Today sees the publication of the July 2012 IPD Monthly Property Index for the UK. 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 fell by 0.4% in July 2012, after monthly falls of 0.5% in both June and May 2012 which in turn were after monthly declines of 0.3% in each of April, March and February 2012 and preceding that, several months of almost flat performance. Prices reached a peak in the UK in June 2007 and fell steadily until August 2009 when a rally started. Prices then increased by 15% in the year to August 2010 but since then prices are actually down by 0.6% and in the last 12 months prices have decreased by 2.4%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 8.7%. Commercial prices in the UK are now 35.8% off their peak in June 2007. The NWL index falls to 802 which means that NAMA needs to see a blended increase of 24.6% 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 overall outlook for the UK economy is muted in the short term with the country suffering a double dip recession after a shock- though modest – 0.2% contraction in GDP in Q1, 2012. The UK has a so-called Office for Budget Responsibility (OBR) which is independent of Government and produces its own economic forecasts and commentary on fiscal policy. The latest report from the OBR was published on 21st March, 2012 and it forecasts GDP growth from 2012-2015 at 0.8%, 2%, 2.7% and 3%, deficit of 8.3%,5.8%,5.9%,4.3%, debt:GDP of 72%,75%,76%,76%, unemployment rate of 8.7%, 8.6%, 8.0%, 7.2%, house prices of -0.4%,0.1%,2.5%,4.5% and inflation of 2.8%,1.9%,1.9%,2%. Last month, S&P of its top Triple A credit rating with “stable outlook”. Both Fitch and Moody’s have put the UK on a negative credit watch. The Bank of England last week revised downwards its estimate for GDP for 2012 from 0.8% to zero. Inflation appears to have come under control in the UK and is presently running at 2.6% per annum.
Monetary policy is overseen by the independent Bank of England and the current Bank of England rate is 0.5% and has been since February 2009. In the past month, another round of quantitative easing has been announced which means that GBP 350bn has been printed and pumped into the GBP 1.5tn UK economy.
About half of NAMA’s portfolio was located in London which has so far performed very well from Aug 2009 to Dec 2010 but has been more subdued over the past year. Supply shortages and money chasing a relatively stable investment have maintained prices and there might even be a short term fillip from this year’s Olympics. Beyond London and the English south east, there is evidence of prices waning amidst sluggish economic growth and stunted lending. NAMA’s strategy for UK assets was revealed in the recently published Comptroller and Auditor General’s report. NAMA expects to dispose of half of its UK assets by 2013, and 40% extra by 2015 and just 10% by 2020. So by 2015, NAMA will have largely exited the UK market.
A recent report by property powerhouse CB Richard Ellis claims that Irish investors were again heavy sellers of London property in the first six months of 2012. Irish investors sold GBP 545m (€700m) in London in the first six months of 2012, compared with GBP 1bn for the same period in 2011. Big ticket sales included David Arnold’s D2’s 23 Saville Row which went for GBP 219m. D2’s Woolgate Exchange is still on the market for about GBP 300m after a sale fell through. According to CBRE “Although the London market continues to hold up well, there are less bidders for some assets than would have been the case even 12 months ago. The most dominant investors are Middle and Far Eastern investors and sovereign wealth funds. However, outside of London, there has been a notable shift in sentiment which has manifested itself in some yield softening over recent months with this effect particularly noticeable in regional markets.”