Things could turn ugly
Economist Roger Bootle has some words of warning for those invested in the commercial property market – or thinking of doing so.
Writing in today’s Daily Telegraph , he says that while the current rebound in the commercial property market is not unprecedented, the most recent comparable period (early 1990s) does not inspire confidence. “After rising sharply between mid-1993 and mid-1994, over the subsequent 12-18 month period, commercial property prices then gave back about half of those gains,” he notes.
Bootle, MD of Capital Economics, notes that recent IPD data showing a 11% jump in prices is valuations-based, so there is a lag behind the transactional market. “On the ground, there is plenty of evidence that in parts of London, the market is starting to look very frothy again,” he says.
“My central scenario is that over the next 12-18 months, commercial property prices manage to hold onto their recent gains, especially since foreign buyers and domestic pooled property funds still have plenty of cash to invest. What’s more, I am conscious that, unlike in the lending boom of the late 1980s, this time round, speculative development loans were far more restrained,” he adds.
But Bootle warns that “things could easily turn ugly again”. With sharp cutbacks due in the public sector and higher taxes soon to hit the private sector, the outlook for job creation is not good, he notes. Meanwhile, if worries about the public finances caused bond yields to rise sharply, that would deal commercial property a severe blow on grounds of both financing cost and relative value as an asset, he points out.
Bootle also thinks that the repayment schedule for borrowers looks worrying. “In short, despite recent signs of rude health, this is a part of the economy where dangers still lurk to trip up the unwary,” he concludes.
