Today sees the publication of the UK October 2011 IPD Monthly Property Index – the index covering UK commercial property up to the end of April 2011. The IPD (Investment Property Database) index is the only UK commercial index referenced by NAMA’s Long Term Economic Value Regulations (Schedule 2) and is used to help calculate the performance of NAMA’s “key markets data” shown at the top of this page.
The Index shows that capital values were flat in October 2011 and indeed prices have been more or less flat for over a year now. Prices reached a peak in June 2007 and fell steadily until August 2009 when the current rally started. Prices then increased by 15% in the year to August 2010 but since then prices are up a measly 2.2% and in eight of the last 12 months the monthly increase had only been 0.1%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 11.5%. Commercial prices in the UK are now 34.1% off their peak in June 2007. On an annual basis prices are up by 1.7%. The NWL index is remains at 833 which means that NAMA needs to see a blended increase of 20.1% in property prices across its portfolio to break even at a gross profit level (taking into account the fact that subordinated bonds will not need be honoured if NAMA makes a loss).
The table below shows the change in value of an index set at 100 at 30th November, 2009 and applying the month-on-month % increases in a compound manner.
The outlook for UK commercial property looks unclear, which is hardly surprising as the outlook for the UK economy generally is uncertain. Economic growth this year has been subdued and an annual outturn of +0.7% is expected for GDP according to the EU’s Autumn forecast issued last week. Since 2007 the UK has committed to a programme of Quantitative Easing (printing more pounds) totaling GBP 295bn or 20% of its GBP 1.5tn GDP and inflation has been a feature of the UK economy since 2007. The latest forecasts for UK CPI and RPI inflation are for 4-5% in 2011 which will fall in 2012 but stay over 3% before falling to 2.3% in 2013. Despite the travails of the EuroZone and US economy, sterling exchange rates have remained highly stable in the past 12 months. The UK’s base interest rate has been 0.5% since February 2009 and the outlook is subdued despite the hefty inflation.
The UK has a large number of commercial property markets across Northern Ireland, Scotland, Wales and England. NAMA has indicated that it has substantial assets in London and the central London property market is probably one of the most analysed in the world. BNP Paribas last week produced its quarterly monitor on construction in central London (the West End, mid-town including the Kings Cross area and the City) and concludes that the level of new space coming available to the end of 2013 remains modest; there is an implication that with constraints on supply that prices will remain buoyant.