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Property problems

Markets have adopted a more confident tone in recent weeks but the fragility of investor behaviour has not evaporated.

A rally in world markets stimulated by the likely success of Barack Obama was short-lived as concerns over a weakening economic situation reasserted themselves. Japan, once again, see-sawed, demonstrating that the world’s second-biggest stockmarket can be just as much of a casino counter as some of those in emerging markets.

Property has also suffered hugely as fears mount over occupancy rates, failing tenants and a newbuild overhang that could take years to clear. I was reminded that property is as diverse a market as any by the comments from speakers at the Cofunds Platform conference, held in London last week.

Planning conferences is a tricky business. When the Cofunds Platform concept was first developed two years ago, the editorial board, of which I am a member, considered property as a suitable choice for one of the early conferences. At the time, property funds were very much flavour of the month. We decided the timing was too risky, though, fearing – as proved to be the case – that property could suffer a downturn which, because of liquidity issues, could prove painful.

If you needed confirmation of the difficult state of the commercial property market, then the fact that Aviva – one of the confer-ence participants – suspended dealings in one of its property funds earlier during the week underscored the disenchantment that investors are feeling with this asset class. Raising money to satisfy redemptions in a tough market was proving problematic.

The tone of the presenters – five fund group representatives and the chief economist from the Royal Institution of Chartered Surveyors – ranged from realistic to short-term pessimistic. Only Simon Rubinsohn of RICS pronounced on the residential market – and he did also have a few words on commercial property. His views are always worth a listen.

The severity of the downturn in house prices separated it from earlier property bear markets. While he was concerned that the effects of the recession had yet to be felt (rising unemployment usually brings forced sellers, further depressing prices), a double-digit fall for a single 12-month period was exceptional. Perhaps more important was the virtual collapse of transactional activity and the willingness of failed sellers to place their properties on the letting market.

With new housebuilding grinding to a complete stop, he foresaw the ground being laid for the next housing bubble. Constructing homes purely for the rental market is probably no longer a business model but pent-up demand for homes is increasing. For example, affordable housing is way behind schedule and the Prime Minister’s target of new homes will fail to be met by a huge margin. The next shortage is just around the corner, with all that implies for prices.

But it was a subdued picture painted by the real estate gurus, by and large. Perhaps the best ray of hope came with the final fund group speaker. Standard Life, which, unlike the other four, focused purely on UK property, considered we were two-thirds – or even three-quarters – through a major slump in commercial property values. If correct, the turn would be seen some time next year.

So much depends on the length and depth of the upcoming recession. Its likely effects could be mitigated by the Bank of England’s response. A half-point reduction had been expected for some time but it was only in the week ahead of their meeting that a full one-point cut was being openly discussed. In the event, we had a point and a half.

I am looking forward to the minutes of last week’s meeting when they are published.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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