May Day not mayday?

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1 May 2009

As the dust settles after the budget announcement last week and the government continues to boldly go where no government has gone before in the past 302 years, to the day, since the Act of Unions brought England and Scotland together; what has been happening in the market and this May Day should we allow ourselves some optimism that the worst of the market distress is behind us?

Big Houses, Big Interest

There is no denying that there are many issues restricting the 'normal' operation of the market at the moment, with finance and equity requirements being the most acute factors that are plaguing the market from the bottom up. However the top end of the market, where choice rather than constraint limits activity, appears to be rousing from its winter hibernation.

The credit crunch brought about a fundamental uncertainty surrounding the future of wealth causing a paralysis in the top end of the market as buyers reviewed their investments and consolidated their position. While we are still facing a tough economic outlook, the current stability compared to the daily turmoil post-Northern Rock is enabling life and financial planning to recommence. Those who are unfettered by equity issues are now seeing the current market as a golden opportunity to buy quality residential property at historically low prices, especially given the alternative investment options.

This week alone, without naming names, we have been involved in four deals in the £1m - £2.5m bracket, ranging from townhouses in the New Town to large detached and semi-detached homes in prime Edinburgh locations; these included agreeing the sale of a substantial house in the Grange where four different parties were competing to purchase.

This revival in activity has not been limited to Edinburgh. Our Glasgow office has also seen a strong increase in buyer interest for quality property; most notable has been the 9 notes of interest and 36 viewing appointments arranged for one property within just one week of listing.

The Land & Development Department have also seen a shift in market attitude with investors and land buyers returning with renewed commitment and this has also seen an upturn in deals being agreed.

This activity suggests to us a key shift in the market, as buyers who are unrestrained by finance elect to re-enter the market, and crucially, place their money on the table perceiving they are achieving good value.

Its life Jim, but not as we know it...

Nationwide have released their figures for April which show a drop of -0.4% in the average house price when seasonally adjusted. What is notable about these figures is the fact that they show a slowing in the rate of decline and infers that we may be reaching a plateau as values remain fairly consistent month-on-month (see graphs below for trend).

This is also consistent with other indices such as the British Bankers Association whose figures for March show a similar trend of comparative consistency month-on month above previous lows, despite the fact that lending figures dipped in March.

The change in indices is an encouraging sign that we may be reaching the market bedrock from which to build and that an increasing majority are accepting the fact that we are moving into a changed economic period.

With trends like these not being limited to housing related indices it may be the case that while we are far from the end of this current cycle we are perhaps nearing the end of the beginning*.

*Apologies to Winston Churchill.

Maybe not full speed ahead, but ahead none the less

While stabilisation of indices and slowing declines are a welcome relief from the freefall of the past 18 months, all market sectors are not born equal and there is still lingering [uncertainty / opportunity] delete as appropriate. The new build sector is currently less equal than others and this has been illustrated by the recent downgrading of the building sector by Panmure Gordon as they "are adopting a 'sell in May and go away' theme across our housebuilding universe" believing "that share prices have run ahead of themselves on short-term mortgage lending data in January and February, ignoring the fact that prices and margins across the housebuilding sector have continued to deteriorate."

Evidence that the building sector is still facing tough times can be seen in the fact that a reported 9 construction companies per day are going bust according to figures released by PriceWaterhouseCoopers. This is a 15% year-on-year increase on Q1 2008.

In the new build sector when the going gets tough, the tough get discounting, and this still remains the case. The combination of interest rates, sector distress and sizable discounting has meant that the yields that can be gained are increasingly preferable to the rates being offered in savings accounts and far less risky than many other investment strategies.

With this in mind both our sales and lettings teams have been kept increasingly busy working with our developer and investor clients, large and small alike, to maximise their investment and property potential. To this end we will be releasing details in the next couple of weeks of an investment tool that will aid both individual investors looking for opportunities, as well as developers, banks and administrators seeking to efficiently maximise their property assets in the current market.

With diminishing stock properties and limited forthcoming supply combining with low interest rates, depressed market values and poor or risky alternative investment avenues there is an alignment of factors that are driving more and more investors back into the residential property market as risk, capital growth, yield and potential future inflation loom large in their thoughts for mid term investments.

Taylor Wimpey Refinancing Completed

Yesterday bondholders passed amendments to the debt facility approving £2.5bn in financing to provide a stronger base for the future. Interestingly the bond coupons are now in excess of 10%, illustrating the changed perception of their credit quality.

• 2012 Bondholders £250,000,000 11.175% (formerly 6.625%)
• 2019 Bondholders £200,000,000 10.925% (formerly 6.375%)
• Taylor Wimpey's 2008 results (2007 profit - £346.1m)

Pre-tax loss of £74.7m  - £1.9bn of exceptional items on its balance sheet.

• Volume fell 10%, to 13,394 units
• Average price down 11%, to £171,000
• Audited results confirm £1.97 billion loss for 2008
• Current order book £881m vs £1.4 bn

Taylor Wimpey in their own words...

"The ongoing economic uncertainty is expected to further impact on consumer confidence and we therefore remain cautious about the prospects for a meaningful recovery during 2009."

 "Trading in the UK has been encouraging during the first few months of 2009, with the underlying pick up in demand coming from all major customer groups and geographies.

"The industry has controlled stock well, reducing the risk of a repeat of the extreme price competition that was experienced in the last major UK housing downturn."

Realistic pricing is the key to selling; don't take our word for it, trust (social) science.

There is no denying that working at the coal face of the market for the past 18 months has at times seemed like mining an exhausted seam; dirty and tiring work with little reward where we have seen more than one or two canaries stop singing. Without labouring to engender any sympathy for estate agents, a common trial that we have faced has been matching buyer and sellers expectations on value, especially when sellers have been unwilling to accept a substantial decrease in their perceived asset value.

While this attitude is improving, advising a client that the offer they have received is a fair market value and unlikely to be beaten can be challenging. Therefore, if you are selling, or thinking of selling your house, it may be worth reading the following article in Investor Chronicals which summarises the academic research of Sergi Jimenez-Martin of the Barcelona's Universitat Pompeu Fabra.

In short his research concludes that the average American over-estimates the value of their house by 5-10%, although those who bought during a recession are more accurate. Also, and particularly relevant for the current market, sellers who bought in a boom period can over-estimate values by up to 20%.

To read the Investor Chronicles Article click here

For those who wish to read the full academic report click here

Contact Us

If you have any questions, would like any further information regarding the above content or would like to discuss how the Rettie & Co. Consultancy & Research Team can help your business, please do not hesitate to contact:

Andrew Meehan
Researcher
t: 0131 624 9051
e: andrew@rettie.co.uk

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