The property media grows in reach and influence as time ticks by. Headlines would have you believe that crashes are coming but at the same time housing is more and more unaffordable. In reality with recent wage inflation at 8.2% and CPI at least on its way down under 7% – the peak has happened and working people are playing catchup on the cost of living crisis in real terms. In the meantime the post-Truss correction of around 5% on pricing – and a significant drop in volume, but covid-inspired volume was well above the trend of the past decade, has made a difference that looks more like 15% when adjusted for inflation or wage inflation.
No-one wants to catch the falling knife – but sitting on the sidelines in this environment could seriously damage your wealth. There are so many willing vendors out there at the moment – the only job is to parse the truly motivated from those who are still trying to pretend it is June 2022.
The cost of leverage is a problem if you are not a cash buyer – that cannot be ignored. Deferred considerations are a powerful way around that if you can construct the deal appropriately. Vendor finance is in the ascendancy. I expect prices to stabilise in the shorter term – within 12 months – and the bears to move on, still scratching their head as to why the crash they think is so obvious is still not happening.
Miss this window to acquire at your peril. Commercial property has always been sensitive to interest rates and this hike is historically unprecedented in logarithmic terms. You do need to demand a significant premium on the risk-free rate – that is true – and that rate has moved from basically zero to over 5% in short order. However, a sticky inflation rate will keep rents nicely buoyant and if you can buy 30-40% cheaper than 12-15 months ago, this has to be considered.
The coming period will all be about rent growth. This is how we, as investors, get inflation on our side here. Values will pick up because rents passing will pick up. Rates will adjust back downwards – my view is that along with peak inflation we’ve also seen peak gilt and swap rates, which will continue to reprice mortgages back downwards to pre-2008 levels, as margins settle down. This might be a painfully long period of another six to 12 months, but if a deal works at today’s prices and you are a five-year fixed disciple like I am, then in five years’ time I would be very surprised if you aren’t sitting pretty, assuming competent asset management.
Why is this the number one topic for the next quarter? Because I hear experienced investors from around the country saying they are taking a break from buying and waiting to see what happens. I’m convinced at this point that they are making a mistake – and they’ll only know what the opportunity was when it has already passed them by.
Inflation has around 12 months left above target, and another 12 months bobbing around between 1% and 4%, by my forecasts – in any historical context this makes sense, although for whatever reason the central bank and the major forecasters have denied this reality for most of 2022 and 2023. The underlying economy is now hot with inflation and so many businesses are well positioned with long term cheap debt that only starts to cause them problems in 2030 and beyond that problems then turn to growth in revenues, and with the average household smarting from the cost of living crisis, that’s a fairly impossible task. Look at the losses in the retail sector, after inflation has been factored in.
The game is to get inflation working for you – behind the government and index-linked assets, rent-producing property should be the second largest winner as long as inflation is being reflected in wages. Traditional “old school” methods of leaving the rent alone during a tenancy are stone dead – in my view they have been for years, but the interest rate has put paid to many of these. Also – right now – a whole heap of investors are left holding stock where the interest rate is above the net yield (after operational costs) – i.e. their gearing is negative, and their returns on equity are near-zero or even negative.
If this is you there are ways out – active asset management, sweating the asset harder. Rent rises, change of use to HMO or short-term rental – cut in operational costs by looking for efficiencies – in some cases, sale is the best policy. I spoke with someone who by his own admission is in financial trouble at the moment – and doesn’t want to sell but has around 3 million equity with a 1 million latent capital gains tax bill. Imagine sitting on a £2 million net profit and considering yourself in financial trouble! Crazy.
Inevitably, even in his situation (portfolio returning 4% gross yield, primarily resi) – complete liquidation likely isn’t the answer. Instead – partial sale, assessing every asset on its own merits, financial restructuring and a fresh approach to asset management are all likely to make a difference, alongside some sensible tax advice. For him the tax tail is wagging the dog and it illustrates just how much we should never let that happen.
So – look internally, get lean, be efficient and commercially minded. That’s the starting point. If the roof wasn’t fixed when the sun was shining it’s even more important to do it right away. Bearing that in mind though, any “acquisition holiday” will cost dearly over the coming 24 months when the train is still on the tracks, chugging away, and the rent rise trend does drop off, as it is bound to do over the coming 12 months. More will have been attracted to the market by buoyant rents and the agent and auction house relationships will be in the dust, picked up by other enterprising souls. Holiday at your peril.
