The quadrant theory

Setting aside any concerns you may have about our economic position, the UK is still a very wise country in which to invest in. The next few years will be tough, yet the fact that we have a deficit plan underway will set the course for the next 15-year property cycle.

The first five years will be choppy. A diminishing public sector won’t be filled immediately by a booming private sector. Yet give it time and as with every cycle post-bust comes recovery. Europe is having a very difficult time at the moment; put countries with different economic cycles together and the stresses and strains will come to the fore in those economies where real growth and GDP are lacking. Greece and Ireland have suffered while Portugal and Spain still teeter on the edge of collapse.

The difficulties across the continent have yet to work their way through. Considered a basket case for a while, the UK is increasingly looking as if it will escape the financial carnage. Partly because we aren’t in the single currency but more importantly that international confidence exists in our ability to repay debt.

While that continues, so the inflation we have will quietly be eating away at our debt. Conveniently we are gently inflating our way out of trouble. Property is a great hedge for inflation as not only is it a tangible asset but also we have a drastic shortage of supply in some key areas of the market and rental growth will inevitably follow inflation and not the capital markets.

Hence to the quadrant theory. Four areas of the market with very different prospects. London remains the gold standard of the property industry, prime retail and office locations have become a safe haven for international funds. Yields have compressed, rents hold up and as a prime investment for equity rich investors it’s perfect.

The other quadrant of yield compression is that of the prime shopping centre. Arguably the internet has polorised the market. Secondary centres are losing out, yet the demand for space in the best trading centres remains high from retailers that continue to do well. That’s not to say an asset does not have to be worked. Indeed they do. Tenant mix is imperative as is refreshing the offer on a regular basis. Yet there’s hardly any new supply and investors want a piece of the action.

Meanwhile we have the other quadrants. Regional property and secondary assets. Yields have moved out. Space is in supply but not in demand, rents are stagnant and the whole picture is very different. Yet debt isn’t available. That’s taken a huge number of buyers out of this space and in fact we now have one of the best buying opportunities for over a decade.

It’s risky, you need equity and you also have to have an asset management plan that is both aggressive and achievable. To the opportunistic investor, now is a great time to invest. We had the false dawn of early 2010 where punters and speculators saw green shoots. Then they died back. It always happens post recession, some call it too early and is normally driven by political activity. And the same can be said of 2010.

Yet if I was buying? I would be looking right now. The fund that buys assets at higher yields and supports tenants through a difficult time will be the investor that makes big returns down the line. The buyer that has skill in asset management and keeping tenants happy, in place and in business will see capital growth when yields settle and rental growth as and when the economy eventually recovers.

When everything looks bleak – that’s the best time to step in. As we stand on the abyss of cuts and the uncertainties of recovery are impossible to predict – that’s the time to demonstrate entrepreneurial spirit. Adopt the quadrant theory and buy wisely. In five year’s time, you’ll be venturing into a sellers’ market.