A sign of the times

The global economy is now dominated by China; who are unlikely to revalue their currency. This will force the USA to consider yet more quantitative easing which will have the overall impact of keeping long and short interest rates lower for longer.

The UK will repeat last year’s performance. Economic growth will be lower than +2 percent in 2011 but the manufacturing sector is likely to continue growing by three percent in 2011, as the Government sector shrinks.

London and the finance sector will also do well, growing by about three percent.

Bank base rates are likely to remain almost unchanged for most of 2011 at around 0.5 percent.  However, it is the cost of the bank borrowing which will remain relatively high. Margins will remain between 200 and 300 basis points above the base rate, with a loan to value ratio of 65 percent which is a far lower valuation than 80 percent  back in 2005.

By the end of 2010 world food prices were up 20 percent, non-food agricultural such as cotton up 60 percent and world oil prices up around 10 percent. Add to this the UK government’s objectives to raise National Insurance, coupled with the raising of VAT and Capital Gains Tax; the overall impact will be cost push inflation in 2011.

Unemployment will continue to remain stubbornly high; with the UK ultimately seeing 2011 as a year of stagflation.

The green agenda
The green agenda will not go away fast. It is driven by the needs of energy security, the cost of energy which will rise faster than inflation and increasing concerns over widespread climate change.

The Government will need to sort out of the plethora of different certificates in the market including BREEAM, LEED, LES-TER, Energy Performance Certificates which have caused no-end of confusion to all concerned.

In late 2010 not only had the Government began to rethink the Carbon Reduction Commitment, perhaps turning it into a carbon levy or tax, but it was also proposing a “green deal” whereby a third party would retro-fit a domestic or non-domestic building such that the energy saved paid for the capital expenditure at no cost to the occupier.

If it works this, together with the Feed in Tariff, could be hugely beneficial for all companies. Since April 2010 it has been possible to sell electric power back to the Grid from micro-energy production facilities, including photovoltaic cells on the roofs of houses and offices. In April 2011 the Renewable Energy Tariff should finally come into force enabling those who have solar energy systems to claim a beneficial payment for their investment initiative.

Commercial property market
The outlook suggests that, with the exception of offices, retail and industrial rents will remain almost unchanged for the next two years. Only in Central London will there be some extraordinary office growth. In the retail sector, the steadfast expansion of major food store brands including Tesco, Sainsbury, Morrison, Asda, Waitrose and Marks and Spencer will look set to continue. The industrial and logistics markets will follow the trends in retail.  Food stores will be seeking newer and better space. There will also be industrial demand for waste-transfer stations and facilities to manufacture wind turbines.

Property investment
After the extraordinary surge in capital values, in both the stock markets and the property market between 2009 and 2010, the bounce-back is now over.

It is widely predicted by end of 2011, average capital values may have fallen back into negative territory.  The total return is likely to remain positive, but only because it will depend on rental income in the region of six percent.

London will once again remain the most popular investment location with equity investment money is crucial.  The UK life and pension funds, as well as some of the overseas high-net worth individuals and sovereign wealth funds, will have the pick of the market. But they will only be seeking prime, well-let with a long income stream investments.

The outlook suggests, across the UK as a whole, house prices will remain unchanged for the next three years, with the exception of Central London. Here we expect house prices to rise on average by five percent between now and 2014, mirroring the behaviour of the commercial office market.

The outlook
The outlook for 2011 suggests that there will be two economies, those employed and those unemployed. A north versus south divide has well and truly returned and may take some years to be reversed which we could see having knock-on effects for those involved in all aspects of the property industry.

In the commercial market, prime property will command much excitement from equity investors, while secondary and land markets will continue to wither in value. The bargains are available for those with cash.  Brand new existing vacant standing buildings will be cheaper to purchase than newly constructed buildings. But building costs are rising faster than inflation and with capital values falling, land values are heading south and new development looks un-viable in many places in 2011.