Gains since 2003 being unwound in months

Some property investors are preparing to go 'bottom feeding' for opportunities in the UK early next year but it is by no means certain that 2009 will mark an upturn in the cycle, Malcolm Frodsham of the Investment Property Databank has cautioned.

Speaking with PropertyEU's Web TV unit on the second day of the Barcelona Meeting Point real estate fair on Wednesday, Frodsham said UK property values are expected to fall by some 10% in the next quarter.

Frodsham, who is head of research at IPD UK, pointed out that the gains during the boom years may be eaten up if the downturn, which has practically halted the real estate investment market in the UK, continues for the next few months. 'It is almost a certainty that values will continue to fall,' he said. This is clear, he added, from the transactional data, continued evidence of forced sales and the inability or unwillingness of banks to lend at the rates they used to during the property boom of the last few years.

Frodsham said that the re-pricing in the UK property market has been incredibly rapid over the last few months. 'Since 2003, yields have fallen from 8% to 5.3%, that took about four years, we have unwounded all that in the last four months.'

‘It would be very nice to say that would be fair value and stop. Of course, markets don't work like that. What we are going to see is how far the market overshoots. And of course If we are in recession, if the banks are still in crisis and if there is no equity out, then they will overshoot.'

Frodsham said that as companies struggling to refinance their portfolios, banks are likely to take over big shares of the property market along the same lines as it happened in the 1990s, particularly in Sweden. 'All sectors are suffering from the downturn. But the retail sector is seeing a great amount of distress. We are expecting a great wave of bankruptcies in the retail sector after Christmas, when it is a classic time for retailers to go bust,' he added.

Frodsham believes that the 2009 year will see a lack of transaction activity as most companies focus on refinancing their portfolios and selling assets.

'People who can access equity could have an interesting year. At the moment they are buying debt, they will soon buy in the listed sector and in REITs, which are trading at significant discount to NAV. Not until very late next year investors will come back to buy direct property in the UK. But it is very logical: why buy in the direct market if you can buy in the listed market at a 40% discount?' he pointed out.

Investors were left with the dilemma of when to go 'bottom feeding'. He said some investors are beginning to see opportunities, but added: 'It remains to be seen how long and painful this cycle is and no one can be sure that next year will mark the turning point in the UK.'


Click on the link below to watch the interview.