Is the Real Estate Ice Age about to thaw?

Every downturn is a sobering reminder that the secret to making money from property is timing.

You can own a beautiful, new city centre building, have applied intelligent sustainability improvements to turn your brown property green or pre-let your big box logistics development, but, once the downturn hits, you’ll have lost money. This time around, values fell sharply by more than 20% in the second half of last year, eroding equity at a faster speed that we have ever seen.

On the other hand, if you had bought an old industrial estate in Scunthorpe or an ugly office block in Woking but sold out in a rising market before the crash came, you’d have made money.

Timing is the key to being a successful property investor. And the reason for this is that values, which are the sum of future discounted cash flows, are driven by the cost of money. Asset management improvements can move the needle, but not as much as the cost of money. If interest rates and bond yields rise, property values fall, however “prime” your property is.

Many property investors are mistaken in their understanding of property values. A valuation of a property is an assessment of what the “exchange price” is. It is not an assessment of value, incorporating an estimate of future performance, nor is it a recommendation around the worth of that asset to an individual owner.

After the sharp drop in values, or correction, as many investors like to politely call it (as if the market had been wrong and needed amending), we are now experiencing a very dull hiatus – the customary period between crash and recovery, when buyers and sellers are out of sync pricewise. In a rising market, when the seller is taking a profit and the buyer is expecting a profit, deals flow; in a falling or stagnant market, where the seller will be taking a loss and the buyer doesn’t know if values are going to drop further, deals dry up.

However, there are signs from the listed property sector, the best predictor of the direct market, that the worst is over. Comparing the current downturn to those in the 1990s and the Global Financial Crisis, JP Morgan Cazenove’s real estate equities team sees similarities with the 1990s and notes the two conditions that catalysed listed UK property’s return in 1992: one, a trough in values that was in sight and, two, the Bank of England hiking interest rates for the last time, and soon beginning to cut.

If UK listed property shares start to bounce back, probably on condition that the slowing inflation trend continues, then that would signal a rise in property values in six to nine months’ time. That might, in turn, encourage banks to force owners in breach of terms or approaching a refinancing to put their properties on the market – and the Real Estate Ice Age in which we are living would start to thaw.