While property markets were not immune from this week's global equities sell-off prompted by 'Black Monday', Mike Prew of the US-based Jefferies Group believes that the UK property sector may be brewing up a storm of its own.
The Jefferies Group is warning investors that low inflation and cheap credit are dragging the UK into 'bubble territory'. What does this mean, and is the threat real?
Investors constantly seek ways to make money, but this is especially true when interest rates are low. Low rates drive investment in property and spark competition that causes rental values and house prices to rise.
Recent investment reports show that foreign property investment has impacted large areas of the UK. If interest rates were to increase, this change could kill international demand and cause a price crash.
Low interest rates have also allowed first time property investors to enter the market by exploiting cheap credit. If interest rates soar, cost of capital would rise and new investors could not continue to stream into the market.
Cause for optimism
While talk of crashing prices sounds menacing, there is reason to hope that any future property bubbles will be geographically confined or limited to specific sub-sectors of the market.
95% of Royal Institute of Chartered Surveyors members say that UK commercial property valuations are at or below fair value, although London prices are an exception. Likewise, Knight Frank’s recent UK Market Outlook report highlighted that rental returns varied markedly between office space (4.9%), industrial (4.3%) and retail (2.2%) rentals - it is clear that not all UK property is grossly overvalued.
If your investments are based on realistic projections of rental income rather than capital appreciation or dividends, you may well be safe from bubble related trouble.
Just last month a study found that demand for UK commercial property rose for an eleventh consecutive quarter, while available rental space declined for the ninth successive quarter: this relationship suggests that the rental market is strong.
Nonetheless, with the UK's economic recovery still a work in progress, it’s worth ensuring that you have the liquidity to protect yourself if a tenant can’t or won’t pay. For information on sensitive debt collection with rent arrears that won’t tarnish your name, contact a Dukes Advisor today.