Wait and see (until the wall of money comes back to property again)

wall-of-moneyMore than four million property investors in the UK are holding onto their cash rather than investing it in real estate, according to a survey:

They are watching the property market very closely to try and cash in on the cheapest property prices before they start to rise again and an estimated £20.2 billion which could re-vitalise the property market is being held onto by prospective investors as they wait until they think that prices have bottomed out, says the survey from mortgage lender First Direct.

So, the name of the game is ‘Wait and See’. How long to wait, is the million dollar question. Lets take another look at the UK, one the most transparant and professional real estate markets:

It looks like we are now bumping along the bottom of the trough,

… said Miles Shipside, Rightmove’s commercial director. He added that the market now needs a significant improvement in mortgage finance availability for it to start on the road to recovery. I don’t believe this is new to anyone reading a newspaper over the past few months.

So, UK’s wealthiest man is playing the same game of wait and see too. From the lips of Mark Preston (CEO of Grovenor Group with £523 million available for acquisitions), the Duke of Westminster said to me – and others:

People talking about green shoots of recovery have been spending too much time looking at the bulbs in their garden. By being patient there will be more compelling opportunities coming in due course. This downturn is going to be long and hard. We’re approaching all planning with that view.

So, guess what happens when the game of ‘wait & see’ is over and the majority of the investors comes back to the game of ‘shop ’till you drop’: an estimated £20,2 bn (and half a billion from the Duke on top) will be poured onto the UK property market alone. And probably much more. In other words: when yields drop, they will drop fast.

Some advisors are taking an advance on the recovery and are pulling pension funds into the market.

Legal & General Property for instance, advises pension funds to look to real estate.

UK leases tend to be long and generally have upward-only clauses protecting against reductions in rent, making commercial property a robust source of income during economic decline.

That may be the case – and in theory they are absolutely correct. However, these high-tension times have also brought us tenants that go bust, tenants that couldn’t pay the rent (on time) and tenants that negotiate rental conditions down (and landlords giving in on them). And with rental income being the main driver of property value, you are likely to suffer during times of economic decline. Nevertheless, if their investment horizon is long enough and their pockets deep enough to cover some smaller losses along the road (which is likely to be the case with most pension funds), for them, property is an excellent alternative to almost every asset class.