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Debate: Is UK commercial property undervalued?

A group of 75 property sector professionals met in London to discuss whether UK commercial property is undervalued and what the future holds for the property market.

by
Charles Stanley

in Fiduciary news

05.10.2018

Uncertain times have an impact on investor confidence. With Brexit on the horizon, Charles Stanley, Michelmores and Goodman Jones hosted a debate on what the UK commercial and domestic property market might look like over the next year.

A group of 75 property sector professionals met in London to discuss whether UK commercial property is undervalued and what the future holds for the property market.

The audience responded to several interactive questions to take the pulse on the challenges and opportunities facing UK real estate.

Affordability

A third of the audience indicated that affordability was the key factor likely to affect UK house prices over the next twelve months. This was followed closely by interest rates, then SDLT and tax changes, with foreign investment, at 10%, being the least likely to have an effect on prices.

Tenant Demand

An overwhelming 58% of the audience believed that tenant demand will be the main factor affecting UK commercial (non-retail) property prices over the next 12 months. Foreign investment came next with 22%, followed by 14% who felt that a change in taxation will have an impact, with only 8% of the audience viewing interest rates as a factor.

House Prices

When asked the question "Do you expect the gap in house prices between London and the South East and the rest of the country to increase over the next 5 years?", almost 70% of the audience considered this to be either unlikely or very unlikely. A minority of 10% felt it was very likely, with 22% deeming it a possibility.

Residential Best For Investment

Residential was the sector that 42% of the participants felt was the best to invest in now, followed by industrial/other at 35%. Offices and retail came bottom of the poll, with 15% and 8% respectively of the audience thinking these sectors presented a valid opportunity.

John Redwood, Chief Global Strategist at Charles Stanley, then delivered a presentation which covered a global statistical overview; the general economic outlook and the main risks this faces. These included the impact of a US interest rate rise and whether the UK would have to follow; the tariff and trade war; the Middle Eastern crisis and Russian involvement in the balance of power; a new phase to Euro area banking and deficits troubles; a potential Chinese slowdown; and finally, the impact of Mr Trump on the global stage.

Tim Venner, Head of Business Development, Charles Stanley Financial planning said, “We were grateful to both Michelmores and Goodman Jones to be able to provide a valuable insight into the UK commercial property market. John Redwood's understanding and knowledge of the global markets helped give an insight into the effect on different investment classes.”

In relation to the UK commercial property market, Mr Redwood highlighted the trophy purchases of several iconic London landmarks. He saw these as demonstrating a trend towards falling in line with book valuations, as opposed to the situation two years ago when the Cheesegrater (122 Leadenhall) sold for 25% above book valuation. However, as the recent purchases of a combined total of over 3 million square feet of office space by Apple, Facebook, Google and Bloomberg demonstrates, the technology, media and telecoms sector is currently spearheading demand for London space.

Will this level of demand continue? Mr Redwood discussed the negative and positive influences that could affect the UK property market, and put forward three scenarios outlining: Best Case (Stronger Growth); Worst Case (New Crisis); and Base Case (Muddling Through). With a 65% probability for the Base Case the message for the audience was that, while uncertain times lie ahead, things could be considerably worse, and a patient and pragmatic approach may be the best way to weather the storm.

Paul Paling, Head of London Michelmores, commented; "The evening stimulated keen debate, and as John Redwood highlighted there are headwinds to be reckoned with, however the outlook is not doom and gloom. We believe that the UK property market will continue to be resilient and an attractive investment prospect."

Cetin Suleyman, Managing Partner, Goodman Jones added, “It was fascinating to hear the views of the room which included property developers and construction business owners.  John Redwood’s observation was that digital transformation will have a significantly greater impact on business success than a short-term economic impact of the Brexit deal. As ever, uncertainty brings opportunity for entrepreneurs and businesses willing to invest in evolving to line with future market expectations”

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