The Estates Gazette Property Sentiment Survey, published a couple of weeks, ago (29 June, pp66-70) really got me thinking about what drives confidence and what valuable information can be deduced from it in commercial decision-making.
Undoubtedly, the results showed a massive shift in sentiment between Q2 2012 and Q2 2013, most notably in the residential sector.
Only 34% of respondents last year said that they expected the prospects for the residential sector to improve, compared with 69% now.
Similarly, across the board, the percentage of respondents who felt that there would be a deterioration in the sector versus an improvement went from -1.25 up to an impressive +37.
Is this a useful indicator of the future of UK real estate, or is it merely informing us of changes that have already taken place?
Over the 12 months to 31 May 2013, the FTSE 100 increased in value by 24%. Add to that the increase in residential prices over the last quarter of 3.7% and you can see where a shift in confidence may have come from.
This lag must make confidence surveys of little practical use for making commercial decisions. Or does it?
The first quarter 2013 IPD results show an uninspiring total return of 1.1%, including a capital loss of 0.4%. The capital movements are largely driven by valuation, which is predominately based on historic transactions and may, therefore, lag the market even further than confidence.
Any one-upmanship to be gained from this lagging indicator would also be dependent on actually being able to buy the assets you want at valuation in what is an illiquid, lumpy and heterogeneous market. Ask anyone currently bidding on a prime central-London office.
Bank lending
Further, does expansion in bank lending follow a similar path to confidence, in that it follows on from improvements in the wider market? There was some suggestion by banks that the £5bn shortfall in lending against prior- year expectations, as published in the lending intentions survey a few months ago, was driven by lack of demand from investors. However, with new-found confidence in the markets, margins finally stopped rising about three months ago and we have since seen a sharp reversal, with pricing down around 50bps from its recent peak. This to me is the true indication of whether banks want to lend.
For those property investors with good schemes but starved of liquidity, let’s hope this year’s lending intentions prove to be more accurate predictions, with £36bn available for senior loans and £4bn for development finance. The latter comprises 12 lenders, with four saying that they would lend to speculative development – presumably after you have injected a large pot of equity and signed your life away in guarantees.
With new entrants coming into the market all the time, providing senior and mezzanine financing, maybe this is a year to have confidence.
Certainly, Deloitte’s CFO survey out last week showed renewed optimism among finance chiefs with a net 33% of firms now expecting to increase investment.
Nearly half of chief financial officers – 45% – think now is a good time to take greater risk on to their balance sheets, more than double the amount that felt the same way six months ago.
Economic policy
In terms of the value of public opinion, the starkest result from the Property Sentiment Survey for me was that 39% of respondents felt that the government’s economic policy was having a positive impact on the economy, more than double the 18% at the same time last year.
It seems that outcome is the measure by which we judge strategy, rather than merit, and specifically outcome at the point in time we are making the judgement. No wonder governments act in the short-term interests of getting re-elected rather than the long- term interests of the country when we are such a fickle lot.
Rebecca Worthington is chief executive of Lodestone Capital
