Making Property Work For Longer Term Gains

11 May 2009

As I review the article which I wrote for the Newsletter 12 months ago, I find myself surprised that little of significance has changed since April 2008. Following the initial banking crisis in the latter part of 2007, we were treated to a second significant panic at the start of October 2008. The financial system still appears paralysed by toxic debt and despite the huge Government bail-outs, borrowing for new projects is all but impossible to achieve.

Particularly hard hit is the development sector where even established developers have found access to project finance almost non-existent. Despite statements to the contrary, it appears that none of the banks is open for new business. The lack of development finance and the disappearance of funding for larger investment transactions has led to a very significant realignment of most property businesses.

Despite the current recession, it remains my opinion that our home-grown politicians seem unable to provide practical government that would help our development as an autonomous region and drive forward one of our major strengths, namely our knowledge- based workforce. The ideological differences regarding the selection process in education remain a mystery to business leaders who simply want to be able to select the best candidates to enhance their competitive advantage within the wider UK economy. Selection has and always will exist in all sectors of society, and changing an educational system that has consistently produced the best results within the UK could seriously damage our economy in the future.

Northern Ireland has stepped away from being a mainly manufacturing economy and we therefore need to maintain any competitive advantage that we have gained by continuing to produce the best knowledge-based workforce for the economy of the future. In terms of major businesses choosing Northern Ireland as a location, we remain a cost effective opportunity for technology-based businesses as well as call centre and back office functions. At a time when major corporations are looking to make significant cost reductions in their operating budgets, we should be again highlighting Northern Ireland’s cost advantages.

Office rentals in Belfast still rarely top £14.50 per sq ft as opposed to Birmingham (£33.50), Manchester (£32.00), Edinburgh (£29.00), Glasgow (£28.50), Newcastle £23.00 and Cardiff (£20.00 per sq ft) - Source: 2009 Global Real Estate Markets Annual Review – Knight Frank Rutley. With a number of high profile buildings nearing completion, we can provide a real competitive advantage.

Our elected representatives should again be pushing Northern Ireland as one of the UK’s most cost effective locations and we need decisive leadership to promote the region as a huge business opportunity with significant quality of life advantages over other regions in the United Kingdom. With a highly qualified workforce, competitive property values and modern facilities, Northern Ireland remains open and ready for business.

Over the last few years many thought that being a property speculator was a way to an easy fortune, and for a very short period of time, property was treated as a short term tradable commodity. Many long established property companies and property professionals exited the market prior to the crash as they realised values had reached ludicrous levels due to the easy availability of cheap finance. For the first time in many years, real value can now been found within the market especially by comparison to leaving cash in the bank. Recent auction sales in the wider UK market confirm a healthy appetite from private buyers for good long term investment product to off-set value loss in pension schemes or savings interest. For instance, Allsops auction on the 31st of March 2009 achieved a 79% success rate with an average lot size of £860,000.

Our own experience highlights the fact that cash buyers who view property as a long term investment are waiting and watching for opportunities to pick up well secured investments producing returns that show real advantage over bank interest rates. At Osborne King we began targeting food sector investments in late 2007/2008 as a de-risking policy for our clients. We have subsequently completed some eight transactions in this market sector producing reliable returns on a long term basis.

2009 sees the start of a new era in property for many who had not come into the industry prior to 1994. Gone is the concept that the only way is up and that property is simply another tradable commodity. Gone for my lifetime are the crazy ‘loan to value ratios’ and the cavalier introduction of interest roll-up meaning that debts simply escalated. Last month’s Budget has made us all very aware that we are now destined to pay for the excesses of the last decade for some time to come and, therefore, those of us involved in property need to find ways to make property work harder and more effectively for investors. The need for tight financial planning, effective credit control and creative strategies to assist both landlords and tenants alike, provides a new range of opportunities and challenges for surveyors. As the financial system returns to a more stable platform, we will need to develop workable solutions allowing structured development to begin again and provide the infrastructure for Northern Ireland’s economic future.

At Osborne King we have worked hard over the last two years to keep our highly experienced team together despite the downturn within our transactional business. We believe that our surveyors have gained new skills resolving issues in the most pronounced economic downturn since the Second World War and our prudent policies will pay dividends for our clients going forward in a new market environment. A year ago I commented that “we need to see a return to conservative values in business where sound financial planning is seen as a positive attribute” and I believe that even more today.