Whilst we mightn’t have full visibility on NAMA’s portfolio of commercial property in the UK, we learn today that the average price of commercial property across the UK has declined for the 11th month in a row. NAMA has had a strategy for at least the past year and a half of quickly exiting the UK market, and in light of the last 11 months of declines and the uncertain outlook for the UK economy, we might be close to identifying an asset management strategy success at NAMA.
Last Wednesday saw the publication of the October 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 0.3% in October 2012, which follows declines averaging 0.3% per month since December 2011. 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 1.6% and in the last 12 months prices have decreased by 3.5%. Overall since NAMA’s Valuation Date of 30th November, 2009 prices have increased by 7.6%. Commercial prices in the UK are now 36.4% off their peak in June 2007. The NWL index falls to 791 which means that NAMA needs to see a blended increase of 26.5% 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 three subsectors in UK commercial property with an index for all three at NAMA’s valuation date of 30th November 2009 of 100. Offices have been relatively buoyant whereas industrial premises like factories and warehouses have been relatively flat.
The next forecast from the UK’s Office for Budget Responsibility which independently monitors and comments on the UK economy is due out on Wednesday this week 21st November 2012. According to the OBR’s current forecast, house prices are projected to fall by 0.4% in 2012 before increasing by 0.1% in 2013, 2.5% in 2014 and 4.5% in 2015 and 4.5% also in 2016. UK inflation has now come down below 3% per annum despite being elevated since the banking crisis in 2007, overall inflation in 2012 is set to stay close to 3% – remember that UK inflation has increased by nearly 18% since their peak in October 2007 whereas in Ireland inflation has been subdued and is less than one third of that – the UK has pumped GBP0.3tn of “quantitative easing” into its GBP1.5tn economy and another GBP50bn has recently been announced. UK interest rates may increase later this year to combat inflation – the base rate has been 0.5% since February 2009.The UK economy is officially projected to grow by an anaemic 0.8% in 2012 in real terms, close to our own Department of Finance’s projection for Ireland at 0.9%. However both the Bank of England and the Confederation of British Industry have recently projected nil growth or recession in 2012.