Harris Lamb Blog – 8th Sept

Intrest Rates

8th September, 2010.

The Great Divide

By Peter Wood, Director, Investment

Peter Wood follows on from his July Blog to give us an insight into pricing within the investment market.

Last month I talked about whether the margin between interest rates and low risk property yields was sustainable. This month I will continue this theme with outlining how the market is currently being affected and where the current situation may drive pricing.

As usual, I am continually asked by my occupational colleagues: “why in such a strong investment market for long leased stock is there such a disparity between occupier demand and investment market movements, has this always been the case?”

The answer is found in simple economics, supply and demand. We are currently seeing compression of yields in all sectors for well let stock. For example high street retail in top towns and cities occupying prime locations with strong covenants for over 10 years certain are heading south once again, and to be honest this is to be expected, I do not see this trend abating in the short term and expect further compression to come, the 5 year SWOP fell again over the last few weeks and with inflation on an RPI basis running at 6 times interest rates what do you expect!!

This is in stark contrast to the unfundables! As soon as we look at the type of property that is not attractive to the current key players (equity privates and Institutions) the pricing slides south. Unless you have a real sector specialist who understands the risks involved and have backing, these assets are in for a continued rocky ride. To an extent their values have been shored up by lack of supply so far but if we see an increase I am sure that pricing will once again be adjusted down.

So there we have it, quality stock will appreciate and secondary stock will depreciate. Just make sure your quality stock doesn’t become secondary by the passage of time.

As Investment Director at Harris Lamb if you wish to discuss aspects of property investment or strategies for existing portfolios I can be contacted on 0121 213 6004 or peter.wood@harrislamb.com