Property Insights July 2008

UK Market Update

Nationwide reported prices dropping by 1.2% in July. Similar trends were report by Halifax and Hometrack (-1.2%). Rightmove reported a mixed bag, with some parts of London still rising (London rose +0.3% overall). The Land Registry numbers were a little more positive, though these figures are about 4 weeks behind the other indications (note: Rightmove has the leading indicator).

Clearly the UK market slowdown continues with property prices falling in almost all areas because of a combination of:

•  Credit squeeze – banks are reluctant to lend high multiples of income, and are demanding high deposits to reduce their risk of default and negative equity

•  GDP slowdown - the economy is growing at ca. 1.5% per annum, and may be heading for a couple of quarters of recession, hence consumer confidence is low, unemployment is rising slightly and wage growth has moderated to ca. 3.5% per annum (from 4.0 to 4.4% in 2007)

•  Buy to let investors are buying less – likely waiting for prices to drop further and more bargains to appear

•  First time buyers – have dropped to a half of levels three years ago – they are almost non existent

•  Existing homeowners – the introduction of home information packs, high stamp duty taxes and moving costs has meant many existing owners have chosen to stay put and instead extend their homes. Difficulties getting kids into good schools means many owners, once they have got established in work and schooling arrangements, are reluctant to risk moving

•  Taxes – the rises in stamp duty over the last ten years make it far less attractive for people to move home, particularly in southern England

•  Debit – levels of debit got so high leading up to mid 2007 - many home owners and investors have now retrenched

•  Inflation - the rise in CPI inflation from 1.5% a few years ago to the current 3.2% (driven in large part by higher oil prices between $125 to $145/bbl) has meant interest rates have remained at 5% making borrowing relatively expensive compared to the USA (2% base rate) and European mainland (4%).

•  Developers – have been reducing prices of new build apartments to offload stock as balance sheets have deteriorated and many home builders have got into trouble with high levels of debit and dropping stock market valuations

•  Manufacturing – is in recession, albeit a weakening pound should help exports later in 2008

•  Young buyers – many young people prefer to rent rather than being saddled with huge mortgages, particularly now that most students leave college with massive student debits. They also like to travel, enjoy life and have families later in life – so deferring the purchase of a home is considered by many as an attractive option. Young immigrants also find it difficult raising finance in the UK and therefore rent instead.

The more positive underlying trends are:

•  Rising population – an additional 5 million people will need homes in the next 20 years

•  Stock market performance – the FT100 and other stock markets have not performed well and there continues to be interest in property as an alterative investment

•  Oil prices – the UK benefits from high oil prices in taxes from the North Sea, oil/gas income and government taxes on oil/gas income from around the world that ends up in London and Aberdeen. Remember the UK is almost self sufficient in oil, and its gas imports are not high compared to most European countries

•  Taxes – the government will likely go slow on tax increases moving forwards because the population cannot afford any more

•  Smaller households – high divorce rates, partners owning two properties and an aging population of single people will mean more homes will be required in the next 20 years

•  Inflation - with oil prices dropping to $125/bbl and the UK and global economies slowing, it may be possible for interest rates to drop in the second half of 2008 to 4.75% or even 4.5%

•  Employment – levels remain high and unemployment is not likely to rise a significant extent in southern England and London

•  Building – levels of home building are at such a low level that demand will eventually exceed supply and start supporting prices, possible late 2009 onwards. 240,000 new homes are required a year, but only a net 140,000 are being built (25,000 are demolished)

•  Olympics and London Infra-structure – new investments, infra-structure and public spending in London in the run up to the 2012 Olympics will help support prices in London. £1.5 Bln retail park at White City and £1.5 Bln retail park at Stratford will also help.

•  Rental market – young people and immigrant workers have a preference or a necessity to rent – this should stimulate strong rental demand – rents are increasing – this should continue

We believe house prices will continue dropping for at least another 6 months. After this, depending on interest rates (and inflation, and oil prices) it's quite likely the market will stabilize. Interest spread rates are coming down and the main credit squeeze is starting to subside. It's too early to say when the drops will stop – or whether there will be a prolonged downturn. Much depends on consumer confidence, and the government's management of the economy and whether the UK slips into recession and job losses accelerate. All these are quite uncertain.

Clearly for the first time buyer or new property investor it will be a high risk period. For seasoned property investors who are cash rich, opportunities abound, and these could increase towards the end of 2008.

To reduce investment risk, it's worth considering purchasing property only in developing city areas – and London probably provides the best opportunities and lowest risk of a fully fledged property price crash. The reason is levels of borrowing as a proportion of property value remain relatively low in London as wages are higher. As long as the financial sector does not contract, the sheer scale of wealth in the city and foreign investment in property and business should support prices. This is evidenced by the “ super-prime” property prices in Kensington and Chelsea still being on the rise in July. The trick is to find bargains in areas that are regenerating close to very expensive areas – these should experience a ripple effect up until the Olympics of 2012. This is the reason why we have prepared an infra-structure review of London outlined below, to help you with your investment insights and decisions.

Outside London, areas with a projected strong employment prospects are also attractive – some examples are:

• Aberdeen (oil companies, BP, Shell)
• Cambridge St Neots (high tech jobs)
• Reading (British Gas)
• White City-London (2008, 7000 new jobs, £1.6 Bln retail development)
• Stratford-London (2012, 7000+ new jobs, retail development)
• Newbury (Vodaphone)
• Southampton (new business)
• Kettering (transport hub, new businesses)
• Exeter (met office jobs, new business)

Historic cities and market towns with good schools and universities should continue to experience better house price stability during a downturn – examples are:

• Oxford
• Cambridge
• Warwick
• York
• Harrogate
• Lancaster
• Stratford on Avon
• Bath
• Exeter
• Taunton
• Skipton

London regeneration and infra-structure update for property investors

For all the serious London property investors, we have prepared a summary of the key infra-structure upgrades, mainly in East London, that we believe will impact asset prices and returns in future. Beyond any doubt, a new rail or tube station helps with bringing new wealth, income, jobs and prosperity into an area - helps deprived areas and increases rental demand and property demand generally. It's not rocket science. We have systematically researched the latest timings and stations to be built, to help you in your investment decisions.  

A.  Dockland Light Railway Extensions

Any property close to these new stations will see their value increase relative to the average London property. We have summarised the branch extensions - with new stations and timing:

1.  Woolwich Arsenal 2009  (from Silvertown via North Woolwich via new tunnel under Thames)

2.   Stratford 6 km extension – 2010

• Stratford International
• Stratford High Street
• Abbey Road
• West Ham
• Star Lane
• Canning Town

3.  Langdon Park (north of All Saints near Bow) new station on old line under construction

4.  Dagenham Extension – proposal ony - possibly 2012

• Beckton Riverside would serve the development proposals for the area between the River Thames and the A1020 in the vicinity of the proposed Thames Gateway Bridge.
• Creekmouth, Barking Riverside and Goresbrook (formerly Dagenham Vale) stations would be located so as to maximise catchments within the Barking Riverside development.
• Dagenham Dock station would be an interchange

These light rail developments link to Stratford - the main site for the London Olympics of 2012. These areas will likely encounter faster regeneration because of the new communications. Some of these areas will be transformed. Woolwich is a good example - one will be able to travel via DHL to Canary Wharf (20 minutes!) then Bank in the City of London (27 mins) without changing - and this is sure to boost prosperity and with it property prices. At present, it takes about 50 minutes to get to Bank - so now Woolwich will be open to all the city workers who earn high salaries and want to live along the Thames in a regenerating area up-river. Okay, we all know Woolwich is not Battersea, but it will certainly show improvement over time because of this new infra-structure development. And anyone that has ever visited wind swept North Woolwich in the winter will know this new development cannot have come quick enough.

Watch out also for the Dagenham development which may or may not proceed - a direct link between Canary Wharf and Dagenham would undoubtedly have a big positive impact on the area.

B.  East London Line Extension

Here we summarize the latest timing and stations to be built on the "East London Line tube extension". Many of these areas will be transformed particularly those that currently have no station and are also far from an existing railway station - Haggerston is probably the best example. By 2009, we'll be able to travel by tube from Highbury to New Cross Gate without changing train. It will open up New Cross Gate and New Cross to the vibrant City and north of London - very exciting.

2009 New tube trains

1. Dalston Junction
2. Haggerston
3. Hoxton
4. Shoreditch High St
5. Through trains to New Cross Gate (terminating)

2010 East London Railway Opens - through trains to:

1. New Cross Gate (already open, now a through station to West Croydon)
2. Honor Oak Park
3. Forest Hill Sydenham
4. Crystal Palace
5. Penge West
6. Anerley
7. Norwood Junction
8. West Croydon

Phase 2 (to be announced)

1. Surrey Canal Road
2. Queens Rd Peckham
3. Peckham Rye
4. To Wimbledon (possibly via Clapham Junction)
5. Brockley

 

 

 

In 2010, the above-mentioned stations will open - transforming places like sleepy Brockley and Honor Oak into the mainstream tube world. Large tracks of SE London Victoriana will become accessible to City workers - we expect this to positively impact property prices.

Workers will be able to travel from Highbury all the way to West Croydon by tube -  overland on "East London Railway" from New Cross Gate southwards. We've been waiting years for this exciting development and this extension to West Croydon is now 95% certain of happening.

Phase 2 seems to be suffering a bit of delay - this is the section from a new station called "Surrey Canal Road" near Millwall Football Ground (next to the Incinerator) via Queens Rd Peckham, Peckham Rye all the way to Wimbledon. We'll keep you posted on any developments here - it's likely to happen though, but possibly not until 2012 or later.

Any residential property investment within 3-5 minutes walk of these new stations will see a big benefit in both rental demand and asset prices after station completion. We hope you have found this research helpful in assisting London property investors.

C. Crossrail – a massive £16 Bln new project

This huge project got the go ahead in July. At peak times, 24 trains per hour will run in each direction through central London and reach speeds of up to 100 mph on open stretches and 60mph in the tunnels. Heathrow will be 31 minutes away from the West End and 43 minutes from Canary Wharf.

New stations are planned at Paddington, Bond Street, Tottenham Court Road, Farringdon, Whitechapel, Liverpool Street and Isle of Dogs. The heart of Crossrail with interchanges in all directions will be Farringdon – a one bedroom flat close to this station will surely be a good long term investment. Relatively down at heel Tottenham Court Road will get a boost. Liverpool Street will see a boost, and benefit also from the East London Line extension and proximity to Eurostar at Kings Cross. Lots of good news for these central areas.

Crossrail will link the West End with Southall (19 mins), Woolwich (22 mins), Ilford (20 mins) and Romford (31 mins). Likely completion date is 2014 if all goes to plan. Expect further price rises in these suburbs as the West End and City opens up to these previously deprived areas.

Abbey Wood will be a big beneficiary – this place is almost impossible to reach at present. It will have direct access to City jobs and the West End. Prices should rise dramatically if and when the project is complete. Let's hope the project goes through the execution phase. It's been 20 years in discussion and the city will see huge benefits in previously deprived areas because of this project.

UK property hotspots 2008 for a 2-3 year timeframe

We often have requests for our Property Hotspots listing – we enclose the listing for 2008. It's important to note that for most of these areas, we do not expect prices to rise this year. There may be the odd exception – some parts of London may still see small rises such as Soho and Islington. And in the “super-prime” market frequented by wealthy people from Middle East, Russia, Africa, USA, South Asia and the Far East – prices could well continue to rise – such areas include Mayfair, Chelsea, Kensington, Knightsbridge and Notting Hill.

The main objective of presenting this list though is to allow interested investors who have cash and funding to seek out the best opportunities in a 1-3 year time frame. It's quite possible prices may start rising by mid 2009 in these areas if interest rates drop late 2008 and oil prices stay at or below $125/bbl – we do not know when property prices in the UK will bottom out or how severe the downturn will turn out to be. Some areas like Oxford have not experienced any downturn as yet – primarily because of people wanting to move to the City because of its education, history, surroundings and expanding businesses.

The listing is very selective. You will notice no hotspots in the Midland, East Midlands and many northern areas. The closest to a hotspot we would venture in East Midlands is Doncaster, because of its fast train link to London. In the Midlands, we'd go as far south as Gloucester, Tewksbury, Cotswolds and Cheltenham before picking up any area we believe to be more secure from the downturn. Many areas of Manchester may see prices staying firm because of the strong business in this major city. But overall, the drop in public spending growth, manufacturing being clobbered and lower incomes in the north we believe will have a pretty severe impact on property prices in the next year.

Areas in the listing have been selected because of a number of positive factors that will support prices and lead to increases in future years:

• Regeneration
• Improvements in communications – rail, tube, road, bridge, tunnel 
• Olympics
• Jobs market exposed to international wealth and finance
• Ripple effect from more expensive neighbouring areas
• Retiring babyboomers, holiday homes and second homes
• Shortage of land, shortage of supply, increasing population
• Education, universities, knowledge
• Oil wealth

With the Olympics coming up in 2012, it's hard to believe that places like Hackney Wick, south Hackney, Stratford and Bow will not see prices rising. With Ebbsfleet arriving, it's difficult to see how Gravesend will not see prices rise in a 2 year time frame – especially when the fast commuter trains start in 2010. Dartford, Rochester, Northfleet, Strood, Southfleet and Istead Rise will all be positively impacted.

Table: 2008 UK Hot Spots - PropertyInvesting.net - 3 year view

London	Reasons	Rating
Soho, Bloomsbury	Midway West End/Mayfair and City - massive wealth, nightlife	9
West Kensington	Spill over from Kensington - huge wealth/finance	8.5
Lambeth - South Bank	Proximity to West End, mid-town, City and Docklands	8.5
London Bridge - Old Kent Rd	Proximity to City, stations, night-life	8.5
Peckham (Queens Rd)	East London tube station promised, distant Olympic effect	8
Kennington	Gentrification, proximity to Westminster	7
Hackney - Hoxton	Gentrification, Olympic effect, proximity to City & Stratford	7
Elephant & Castle	Proximity to City, West End, regeneration	7
Chelsea	Wealthy international investors, city bonuses	7
Bow - Bow Church - Shoreditch	Olympics, proximity to City, Stratford, regeneration	7
Bayswater	Proximity to West End, Notting Hill, Hyde Park - good value	7
Battersea	Gentrification, proximity to Chelsea	7
New Cross Gate - Telegraph Hill	E London line tube extension, regeneration, proximity to City	7
Woolwich	DHL extension due by ca. 2010, cheap, regeneration	6
White City - Shepherds Bush	Retail development, regeneration proximity to West End	6
Stratford - Plaistow	Olympics, new Eurostar station, regeneration, retail	6
Royal Docks, Silvertown, N Woolwich	New DHL extension, city jobs, Olympic affect	6
Limehouse	Midway Docklands and City - jobs	6
Forest Hill - Catford	East London Line extension opening late 2007	6
Clapham	Gentrification, proximity to West End, City	6
Canada Water	Regeneration of £1 billion, one stop to Canary Wharf	5
South East
Gravesend - Northfleet - Southfleet	New Eurostar station at Ebbsfleet	8
Cambridge	Top education, history, promixity to London, house shortage	6
Ramsgate	Fast commute to Kings Cross in 2009, nice harbour	6
Newbury	Shortage of homes, big business, A14 improvement	6
Reading	Oil company HQ, M4 corridor, close to Heathrow and London	6
Winchester	Excellent education, history, shortage of homes, wealth	6
Oxford	Top education, history, promixity to London, house shortage	6
Rochester-Strood	Regeneration, proximity to Ebbsfleet	6
S Midlands
St Neots	High-tech business, close to Cambridge, A14 improvement	7
North, North West
Bury	Regeneration from low base - for 5 year outlook only	6
Skinningrove	Late regeneration and identified as nice seaside village	5
Bradford	Regenaration from low base - price could rise late 2009	5
South West
Portreath	Regeneration, airport, beaches	8
Hayle	On A30, rail, big harbour development, close to St Ives	8
Newquay	Regeneration, proximity to Padstow and Truro, airport, A30	7
St Just	Regeneration, Heritage Site	7
Weymouth	Olympics and regeneration	7
Swanage	Proximity to Sandbanks - late regeneration	6
Wales
Barry Island	Spill over coastal resort near Cardiff	5
Scotland
Aberdeen, Stonehaven	Oil boom, catch up since mid 1980s	9
Dundee	Low prices, regenerating, nice countryside	8

If you can use the quiet market and relatively high interest rates to seize on opportunities, it might do you good in future years. Not without its risks of course, but we believe focusing on these areas – particularly where new jobs are being created – will help your investment returns in a 2-3 year time frame.

Woolwich is an interesting example – depressed, down at heel, high unemployment, south of the river – many things going against it. But with the Docklands Light Railway Extension due to open in 2009, Olympics 4 miles away, city jobs close by and a low price base – it's an area that will improve substantially in the next ten years. Expect prices to drop for the next year as some distressed sellers come into the market. It will improve in the longer term though. The larger Victorian properties towards Plumstead are also worth considering. Crime is relatively high at present, but as the area improves, this should reduce.

Closer to the city, a safer bet is New Cross Gate - Nunhead - Peckham. This area will benefit from the East London Line Extension from 2009 – 2010. A new station at Surrey Canal Road should eventually transform this part of London near Millwall football ground. The Hatcham Park conservation area close by is already popular - though it's likely to become more so in the future.

In the north of the UK, as we have been mentioning for 18 months now, Aberdeen is a hotspot. A shortage of land, property and building, employment growth in the oil/gas sector and wealthy retiring oil workers all play in its favour. The corporate lettings market is vibrant. City centre apartments and nice old detached properties in central areas are probably the best opportunities. Stonehaven and Dundee are both experiencing positive spillover from Aberdeen. Anywhere within 40 miles of Aberdeen is worth considering, unless you think the oil price will crash.

Overseas European Investment

We believe the European economy will take a knocking in the next few years as interest rates rise, inflation stays stubbornly high (because of oil prices at $125+/bbl) and the general tough banking conditions in the western economies. Exports to the Far East are helping, but the Euro seems overvalued – probably by about 20% against fundamentals. We expect the Euro to decline along with the UK Sterling in the next year. This should help exports and growth but property asset values on a US $ or global basis will suffer because of it.

We have ranked the countries we believe will see highest house price growth (top) with those showing falls (bottom). The general trend is that the newly joined up Euro countries will see prices rising, with the older ones seeing stagnant or falling prices. Italy will suffer from high oil/gas import costs, as will Spain and Greece. Less airline travel to these holiday destinations because of higher airline fuel prices will also dent demand for property in these countries. An exception is Cyprus with an influx of Middle Eastern money and tourism helping the small economy of this Island.

The list is ranked in terms of certainty of house price rises (top) to house price drops (bottom) in the next two years:

• Russia
• Norway
• Cyprus
• Albania
• Romania
• Montenegro
• Serbia
• Poland
• Luxembourg
• Hungary
• Malta
• Croatia
• Belgium
• Finland
• Solvenia
• Slovakia
• Bulgaria
• Denmark
• Lithuania
• Czech Republic
• Switzerland
• Sweden
• Holland
• Austria
• Turkey
• Latvia
• Germany
• Estonia
• UK
• Ireland
• Spain
• Italy
• Iceland

The countries with the biggest potential upside in house prices movements are probably:

• Albania
• Romania
• Poland
• Montenegro
•  

Albeit some of these countries or regions are also high risk, particularly Albania. Probably the lowest risk but biggest upside country is Romania – with regenerating second hand property in Bucharest the capital being the highlight, particularly in the more prosperous central suburbs. As wealthy Romanians return home from foreign working missions, they will want high class apartments and houses close to the city centre in the better areas of the city (north and north-western central suburbs).

Krakow and Warsaw in Poland are also likely to be hotspots – prices will benefit from the proximity to Germany and Russia – its wealthy near neighbours.

For the safest haven, Norway is beyond doubt secure, wealthy, with massive oil/gas income and beautiful scenery (when it's not raining). With small population and environmental restrictions, expect property prices to continue rising on an ongoing steady basis. Oil towns of Stavanger and Bergen should do well, with Oslo following behind.

Every country has a different market, and asset prices of certain properties will perform better than others. The three key categories one can split property into are:

• Residential : Apartments and houses, in cities, towns, villages, and isolated rural areas - principle homes, holiday homes (private or let)
• Commercial : Warehouses, factories, retail shops
• Land : farmland, residential building land, commercial land, forestry/other

In emerging economies with rapid GDP growth, normally the prosperous cities are the areas which have strongest property price growth over time. This is where jobs are created and wealth is focused. Land restrictions and demand drive prices up. Holiday homes and second homes in countryside or seaside areas also tend to follow. Central city land prices will rise the first, then ripple out to country areas close to the cities. So, as a general rule, for residential property investors – if you purchase historic city centre apartments and houses in regenerating suburbs close to prosperous city centres in the capitals or second cities, you are likely to see prices rising sharply. An example was Prague though this is now quite a mature market. Newer examples are Warsaw (Poland), Bucharest (Romania), Sofia (Bulgaria), Krakow (Poland) and Bratislava (Slovakia), Tirana (Albania) and Ljubljana (Solvenia).

Concluding Remarks: We hope you are enjoying your property investing so far in 2008 – more challenging times than most, but with lots of opportunities.

Property Insights June 2008

UK Market Update

More doom and gloom. It's no surprise with oil prices at $142/bbl, and inflation has reared its ugly head again. Indeed the negative impact of oil prices on inflation could have been far worse so far, but the affects are well and truly now feeding through. In the UK CPI inflation is now 3.1% and looks likely to rise to over 4% in the next year. So this in theory would add at least 1% to interest rates, and push mortgage costs up about 20%. If oil prices don't rise further then it's likely inflation will drop back from 4% to its target range 2 to 3% within a year - but we believe oil prices will continue to rise and cause inflation to stay stubbornly high and put pressure on the Bank of England to raise interest rates. They cannot do this indefinitely because this could cause a fully-fledged recession, but they are well and truly between a rock and a hard place on this issue. We believe it's all down to the oil price – as we've been warning for the last 18 months.

Meanwhile the effects of the credit crunch appear to be working their way through, and some interest rate offers have recently been reduced – a good sign of good credit availability to the banks. Berkleys the builders will now start buying large tracts of UK land, have stopped paying out dividends and therefore seem to have called the bottom of the property market – they've called the bottom and top successfully before. We'd like to re-iterate our view that the property market has not reached the bottom yet, and is unlikely to do so any time soon. It may now take years to properly recover because of high oil prices. This is why we have been advising for 18 months to invest in cities and areas that are positively impacted by high oil prices. You can read the range of Special Reports at the end of this Newsletter.

One element missing so far that could cause a fully fledged house price crash in the UK is dramatically rising unemployment – employment has stayed stable for the last year. As long as the jobs market holds up – which is not for certain of course – then house prices should not drop more than say 5-10% per annum for the next year or so – with the possibility of stabilizing prices at any time if the oil price drops.

Landlord Rental Update

The rental market generally remains firm as first time buyers struggle to obtain mortgages because of the credit crunch, and are avoiding taking the plunge because house prices are likely to drop further. This has been a boon for buy-to-let investors as there are plenty of tenants for reasonable quality accommodation in central – convenient locations. The employment market remains strong and the wave of immigrants needing accommodation shows no sign of reversing. We believe unemployment may rise slightly, but not significantly despite the UK slowdown. As long as your properties are in reasonable decorative order, well presented and in handy locations at competitive prices, you should avoid long void periods in the current market. Rents have generally been rising in the last year or so, particularly in London. Yes, mortgage costs have risen a lot as well, but although many buy-to-let properties don't make positive cashflow, most buy-to-let investors are sitting on sizeable equity so are not suffering undue distress as yet. Some reports of distress seem to come from media coverage of people who entered the market very late and also bought into new build developments for instance in northern cities. But this is not the average buy-to-let investor – most investors purchase older flats and houses and are less exposed to a flood of new build properties hitting the market at the same time.

Continued Housing Shortage

As house prices rose in 2007, the government predicted that the UK needed an additional 300,000 properties per year, yet only a net 180,000 were being built. Now building levels have dropped considerably, probably to something like 120,000 a year - mostly flats. But these government targets should not really change since they are based on population growth, immigration, aging population, and predicted smaller family units. So we expect a further shortage of property now and in years to come as building levels drop when they should be rising. Any older house in the south of England that can be purchased at low price in a good location close to higher paid jobs should be a good long term investment. So we advise looking for selective bargains in London and southern and SE England within 60 miles of London – hopefully requiring some easy renovation – upgrade. As oil prices rise, huge profits will be generated from London based oil/gas and mining companies – London is also energy efficient compared with most areas with its electric trains, commuting and lack of manufacturing. So GDP should be maintained at reasonable levels as long as banks do not go under (unlikely since the key reason they would go under is stress caused by high oil prices, and Middle East investment funds would then step in and buy them up).

In summary, the current conditions are enough to discourage building just when there should be a big building spree for the medium to long term. This lack of building should help support prices into 2010. Yes, transaction levels have halved, and people are staying put, but there is not much sign yet of severe distress, unemployment or a crash. It's hardly surprising so few people want to move because of massive stamp duty increases and transaction costs – a key reason why so many people are choosing to extend or upgrade existing homes. So for the buy-to-let investor, one can see opportunities abound in southern England and London – particularly in the run up to the Olympics in 2012. (Stratford, Hackney, Bow, Canning Town spring to mind, with Gravesend further out another good bet with the new Ebbsfleet station).

 

US Market and Future Economic Outlook

The dollar has dropped as we all know – by about 25% against most currencies in the last 8 months. This has probably fuelled about 25% of the oil price rises. It's also helped re-balance USA's massive trade deficit. Exports have been very strong since the dollar dropped – hardly surprising. Inflation has been remarkably well contained despite higher energy prices and the weak dollar. Productivity improvements and general efficient public and private sectors have helped the US weather the economic downturn – and it now looks likely that despite the sub-prime crisis, credit crunch, house price declines and general low consume and business confidence levels, the economy will escape any form of recession. Indeed, GDP growth is likely to be well over 1% in the next year or so. Even with oil prices up to $170/bbl, we believe the US economy is robust enough to not drift into a recession. We think the worst will be over by end 2008 and a recovery will start in 2009. For US real estate investors, end 2008 is probably a good time to purchase bargains – particularly in areas hit hardest by the sub-prime crisis and re-possessions such as Florida, Phoenix in Arizona, and parts of California. These are the areas that in future years will encounter large population increases, GDP growth and retiring baby-boomers settling in the sun. Texas is another winner with the oil prices booming. Wyoming and NE Colorado (coal) are other areas that will benefit from high energy prices. Bakersfield in California is another – a rather depressing small industrial city, but oil production activity will continue to boom – so rentals and oil worker homes will be in short supply.

For non US investors, there is a dollar currency risk to investing in the USA which needs to be properly considered. If you believe the US dollar will continue its decline, it might be worth investing in your home country. It's also a function of local interest rates, local inflation, where you are financing, how much equity you put in yourself (and currency) and which currency you are financing in. We're no experts at currency risk – not many people are – hence your real estate investment strategy needs to add this risk into your decision making. They say if you don't understand it – it's best to avoid it! Overall, if you are a non US American investor and believe the dollar will strengthen – it should increase your appetite for US investments. If you believe the dollar will continue dropping over many years, its probably best to avoid the exposure – unless you intend to settle in the USA one day.

For global investors, our steer is, don't under-estimate the US economy. People have been writing the USA off for years, but it's got the following going for it:

• Highly motivated, organized and educated workforce
• Innovation and high technology
• Available financing for business
• Small public sector, large private sector
• Low taxes
• Increasing workforce and population
• Low cost building
• Coal, oil, gas, nuclear, water, forestry, agriculture, minerals
• Oil shale deposits, and tight gas deposits for when oil price rise further
• Much land, varied climate, good security and political stability

There are not many countries that have so much going for them – yes, the US uses too much oil and gas, but they do produce half of what they need. They have the largest coal reserves in the world – these will not run out. So when the US finally begins to wean itself off its addiction to oil, it should be well placed to trade with China, Brazil and India in the global economic expansion.

Most countries have public sector inefficiencies dragging down their economies – the continued US productivity improvements in manufacturing and services is impressive and it's difficult for many European countries to compete, particularly now the dollar has declined in value.

Norway focus

Let's take a look at Norway. This cold and rainy northern outpost! The population is 5 million. We predict oil and gas revenues will top $200 billion a year by 2009 – massive. That's $40,000 per person per annum. Meanwhile inflation is moderate, currency is strong (hardly surprising with high oil prices), and the Norwegians have been investing their oil wealth for years internationally in high earning investments. The trade balance is massively positive. The population is stable. No problems with immigration, emigration, asylum seekers etc. Politically very stable democracy. Highly educated workforce. Efficient working practices. Trusting and honest people. Very high on transparency and business ethics. Good legal framework. Many good engineers. Beautiful scenery. Long summer evenings. Hydro-electric power in abundance. Forestry in abundance. Nordic culture. The list goes on.

Okay, taxes are high and it's cold and rainy in the winter. But property investment in such a booming business climate looks to us to be low risk and relatively high reward. Another bright outlook is the currency – how can such a currency drop when the oil prices are booming, look set to continue this boom, whilst the currency is not pegged to the dollar or Euro.

Our favoured locations are:

• Oslo – capital, oil company headquarters, banking, services, government-public sector jobs
• Bergen – oil town
• Stavanger – oil town, port, oil-gas import-export terminals
• Southern coastal seaside resorts SW of Oslo – 2 nd homes for increasingly rich Norwegians

If you like long distance skiing and the northern lights (Santa for the kids), the place is also a winner in the winter. In the summer, 20 hours of daylight, skinny dipping in the Fjords and the staggeringly beautiful scenery are all plusses. Good healthy outdoor life. We really cannot think of anything particularly negative about Norway – you've got to break into the relatively introvert family oriented cultural persona and social circles. It's got Finland, Denmark, UK and Sweden as it's neighbours – nothing negative here either! The real highlight though is massive oil revenues and massively increasing gas revenues projected over the next twenty years. Norway will overtake Switzerland and Luxembourg as the most wealthy state in Europe soon – and it's difficult to see property prices not rising off the back of this.

Mining Property Boom

As India and China industrialize, commodity price have risen fast – all commodities have experienced big rises in the last five years. This cycle seems unlikely to be ending any time soon. Minerals like iron ore, aluminium, platinum, uranium, copper, lead, gem stones and coal are required to fuel industrialization in the “BRIC countries”. This cycle has been described by investment banks as a “supercycle” which could last a decade or two – rather than the normal five yearly boom-bust cycle. The reason is this time the expanding global population, shortage of supply, increasing demand for raw materials and rapid industrialization of India and China are likely to lead to a sustained demand over a long period. Countries heavily positively exposed to mining are:

• Chile
• South Africa (NW and north of Johannesburg)
• Australia
• Russia
• Kazakhstan
• Mongolia
• Democratic Republic of Congo (high risk)
• Sierra Leone (high risk, diamonds)
• Canada (oil sands open cast extraction)
• Indonesia
• Zimbabwe (high risk)
• USA (coal in Wyoming, low risk)
• UK ( London is the biggest global financial centre for mining companies)

Out of these Russia and Kazakhstan are also rich in oil and gas and to a lesser extent Australia is also. South Africa has no significant oil or gas, but is very rich in minerals – however, the government recently cut off electric power to the mines in January due to power shortages which reduced mining GDP by -22% - risks have therefore increased and inflation is now over 10%. For a pure mining real estate play, Chile is probably the closest you can get. When mineral prices skyrocket, mining jobs multiply and the mining rental market strengthens – all the employment leads to property prices rising. Void periods are low and yields are high. In Canada, the oil sands mining town of Fort MacMurray is a place the canny property investor can make serious money – purchase of oil company temporary accommodation. Rents are high, property is in short supply, real estate prices are rising and the employment scene is booming – massive skills and accommodation shortage are the order of the day in this oil sands boomtown outpost.

For a booming city with a stable economy, mineral wealth, oil and gas wealth and general exposure to Asia Pacific's booming economy, Perth is a place to consider, albeit it is very remote. Many oil, gas, LNG companies and successful mining companies have their offices in Perth – Melbourne is another city positively exposed to all these booming sectors. In Kazakhstan, Almaty is a city to consider – massively changing in a positive sense. The reason for mentioning all these great cities is that if one finds the sweet spot of rising oil, gas, minerals prices coupled with real estate – you can massively reduce your risks and increase returns – if you can be bothered to visit these cities and invest in these expanding regions. So much easier than trying to make serious returns in Italy, Greece and Morocco – all countries with negligible oil, gas and mineral wealth and set for economic downturn as oil prices rises.

Powerful global forces at work

Our analysis of oil and gas imports-exports suggest a massive transfer of wealth in future years from oil importing nations to oil exporting nations. The dollar is likely to continue its slide and asset prices in western countries are likely to drop. This will provide conditions for Middle Eastern oil wealth to be re-invested into low priced dollar and UK pound denominated assets such as commercial property, businesses, infra-structure and residential property. In general the Middle Eastern, Russian and Far Eastern economies will inflate – whilst the western oil importing nations will deflate. Banks may well go bust in the west as write-downs and lack of credit begin to bite. How long this process lasts and how severe it will be is very difficult to judge – part of it depends on how high the oil prices go – high cost of oil imports acts like a huge tax on energy importing nations. Economic balance will shift further to China, India, Middle East and Russia – and away from Europe and USA – albeit these economies will of course continue to be dominant as far as percentage of global GDP for the next few years. China and India will be catching up fast. Overall global GDP should continue to motor onwards at 3 to 4% growth per annum – fueled by expansions in BRIC countries and oil/gas and minerals exporting nations. For UK investors, avoid the FT100 stock market – all shares except oil, gas and mining stocks. Retail, property and construction will continue to take a hammering. In the USA, the Dow will also suffer (except for oil, gas, coal and mining stock) as asset prices drop and business profits come under pressure from inflation and high energy prices. We re-iterate our stance to invest in property in areas positively exposed to high oil and gas prices.

For Europeans who have been living off debit, rising house prices and the seeming never ending growth period – particularly in the UK – tough times lie ahead. The amount of air travel to foreign locations is likely to drop, with it the holiday home markets in place like Portugal, Greece and Italy – possibly Spain. Much of the property price increases have been driven by mobile UK and other European citizens buying second homes. As retrenchment begins, these prices should come under pressure. There will be exceptions though in fast growing local business areas like Barcelona, Valencia, Montpellier and Malaga/Marbella. But areas remote from jobs and business relying on ultra-low priced air travel will suffer – Cyprus, Greece and remoter areas of Portugal spring to mind.

Property prices are likely to stay firmer in Nordic countries that have efficient industry, knowledge based economies and many high paid jobs with relatively low unemployment – also with better demographics and less of an aging population. Some of our favourite locations are London, Oslo, Luxembourg, Aberdeen, St Petersburg and Moscow.

As Italy and possibly Greece and Portugal slip towards recession, there will be pressures building to reduce Euro interest rates. However, because EU inflation is running at 4% and driven by high energy prices and growth in Germany and France, the European Central Bank is likely to INCREASE rates – sending the peripheral EU economies further towards recession. In a year or so, if oil prices stay high – which we expect – this could eventually lead to the break-up of the Euro currency – as Italy, Greece and Portugal split then deflate their currencies to stimulate business, growth and competitiveness. If they keep pegged to a Franco-German Euro dominated Euro, they will likely slip into recession if oil

Property Insights May 2008

UK Market Update

More Doom this month: April wasn't a very upbeat month and May was no different - Halifax reported a –1.3% monthly drop in house prices with the biggest drop reported by Nationwide at -2.5%. Interestingly, on 20th May Rightmove reported asking prices actually rose by +1.2% with the biggest increases in the south. They also described how vendors were being unrealistic and would likely not find any buyer unless they were willing to accept far lower than the (inflated) asking prices.

The negative sentiment is hardly surprising in view of the credit crunch, and oil prices being $125/bbl as we predicted back in June 2007. What's on everyone's mind is – will the situation get far worse or not. One other factor weighing on sentiment is the current government's overall performance and Gordon Brown in particular – this is likely affecting confidence. The tax take has risen +76% since labour came to power in 1997 and 56% in inflation adjusted real terms – so household finances are being squeezed severely by a combination of high oil prices (this acts like a tax), high food prices (mainly because of oil prices) and the high tax burden (much of it interestingly coming from tax on fuel). It seems all these aspects are coming together to create negative sentiment – people are fed up with high prices and tax all round.

We expect things to worsen in the next few months as the remnants of the credit crunch plays out and rates are re-set in the UK. Furthermore, we see oil prices heading higher – we'll make another we hope accurate prediction in the next few months, but do not be surprised to see $150/bbl in the next six months.

One of the most depressing pieces of news was the inflation rate shooting up to 3% which means the Bank of England will find it difficult to drop rates further. And it also seems the banks are being very slow to pass on any rate cuts to their costumers – financial competition has weakened because of the credit crunch and the banks are clawing back losses via higher rates than they would normally offer. We also now expect interest rates to most likely remain unchanged for the rest of 2009 to control inflation – we hope they will not rise, but this is now a distinct possibility.

The good news is employment remains high, unemployment low, the population is expanding and wages are rising 4% per annum – so the rental market is buoyant. We expect retail sales to slide and property prices to remain under pressure for the next six months at least.

We hold to our Dec 2007 prediction of an overall -5% drop in house prices in 2008 – it's possible it will be slightly more than this. But don't get too disheartened. Longer term we are still quite optimistic. What we need is oil prices stabilizing, a change in the leadership of Government or a new Government and an end to the tax hikes the population has incurred over the last ten years. All this seems likely in a few years time, but for now, we're in a period of consolidation and mild distress.

We hope you have heeded our advice in investing in property in oil exposed cities and countries – the Special Reports describe these. As oil prices stay high, this advice will become even more applicable as a massive transfer of wealth takes place from oil importing nations to oil exporting nations. Oil exporting nations will boom. Oil importing nations with no alternatives will stay in the doldrums:

191: Oil Price Update and Real Estate
187: Real Estate and the commodities super-cycle
186: Oil price starts to skyrocket as predicted - how to profit
180: Oil prices continue to skyrocket
172: Make serious money - best investment sectors
169: Oil supply crunch begins… protect yourself
168: Alarm bells ringing – oil price shock now on the horizon
163: Making Serious Money as asset prices plateau – resources and property
161: Resources winners and losers - ranked list for property investors
160: Find out the winners and losers in the biggest oil boom in history - about to happen...
159: Massive oil boom - the winners and losers - be prepared
158: Supply and demand scenarios - oil boom and the property investors insights
157: Impact of 'Peak Oil' for Property Investment
151: Oil price $125 / bbl and rising…how to take advantage in property
150: Peak Oil shortly due to be reach – unique insights for a property investor
148: Take advantage of the oil/gas/coal boom – key insights

In Europe, the only country that produces more than it uses is Norway. The UK supplies half its own oil requirements (not bad) – so is better off than most. And London is home to many of the world's largest oil/gas and mining companies – so in general London and Aberdeen will benefit, whilst the rest of the UK will suffer.

 

Buy-to-let : No strong evidence of a buy-to-let bust – most investors have made ample equity to shelter themselves from a downturn. As long as the rental market stays firm, which is happening, then – okay – the really good times are behind us, but it should not lead to a meltdown. It's a period of consolidation. Some of the smaller players who got in late and bought new build flats in city centres may decide to exit the market, but anyone who has been in the market for say 3-5 years should be okay. The vast majority of buy-to-let investors intend to remain with the current portfolios or actually expand them.

It's certainly a good time to go searching for a bargain – it's probable prices will drop further – so most people are not in a big hurry. We advise searching hard for real bargains now with a view to the bottom of the market being in October 2008. We expect 2009 to be quiet, not sure yet whether prices will rise, but we think much of the doom and gloom may pass by October.

The stock markets are performing reasonably well and city bonuses will again be high at year end – corporate profits are also strong and the global economy is expanding by ca. 4% GDP with many international companies located in London, so don't expect a recession. We think UK GDP will drop to ca. 1.5% Q4 2008 with London at 2.5% and the rest of the UK at a meagre 0.5%. So we reiterate our long term stance – invest in London or anywhere within a 60 mile radius, or Aberdeen. We are also still fairly positive about south coast towns and cities like Southampton, Bournmouth, Brighton, Weymouth and Portsmouth.

The south-west long term is also very good, but expect some second home owners to sell up in the next year – this will likely suppress prices a bit.

Scotland : Prices stayed so low for so long that Scotland is still playing catch-up with England. The de-population has also slowed and many areas now have moderate population growth such as Inverness and Aberdeen. So prices should keep rising albeit at a moderated pace.

Overall direction: So overall, we stick with our guidance that the prices in southern England and London will outperform other areas in the next 2-10 years. South-west England will continue to be a good place to invest because of a massive housing shortfall as the population increases – partly people settling from London and the Midlands, and partly babyboomers retiring and an aging population living longer. Aberdeen (and within 50 miles of the Granite City) will be a bright spot in the north of the UK. Scotland should weather the credit crunch relatively well in the next year. The oil boom will drive prices further up as housing supply falls short and wealthy oil workers look to retire in the region in the next 5-10 years. In summary – follow the wealthy job, jobs, jobs – and you will find property prices going up.

USA Market Update

We believe all the gloom regarding the US economy is way overdone. An example is the first quarter GDP figures reported last week. Most of the media was reporting the USA was probably “already in a recession” in February and March – as it transpired, Q1 GDP was a whopping 0.9% (or 3.6% on an annualized basis). This is above trend growth. Tax breaks and low interest rates should start feeding through shortly – so we expect growth to continue to be strong. Okay, there has been a severe credit crunch for about 8 months, but this is more or less ended now in the USA. Foreclosures are still rising and house prices areas still dropping markedly, but we expect the worst to be over by October 2008, as the main period of rate re-setting has worked its way through.

As oil prices have stayed high, many oil exporting countries have taken the opportunity to invest in banks, real estate and businesses in the USA whilst asset prices are relatively low and the dollar is weak. The weak dollar has also benefited US exports and reduced imported goods – so the USA's current account deficit and balance of payments deficit have reduced significantly. The dollar is likely to remain weak, but this should boost growth, employment and inward investment by oil rich nations. As the banks work through their bad debit, and take their learnings from the spree of lending too much money to sub-prime candidates, we believe the real estate market is likely to start improving by year end. By end 2009, we see prices rising. So in summary, anytime in the next 8 months is probably a good time to pick up some real bargains – we're thinking foreclosures and distressed sellers.

The biggest downturn has been in Florida, Arizona, and Utah plus parts of California. We actually believe all these states in the longer term are the best states to invest in – the reason is the massively expanding population and good weather for retiring babyboomers – as you can be read in our US Special Reports. The main reason why prices have come down by up to 25% is because of the boom in prices in the previous five years, large building programs and intense speculation. So you might now find you can pick up foreclosures, and real estate from distressed developers for reduction of a further 20-35%. It's when things look the most distressed that it's best to buy, and we think things should start looking less distressed in 2009.

USA boom areas. The latest real estate price news has confirmed our predictions that some of the best areas to invest in are those areas exposed to the energy business – examples are Texas (Dallas, Fort Worth, Houston, Irving, Galveston, Austin), Montana, Wyoming (Green Rover area) and to a lesser extent Oklahoma and Bakersfield in California. All areas positively exposed to soaring oil, gas, coal and energy prices. Some parts of northern Utah may also eventually benefit from oil shale production. Areas around Houston – the Bakken Shales play – are also benefiting from renewed drilling activity.

The coal mining areas of Virginia are also worth a look – it's predictable that coal prices will keep rising and coal mining activity will boom in SW Wyoming and parts of the Appalachian Mountains coal belt. Jobs will be created and previously depressed areas will improve driving real estate prices higher.

We also like Carolina – many businesses are moving south from New York and NE USA in part because of the nice climate, educated workforce and new technologies – Charlotte is the only highlight in the Schiller real estate price survey with real estate prices up over the year.

Canada : House prices in Canada should keep rising and the Canadian dollar should strengthen further against the US dollar as the commodities boom continues and oil sands developments expand. Particular boom towns are Fort MacMurray, Calgary and Edmonton. The whole of Canada though should be positively impacted. The sheer size of the resources of Canada is impressive and this stable prosperous country is sure to do will in future years – a low risk place for real estate investing with good upside, particularly in the oil boom areas.

European places to avoid investing in

There will be a slow and telling suppression of the economies:

• that do not produce an oil, gas, coal and minerals
• have an aging and declining population
• have weak manufacturing
• are slow to reform – especially if socialist government, large public sector and strong unions
• prospered during low oil price times, and before the Indian and Chinese manufacturing and services global boom hit their economies
• where innovation, new technology and education is not strong

In Europe, highest on the list of countries that will suffer are Italy and Greece. Much of the property price booms of these countries has been fuelled by low priced airline travel bringing in NW Europeans to prop up property prices. We see both economies suffering in the next ten years and do not advise any property investment in these developed but potentially declining economies.

Spain is also a candidate for decline, though the country is closer to wealthy NW European neighbours and its economy is rather more dynamic and progressive than Greece and Italy. The population is also more stable. So we do not expect Spain to suffer like Italy and Greece. Portugal will also suffer – we rate Portugal half way between Spain and Italy.

As airline travel becomes far more expensive, and routes are cut, along with new taxes because of climate change, expect any city or country that relies on foreign long distance airline travel to decline – avoid these locations like the plague – examples: Cape Town in South Africa, Gambia, Seychelles, Mauritius and Maldives and possibly Cape Verde. It may sound boring, but wait ten years and oil prices will have hit home in some unlikely locations.

The best place to avoid such a scenario in Europe is to invest in or close to major population centres with prosperous services based businesses. These cities are less energy intensive and may actually benefit from rising oil prices – examples are: London, Amsterdam, Paris, Moscow, St Petersburg, Rotterdam, Munich, Oslo and Copenhagen in Europe. But avoid areas, cities and town way off the beaten track that need much energy and cost a lot to get to – unless these are the most desirable richest enclaves frequented by the most wealthy (e.g. Virgin Islands). Examples are Calabria and Sicily in Italy, and remote parts of Greece.

Other European countries we are neutral on are France, Belgium, Sweden, Finland, Estonia, Latvia and Lithuania. Prices in the countries should slowly drift upwards – all of these western European countries use technology and innovation to mitigate risks of high energy prices (e.g. renewables, nuclear, wind, efficiency savings). Meanwhile the Estonia should benefit from the proximity to booming Russia and stable Finland.

In eastern Europe, prices will still be playing catch up so we expect prices to continue climbing in Romania, Bulgaria, Montenegro, Croatia, Albania, Czech Rep., Poland, Slovenia, Slovakia and parts of Serbia. The point is, in older EU countries that boomed in the 1990s, we expect suppressed GDP and house price growth and a decline in tourism as airline travel becomes far more expensive.

We reiterate the safest places to invest in are Aberdeen, London in UK and Stavanger, Bergen and Oslo in Norway – higher risk but large upsides are St Petersburg and Moscow in Russia. The common thread – they're all oil boom towns!