Since the start of September, the UK has gone through a series of rather unsettling events.
We’ve also had three prime ministers, and you will be excused for not keeping up with the latest cabinet appointments and re-appointments – there have been far too many.
Despite the resignation of Liz Truss and appointment of Rishi Sunak as prime minister, preceded by the departure of Kwasi Kwarteng after the chaos caused by his mini-Budget, the impact of the shock his measures sent through the market continues to be felt. This will have long-lasting consequences for our industry and the UK economy as a whole.
We have seen spiralling interest rates, affecting both commercial and residential property, which risks substantially restricting the volume of transactions taking place, and understandably, the investment community is nervous. To many, it is not at all clear whether putting money into property is still a sensible thing to do, but there is hope that Sunak’s policies will stabilise the markets.
Could it be that our market has to accept a price correction in order to thrive in the future?
There is still a lot of uncertainty; we may not have yet felt the full extent of the damage done by Truss and her chancellor, and it’s too early to tell if any of it can be reversed or at least mitigated by Sunak’s well-intentioned team.
Right now, some may feel like the very foundations of our society are being shaken and there is very little to fall back on given the grim headlines left, right and centre. But it is important to stay level-headed and turn to the past to see how previous challenging economic scenarios played out and how the market reacted.
Yields surprisingly low
While the British economy is not yet, officially, in recession, many believe we are not far off it – and some believe we have been in one for a while. However, commercial property yields are still surprisingly low, indicating a potential disconnect between pricing and economic reality. Something has to change urgently if our industry is to weather this storm.
Today’s commercial property yields are still keener on the whole compared with previous recessions in the early 1990s and the financial crisis of 2008. Looking back at the market data from previous recessions is a useful exercise, providing us with a good point of reference and an indication of what we can expect in the not-so-distant future.
According to data collected by Allsop over the past 40 years, during the economic crises of the 1980s, 1990s and 2000s, yields across the office, industrial and retail warehousing sectors were much higher than they are now, so could it be that our market has got to accept a price correction in order to thrive in the future?
Failing that, UK commercial property will face liquidity issues and its ability to attract new capital in 2023-24 will be further undermined.
Therefore, at Allsop, we are predicting a rapid price correction across all commercial property sectors, and we are witnessing this already. It will be interesting to see the severity of the correction, particularly in the industrial market and, say, the City office segment, where the occupational market appears to be holding up reasonably well. Will it be these sectors that see the first activity following a price correction?
Keep the market moving
For some, the inevitable need for repricing is hard to swallow but it is a necessary step in reinstating the health of our market, much like leech therapy, which some say is good for restoring blood circulation.
We need a short, sharp correction to reflect the current lending environment, which has changed brutally in the space of only four months.
Without repricing, our market runs the risk of finding itself at the mercy of overseas buyers keen to ride the currency wave. We are starting to see the first signs of overseas interest, but is that really enough to sustain the commercial property sector over the medium term? If past experience is anything to go by, the answer is no.
Scott Tyler is senior partner at Allsop