Watch the western sky, prepare for rain

News

17 February 2001

Two things become clear this week: how extraordinary 2000 was; and that most are now not expecting a repeat performance. In fact, nervousness about 2001 is growing.

But the good news first. Bank lending figures (p59) for 2000 were 25.5% up on 1999 at £56.5bn in the final quarter. In inflation-adjusted terms this is 7% higher than the 1989 peak. That is only the official figure for UK regulated banks. DTZ calculates that, if you add in foreign bank lending and that from building societies and insurance companies, UK Property plc’s overdraft is around £80bn – 40% higher than the 1989 peak.

Money is getting cheaper…

This lending level should not contribute to the air of nervousness, although, inevitably, it will. As JLL rightly says, these increases are more to do with the cheap price of money compared with the returns it can make. With interest rates set to fall further, that lure can only grow, as Julian Studley of the eponymous US agent has already figured out (p39). There are few signs of “overly reckless lending”, says JLL. Indeed. For those wanting further reassurance, look at the early 1970s. Then, lending was well under £10bn in today’s money. So the long-term trend is up.

The second, almost staggering, piece of news is just how much space was let in central London last year. Knight Frank says (p39) that take-up rose by an unprecedented 41%. This figure is supported by internal research at Insignia Richard Ellis, which is pleased to announce that it is number one, reckoning to have let 26% of the 18m sq ft it says was available (p37). This huge lettings increase presumably does not apply to the rest of the UK. But there can be no doubt now that 2000 was a vintage year for most.

…but clouds are piling higher

So, last year will be hard to beat. Even if 2001 turns out better than a pretty good 1999, it will still feel a bit flat after a heady 2000. And now an ominous economic trough is drifting over from the US. This downturn is not a recession, it is simply a slowing of US growth. But like long-expected rain at a summer party, it is dampening the atmosphere. Most are still chattering happily, but there is an unspoken nervousness in the air.

This nervousness is showing itself as trimmed forecasts. One of Britain’s largest property funds, Morley, estimates that rental growth will be cut by two-thirds by 2003 (p39). Total growth, it says, will stay at around 10%. Not as wonderful as recently, but maybe at least as good as equities.

It is worth emphasising that no-one has the faintest idea how 2001 will turn out. Rate cuts might re-ignite the US economy: its economic trough may give Britain no more than a mild and welcome shower. A meteorite may wipe out Birmingham. The French may invade Kent. Who knows? But the present climate is easy to read: cloudy. Be cautious, budget for the downside.

Two things become clear this week: how extraordinary 2000 was; and that most are now not expecting a repeat performance. In fact, nervousness about 2001 is growing. But the good news first. Bank lending figures (p59) for 2000 were 25.5% up on 1999 at £56.5bn in the final quarter. In inflation-adjusted terms this is 7% higher than the 1989 peak. That is only the official figure for UK regulated banks. DTZ calculates that, if you add in foreign bank lending and that from building societies and insurance companies, UK Property plc’s overdraft is around £80bn – 40% higher than the 1989 peak. Money is getting cheaper… This lending level should not contribute to the air of nervousness, although, inevitably, it will. As JLL rightly says, these increases are more to do with the cheap price of money compared with the returns it can make. With interest rates set to fall further, that lure can only grow, as Julian Studley of the eponymous US agent has already figured out (p39). There are few signs of “overly reckless lending”, says JLL. Indeed. For those wanting further reassurance, look at the early 1970s. Then, lending was well under £10bn in today’s money. So the long-term trend is up. The second, almost staggering, piece of news is just how much space was let in central London last year. Knight Frank says (p39) that take-up rose by an unprecedented 41%. This figure is supported by internal research at Insignia Richard Ellis, which is pleased to announce that it is number one, reckoning to have let 26% of the 18m sq ft it says was available (p37). This huge lettings increase presumably does not apply to the rest of the UK. But there can be no doubt now that 2000 was a vintage year for most. …but clouds are piling higher So, last year will be hard to beat. Even if 2001 turns out better than a pretty good 1999, it will still feel a bit flat after a heady 2000. And now an ominous economic trough is drifting over from the US. This downturn is not a recession, it is simply a slowing of US growth. But like long-expected rain at a summer party, it is dampening the atmosphere. Most are still chattering happily, but there is an unspoken nervousness in the air. This nervousness is showing itself as trimmed forecasts. One of Britain’s largest property funds, Morley, estimates that rental growth will be cut by two-thirds by 2003 (p39). Total growth, it says, will stay at around 10%. Not as wonderful as recently, but maybe at least as good as equities. It is worth emphasising that no-one has the faintest idea how 2001 will turn out. Rate cuts might re-ignite the US economy: its economic trough may give Britain no more than a mild and welcome shower. A meteorite may wipe out Birmingham. The French may invade Kent. Who knows? But the present climate is easy to read: cloudy. Be cautious, budget for the downside.