscal news coupled with euro and global turbulence, give a bleak outlook. But the government has no mandate or desire to break the economy. Indeed, it is trying to put it back together again. So, with a seemingly sustained increase in the desire by bankers – especially UK-domiciled banks – to lend again, we could be getting back to a post-recession vacuum that will produce ample opportunity for prudent, well-capitalised investors.
Without being trite, the best deals will be those eschewed by traditional investors wishing to reposition to longer-let prime property. Most of these on the market were prime when they bought them. With new vigour, hands-on management and suitable sums earmarked for capital expenditure, short-term defensive buys with longer-term upside will work to the advantage of imaginative investors.
No stopping us
What is almost certain is that the market will not experience the virtual halt in transactions of 1974 and 1991. With the government’s history – by policy or accident – of keeping the UK attractive to global capital, we expect a steady stream of deals to come to the market. Yields may rise to levels of a year ago as investors grow less scared of a “double-dip” recession.
Now, bankers rather than the developers, are the whipping boys. Past governments have assisted with a transparent and thriving investment and development market. We see no reason why this should not persist. The big question mark is: as we have not had a coalition of Conservatives and Lib Dems before, will history repeat itself and the market fall away?