Guest editorial

Citation

McIntosh, A. (2016), "Guest editorial", Journal of Property Investment & Finance, Vol. 34 No. 2. https://doi.org/10.1108/JPIF-01-2016-0002

Guest editorial

Article Type: Guest editorial From: Journal of Property Investment & Finance, Volume 34, Issue 2.

The property market in the New Economic Era: the outlook for 2016 and beyond

December 2015

The boom year for UK property in this cycle was 2014, the BRICs have hit a wall and the long shadow of the 2008 credit crunch is still with us. Where next into 2016? In an uncertain world, in the New Economic Era where the certainties of privatisation and deregulation are no more, there is still sunshine out there for the property investment market, but technology is dominating markets.

Many countries now have even more debt, but the global imbalance of massive Sovereign Wealth Funds continues. The gravy train for investment funds into the UK property will still flow, but at a more modest rate from some, yet others see property as the least risk and wish to expand their exposure.

The globally affluent would prefer to buy and hold a house in London, which stands empty generating no income, rather than chance their luck with loans or investments in the manufacturing sector. In the New Economic Era, the world is awash with savings.

Economic policy, and inflation

We have almost no demand-push consumer price inflation. There is massive cost-price deflation with the collapse of world commodity prices (we use 25 per cent less energy per capita than 40 years ago). And there is significant asset price inflation (with some property markets showing well over 10 per cent and perhaps 20 per cent inflation). Equities yo-yo up and down with asset price inflation, followed by a collapse – as during last summer.

Across the world, central banks are expected to sort this all out, but as Ben Benanke – past Chairman at the Federal Reserve Board – has said, there needs to be a far better partnership between monetary and fiscal measures. Even if the Central Bank base rate rises in the USA, and eventually the UK, there is a divergence – the Euro area may wish to cut the base rate. In all markets, the rate will stay low for some years. Welcome to the New Economic Era.

Dealing with debt

The debt delusion continues; the UK is not alone. Whilst it tries to reduce public debt, it watches the private sector debt mountain grow. Mark Carney, Vince Cable, Adair Turner and others have begun to realise we may be heading for another property debt bubble, which was the 2005-7 hors d’oeuvre before the main course; the collapse of the banking system in 2008. To some extent, the Autumn Statement has begun to recognise this problem.

Recent analysis shows the Greek total net debt (Private, financial, corporate and public) is over 1,600 per cent. The USA is at 800 per cent. The UK is a modest 1,000 per cent!

Any private debt harnessed, raises overall UK debt! But, given that private debt is always more expensive than public sector debt, why not use public debt?

Using Quantitative Easing – and placing funds into, and saving the banking system from collapse – has also stimulated new lending to real estate. So, how do we come off the drug of cheap money? We are all QE junkies.

Employment and taxation; why cannot we create a budget surplus?

Recent numbers show the UK has the highest working age employment ratio – 73.7 per cent – recorded for more than 50 years. But if you add up the zero hour contracts, internships and vast growth in self and part-time employed, the tax-take is modest; it’s not sufficient to create a budget surplus. With the economy rising so fast, this is of concern, but is also changing the shape of the property market. It’s the New Economic Era.

The growth of inequality, not just of incomes but of property asset wealth, is fuelled by QE. Some of the post 50s population seem to be the clear winners! However, as Professor Angus Deaton (no – not the comic), the Nobel Prize Winner for Economics, has said, “success creates inequality – we don’t want to stop success”. How do we get the correct balance?

Trying to reduce tax credits – a much-lauded policy when first introduced, but the political will to do so is doubtful – is another Catch 22. One of the reasons some are prepared to be self or part-time employed is the Tax Credit – a welfare-to-work initiative which balance out their financial needs. There must be a balance between incentives to work and costs.

The main issue is, how does government control expenditure, but also raise tax revenue; large global companies, in the digital age, trading on-line, are very hard to tax. Some major global takeovers are also sometimes undertaken to improve the bottom line by reducing tax, not to create new sales products or to promote new research.

Property is perhaps a prime taxation target, but when and how? As we know, the UBR for high-street shops is due to jump 17 per cent in 2016. But we already know SDLT, CILs, TIFs, Section 106 and other land development taxes, distort the property market. The Autumn Statement also announced other property taxes; higher SDLT for buy-to-let on second homes, tighter capital gains rules, a squeeze on housing benefit and increases (and reform of) council taxation. Welcome to the New Economic Era.

… and property markets …

In the New Economic Era economic events and both bio and digital technology, are radically changing our lives and inevitable our property markets.

Housing

What do the runes tell us about the housing market? Is the writing on the wall? QE and Sovereign Wealth loves UK housing and commercial property as an investment.

We have mismanaged and misunderstood how and why economic policies have changed demand for many decades. Tweaking the planning system will not see 400,000 houses being built a year (as in the 1960s), or even over 4 years – any time this decade. We will need an extra 1 million construction workers which, following a decade when funding to further education colleges has been cut by 50 per cent and shut construction courses, is impossible. The recent measures, in the Autumn Statement, seem to perpetuate a misunderstanding of property market dynamics.

Retail

In the New Economic Era, what are the consequences for shops? Technology is at the heart of the challenge. Numbers from the British Retail Consortium continue to show the footfall of high-street shops and shopping centres falling, whilst those in out-of-town Retail Parks rising. The numbers from Black Friday sales tell us this loudly.

Numbers from the Local Data Company also show a net loss of high-street shops, yet a net gain of openings for Retail Parks. On-line retailing, both home delivery and click and collect, is doing well and the greater use of logistics technology is keeping demand-push inflation very low.

Manufacturing and logistics

Technology is again at the heart of the success. Both long-distance sea cargo and on-shore distribution continue to lower prices in the logistics sector, but only if delivered to efficient out-of-town retail locations, or via on-line sales.

When on-line retailing arrived over 20 years ago, the USA mantra started to circulate; “if you want to invest in retail real estate, buy logistics”. To some extent, this has now come to pass.

Offices

In the digital age, what is an office? What we know is that artificial intelligence it commoditizing employment and killing off jobs. Those able to benefit from the digital age, ranging from key hole laparoscopic surgeons to money and investment traders and real estate investment agents, will win – but not forgetting the computer geek elites who create these systems. Other very important service sector jobs, such as nurses, policemen and women, firemen, waiters and teachers, will struggle to keep up with average salaries.

For the growing band of self or part-time employed, especially the over 50s, the dining table or spare room is the office. Fulltime and government employment is shrinking; the digital age, 24 hour, non-aligned workforce is expanding, but not the tax-take for government. With the fastest growing economy in Europe, there must be another way to raise taxes in the UK.

This is a potential threat to the quantum and liquidity of new property construction. High levels of SDLP already inhibit sales, in favour of extending existing stock, in the housing market. Welcome to the New Economic Era.

Forecasts into 2016 and beyond

Whilst London will become far less dominant, as the rental numbers show overall rental growth is slowing down from next year onwards, but will continue for most prime investment-grade markets for a few years yet. The signs at the moment do not show a crash, as with 2008, but a “Glide Down”. However, you never know; in 2007 the banks themselves never knew how over-exposed to loans they were – they forgot to record the numbers! Negligent? No one, not even the banks, could predict the crash, which followed.

This scenario looks less likely this time (Table I).

The problem with the investment market is that it’s taken slightly longer to slow down in 2015 than expected this time last year. The longer it remains at an unsustainable high level, the more it may eventually settle, especially in 2017 and onwards. However, modest rental growth should offset the negative impact of yields rising.

The on-going discussion about what is prime property is tedious and academic and seems to miss the obvious; market experience shows, it’s an ever-changing mixture of the triangle – certainty of a long income, quality of location and current market demand.

London and South East England will continue to dominate investment returns in 2016 but to a lesser extent, although nationwide all total returns will slow down (Table II).

Here is a summary of some economic and financial risks ahead:

Quantitative Easing – what happens when interest rates start rising?

Neo-Liberal economics – privatisation and the marketisation of society – will it create more austerity, inequality and an even larger private sector debt? Or will it go into reverse?

Global investment – remains risk-averse; governments have failed to shift the psychological bias in favour of expansion investment.

China – will there be slower growth as it moves from a producer to consumer society – so what next?

Low-global commodity prices – will cause even more economic and social disruption.

EU referendum – a divided Europe?

Scottish referendum – a divided UK?

Cyber Wars – potentially far worse than a war, cold or otherwise?

Middle East – what happens to the impact of the on-going collapse of failed states and the mass migration to Europe?

Climate Change and Social Sustainability – Even the Pope and Mark Carney are warning us! For some it’s already too late – mass migration is linked to this problem. The additional property costs and implications are becoming more obvious.

Despite the economic and financial risks ahead, in a world where overall aggregate demand is deficient, where the globe is awash with savings which are risk-averse and seek a secure home for their funds, where there are huge investment needs but where technology is altering all our lives, well-let income producing property still seems a safer bet that most other investments.

In the New Economic Era, the safer long-term property UK bet remains leased residential and logistics investments. The other property sectors are merely cyclical opportunistic plays. Have fun in 2016.

Professor Angus McIntosh

Real Estate Forecasting Ltd and Department of Real Estate and Construction, Oxford Brookes University, Oxford, UK