Identifying the dynamics currently playing out in the property market feels quite easy. So as Q4 approaches, what can we expect?

Daniel Mendoza

First, there is a wall of money out there looking to be deployed. Institutions are experiencing inflows, with the retail funds now typically sitting on in excess of 20% cash. Overseas investors are particularly enthused by sterling weakness, while PE houses have swollen coffers.

Swathes of property companies and private families are sitting on surplus rental income or trading profits and, at the smaller lot-size end, buy-to-let resi investors are turning to commercial following punitive government taxes.

Second, in my 30-year career, I cannot recall such a general dearth of stock levels and envisaged pipeline. Likewise, reported investment levels are skewed by big central London trades and substantial investment in the alternative sectors such as student residential, as opposed to volume of individual transactions.

Third, and more than ever before, the weight of money is seeking sustainable income and we are experiencing greater demand for annuity profile stock and returns.

Fourth, in the South East in general and especially in London, there is a severe lack of residential supply. This, combined with low interest rates and help-to-buy initiatives, has driven pricing to unsustainable levels in the private sector. An affordability crisis is on its way and this will have a material impact on sentiment.

Finally, there is the impact of Brexit. Nobody knows what will evolve from the Brexit talks, but at best there will be a serious drag on any prospect of economic growth, and the incredible swing to Labour in the polls after Theresa May’s own goal is lifting the lid on growing social tensions.

These five dynamics anchor my thinking as I try to make sense of what will unfold. As for the not-so-easy bit, here goes…

I don’t see the wall of money and appetite for property abating. In addition to simple supply/demand forces, property offers compelling returns compared with bonds and equities and is an asset class investors want in their portfolio.

Out of synch

Given this, should you fill your boots as property values can only continue their upward ascent? Or might the elasticity of the inflating bubble be at bursting point, in which case is it time to liquidate and sit tight?

The weight of money is seeking sustainable income

The reality is neither of these polarities. The last two major corrections were marked and swift, one driven by a lack of debt and the other a lack of equity. We don’t have shortages of either this time around, but we are facing an impending and growing velocity of negative social and economic sentiment.

It is also worth considering that the UK’s economy has performed an about-turn. In 2016, we were the fastest-growing member of the G7; in the first half of this year, we were the slowest. Real wages are falling more sharply than they have for three years, while household debt levels have increased and interest rates have only one way to go.

We will experience an increasing squeeze on consumer spend over the next 12 months, causing a slow burn of tenant defaults and downward rental pressure.

Investment values are now out of synch with the occupational narrative so if you’re all about capital preservation, I’d be aiming to unload within the next six months. And if you’re all about income, this correction needn’t overly concern you, assuming good stock selection on your tenants, lease structures and sector exposure. The chances are that you’ll be a combination of both of these, in which case I’d be selling selectively.

As regards opportunity, retirement living has fundamentals for growth.

L&G retirement village, Tattenhall, Cheshire

Considering the ageing population and emerging government policy around elderly care, it could be the next student living.

On a final note, I was pondering Brighton & Hove Albion FC’s prospects on their return to the top flight for the first time in 34 yearsand was struck by how similar I feel about our market: very much open-minded to what might unfold and looking forward to enjoying the ride… but fearing the worst.

Daniel Mendoza is a director at Ereira Mendoza