บทถอดความฉบับเต็มของ Decoding the UK’s Property Market ‘Standoff’

basically because obviously mortgage courts have gone up, so sellers just simply can't raise as much money to buy houses. And really what happens next kind depends on if the labor market stays firm, and obviously wages were very strong today's we're recording this, then that means there probably won't be any forced sellers. But the longer this goes on for you know, or the longer you have to expect, well, something's got to give. And presuming the interest rates stay at least where they are for a long period of time, which they is very hard to see how they wouldn't. The thing that's got to give is buyers to say, well, okay, maybe we have to knock a bit off prices now because otherwise we're not going to be able to move. So that's kind of how we'd see it unfolding. 00:03:23 Speaker 1: But in terms of house prices and you know house price dynamics, I guess in support of higher prices or certainly not a cratering, there's also this funny supply and demand than in the UK. You know, we just don't have enough supply out there, and you're right, if wage prices go up, then you feel comfortable that you can, you know, maybe spend a little bit more. 00:03:43 Speaker 2: Yeah, I mean, well this is the other This is the kind of the things important prices as well, as long as jobs stay firm. Then some early London particularly and obviously I think probably London looms large over the general perception. But if it's a choice to be renting for a ridiculous mind payment, then most people are going to sit down and say, well, how can I turn my ridiculous rental payment into a ridiculous mortgage payment? And at least then I get the sense that I'm actually going to own a place at some point, and that perception is not necessarily always. The case is kind of complicated, and you need to think about your personal circumstances. But I can see that there's a pressure there because people fael caught between a rock and a hard place. I mean, physical supplying demand questions are really interesting. One. My view tends to be that interest rates are the main factor driving property prices simply because it's basically it's kind of like a bond. You know, obviously it's meant to yield a certain amount, and when interest rates go up, you need it to yield more. There for the capital values should come down. But obviously in certain places that simply aren't enough houses, because you know, everybody wants to live, you know, everybody likes leaving its own one, you know exactly. 00:04:53 Speaker 1: And you say rent prices are creat I mean they've gone up some thirty percent right into place in central London. 00:04:59 Speaker 2: Yeah, in London. I mean, the one thing I pointed with London is the prices did also kind of collapse and during the pandemic. So although you know, the last two years have been terrible for renters. Twenty twenty and twenty twenty one were great. I mean, I knew quite a few people from my own experience who ended up, you know, either moving a much nicer property for the same price, or you know, getting a much better deal on their rent. Because during the pandemic the city emptied out. So one reason's bounced back so much and so aggressively is because of that. But also landlords are selling up. 00:05:31 Speaker 1: So you have this as a mortgage, it is because mortgages are. 00:05:34 Speaker 2: Yeah, because the thing the landlord mortgages is that if you've got a mortgage as a landlord, it's an interest only loan, and so as interest rates go up, your mortgage kind of goes up at the same pace as them. But as if it's a repayment loan, you don't go up by as much. So like you know, if you don't if you had a by to let mortgage at two percent and it's now six percent, your monthly payment has trebled in that time. So a lot of landlords are finding that their cash flow negative basically by the end of the month, and that's being reflected and actually the repossession figures and also and the sales figure is one of our colleagues, Damien, just wrote a piece about landlords selling up at a much more faster rate than people expected. The problem is it's not first time buyers who end up getting those properties necessarily a lot of time, whither be either cash rich landlords or it will be possibly first time buyers. But then you're talking about these properties might have been multiple occupancy ones, so you've still get that kind of bottleneck there, which means that the supplier rental property falls and you still have a large number of renters who want to rent. In fact, the number of renters who want to rent goes up because people think, well, I'm going to hold off buy and in case prices fault. So that is kind of Horribleally, if you're in that situation, can. 00:06:52 Speaker 3: I ask you a question about the landlords and renting, because obviously they're the new EPC standards coming through, And at what point you think maybe the landlords, when they're making the decision on that six percent is looking pretty tough, do they sort of think, well, I've actually got to put quite a lot more capital into my property as well. 00:07:10 Speaker 1: For us, your mordals, what is EBC? 00:07:12 Speaker 4: Oh? 00:07:12 Speaker 3: Sorry, that's the environmental controls that the government is putting on. The first phase of that came in in April, and it phases up so that you've got to be an A or a B, which is quite environmentally friendly by twenty thirty. So it's only going to escalate. I mean, it's affecting commercial real estate. But I just wondered if it was also a trigger potentially for land laws moving out of the market because they're a bit scared. Some of those buildings that are rented out really do need some upgrades, don't they. 00:07:36 Speaker 2: I definitely know, and you're absolutely right. In fact, it was interesting because Damien's piece that I mentioned earlier, they kind of going back to the HMRC starts. They found that the by to sale off if you like, actually started and can

I early twenty twenty one, so before the interest rates became such a big issue, and I think at least part of that is driven by the environmental standards because the art haven't the upgrade and those also obviously there's a general I feel like regulatory hostility to the small landlord. Now, I mean that started wee bike with George Osbond's tax changes, so we all have to be absolutely honest, my sympathies for landlords are not high because there's an awful lot of bad actors in the sector. It is not absolutely not the tame it can be in howmateur landlord, what we think they're getting then, and no, I think you're absolutely through. The EPC's definitely an issue as well. 00:08:27 Speaker 1: But in commercial real estate, I guess the way that the deals are structured, there's so much more leverage, they'll be much more sensitive to interest rate increases. 00:08:37 Speaker 3: Yeah, there is a broad span of that, and the listed arena the shareholders have been on and on about being highly leveraged for the UK roats for some time now. So even though you would be allowed to have normally on a loan coven into sixty percent loan to the value of the property. A lot of the main routes that were down in the twenties ahead of going into this period and now they're creeping up to the thirties isn't moving into the forties. And it's the commercial real estate companies that had sort of forty percent or more going into this that are the ones where the stress is really showing. In the private markets, quite often they would go to that covenant. So I think that there is going to be signs of distress, and certainly the routes are starting to say that, you know, there's some of that coming out. But I think Jack, you'll probably agree with me. On the operational side. You know, the properties which have got the good EPC ratings, that are environmentally friendly, that are brand spanking new, they're filling up. But seventy percent of what's vacant at the moment across Central London, for example, where vacancy's eight point five percent I think, and three point eight in the West End and about twelve percent in the city. I think there's the numbers you know that's all concentrated in the second hand property that hasn't been upgrade and it's looking a bit down at heel. 00:09:54 Speaker 1: And second hand property basically, Jack just means where you've had a lease and you're what the second tenants. 00:10:00 Speaker 2: It could be. 00:10:02 Speaker 5: Anything that isn't the sort of the best newest space, So you know, probably and that definition of what is the best space is getting narrower and narrow and narrower. So what location so very centralized locations. So if you look at some of the big companies that have moved recently HSBC for example, they've gone from Canary Wharf. They've chosen to come into the city, so you know, more central location. Similar for Clifford Chance, huge law firm who are Wharf, they've come into the city as well. You see a bunch of companies coming from sort of West London. You know, if you have a drive out of London on the M four, you see all those great big office buildings. A lot of the companies that use that type of space they've started to move in as well. And that's it's I think there's a number of different factors here on the sort of occupational side. I guess one of the realizations that companies have had after the pandemic and this whole experiment with more flexible working is well. 00:10:51 Speaker 4: Why don't if people are going to be in the building. 00:10:53 Speaker 5: Less, Maybe we need less space, but therefore we can afford to spend more on better space that will attract people in so more and amenities, you know, in easier to get to location, trying to incentivize people to come in and overall your cost probably doesn't change that much. I mean, it's also a very long term trend that's always worth bearing in mind, is forty or fifty years ago, rent would have been a lot of business's highest cost. Now it's tiny relative to labor costs. I mean, I think in the city it used to be something like forty or fifty percent that the average business costs would be on rent. Now it's more like five percent. So actually, in terms of sort of staff recruitment and retention, spending a bit more to get a better office can be quite a good investment for businesses, you know, because if it means you lose fewer staff ultimately that's that's pretty good for your bottom line. 00:11:38 Speaker 1: But Jack, that's a crazy number. So from forty percent cost it's gone down to five percent? Is this because everything else has become more expensive? H or rents in London also have come down. 00:11:48 Speaker 5: In real terms, they've come down, I mean, rents are very cyclical. To come back to something talking about earlier, it's it's been a really interesting year covering commercial estake because this time last year you could start to see, you know, the writing was potentially on all rates starting to ratch it up pretty quickly, And I remember hitting the phones calling various people who've seen plenty of cycles and speaking to senior private equity real estate investor, and he was like, look, you know, every real estate crash, every commercial real estate crash, is typically defined by a surfit of cranes or a surfit of credit, and we haven't seen that this time, so I'm not too concerned. But we've also never seen a modertary policy shift as rapid as we have this time. And so actually in the UK, the repricing, the sort of correction that we had particularly in Q four last year, but that did continue into Q one this year is the fastest we've ever seen. It's more vitiginous than the GFC, not as deep, but the rate of decline has been more quick. But at the same time, as soon mentioned, the operational kind of fundamentals are actually pretty good. There isn't that much excess supply. That hasn't been that much building. You Brexit put people off, developing been a

whole, and then the pandemic as well, so there isn't loads and loads of kind of excess new space coming to my ow and the UK. On the public side, the UK reads have kind of learned their lessons in the GFC. Most of them came into this cycle with relatively low leverage. I mean, it's quite different when you compare it to the continental public landlords. A lot of them have come into this with you know, forty or fifty percent leverage, and that's going to get much uglier, I think. But I think the uk reaates broadly, certainly on the office side of been quite well behaved when it comes to leverage actually though. 00:13:27 Speaker 3: But I've just been looking at some of the stats for Central London that Derwert London, one of the big London uts, put out in their presentation for their results last week, and it is quite scary if you look at the take up and you look at the new starts. New starts on site in the second quarter of this year were really strong, and we've got a supply situation where there is forty five percent more space than the normal average being. 00:13:55 Speaker 1: Completed this year to what Central London. 00:13:57 Speaker 3: This is Central London offices for percent more and a lot of that has not yet been let Is that. 00:14:03 Speaker 1: Why I'm seeing like twenty five cranes out the office window. 00:14:06 Speaker 3: It could be reach many questions, all sorts of things, and I think it's probably smaller properties, but there's a lot of land also obviously put some money into that. Now the new starts this year, you can see, Okay, well that will be delivered in twenty twenty five. If I've got the funding for it, then I'm going to be delivering into perhaps a better market. That's what they're thinking. I'm not sure I entirely agree with them, because I think this might actually go along. But in terms of take up in the first half of the year it's thirty five percent below for normal level, So you've got disappearing on both sides. Rent in the city stayed flat about seventy pounds a square foot a year, and in the West End it's been creeping up. So you've got all these different things going on and it's really hard to see how it's going to go. 00:14:52 Speaker 5: Also, on those sort of capital market side, the fact that the UK and London in particular is corrected so quickly is a good thing because what you're seeing in content Europe, where prices haven't adjusted to interest rates and kind of everyone knows where they're going but nobody's admitting it yet, means you've just got this total stand off between buyers and sellers. Where in the UK, because prices have corrected and that was sort of probably aided and avetted by what happened last autumn with the mini budget and all the rest of it. There is a sort of pool of buyers who are sat on the sidelines, and we've had a few false storms this year where everyone thinks that rates are peaked, you know, and then you get a hot CPI print and suddenly expectations move out a bit. But as soon as there is a bit more certainty, a bit more confidence that you know, THEO has gone as far as it's going to go, I think you'll see quite a few buyers jump back in. And to your point around the increase in construction start to Looyte put out surveyed twice a year on called the Crane survey, you know, literally you know, measuring it up, Yeah, exactly. 00:15:51 Speaker 1: I count demise that coming into the office every day. 00:15:53 Speaker 5: And the striking thing from looking at the most recent one of those is that it's massively all those new starts are massively driven by refurbishments. And I think a lot of that is the PC thing that we were talking about earlier. So same for offices, You're not going to be able to rent them out at all unless they're this ALB by twenty thirty. Now whether the government sticks with that is another question. But so there's loads of landlords who are sitting on properties that you know, with leases that are coming to the end of their life, have just come to the end of life that are cory rated CD or an E, and so they're like, well, we're not going to be able to rent this unless we improve it. 00:16:23 Speaker 1: So what happens to these massive buildings and projects. I know HSBC got a lot of people talking because first, you know, it was seen as kind of the great hybrid project of people coming into work, so as Jack said, you need less offare space. But also it's a huge tower, Like what happens to the HSBC tower? Who's going to rent that? 00:16:41 Speaker 3: Those are really difficult questions. The way that it's structured for an office and the size of the floor plates means that it's very difficult to convert that into residential that you know, you're used to having all the wires under the you know, in between the floors. And I'm not an architect, I don't know all the construction details, but my understanding that you know, it's very difficult. So it's almost more economical to put the whole thing down and build something else. But on top of that, you've got to get the planning for it too, so it will take quite a long time. So you've got a long period where your money isn't going to be generating any cash. So you know, there are quite a big constraints towards that. And I'm a bit worried about Canary Wharf. 00:17:20 Speaker 5: Yeah, I think that that's just a very particular case, or in fact not just Warf but those types of very deh nineties early two thousand sort of banking towers are kind of white elephants, I think. On the conversion thing, if you think about big deep trading floor, you just can't really convert it in the flat because everybody needs a window unless you had a whole load of like very very narrow, long flats by the back. 00:17:40 Speaker 1: Of the foot of the children. 00:17:41 Speaker 5: Yeah, really dark, So that doesn't really work. I mean, in Canary Wharf Group's case, they're very well capitalized. It's owned by Brookfield and Qatar, They've got a lot of

real estate acupant. Yeah, they will, and they've seen this coming for a long time, so they are gradually repositioning that state. 00:17:56 Speaker 4: I think they'll they'll be okay. 00:17:58 Speaker 5: But you've got some indivial dual you know, overseas investors who came in and bought what they thought was a trophy asset that maybe had ten years on the lease to Moody's or S and P or whoever it was, and now it's got five years on the lease and they don't necessarily have the skills to reposition that. And that's where you're seeing starting to see those pockets of distress. Ye, there's a couple of big buildings in Canary Wharf that are owned were owned by a Chinese investor, that are now in the hands of receivers. And I think it'll be those investors who bought just for the income who don't really have the skill set to reposition those where that'll be more difficult. 00:18:29 Speaker 4: Think. 00:18:29 Speaker 5: I think the solutions, you know, there'll be some life science space. That's one area where the UK is doing well. There's a big shortage of lab space. Again, there's a whole load of technical issues around which buildings you can change into lab space and which ones you can't anoun to do with floor to ceiling heights and loading and all this sort of stuff, but some of them that will work. Some of them will work for residential conversion. But yeah, the big skyscrapers like HSBC's, that's going to be really interesting. My understanding is some of the options that katar are looking at. There are things like putting in a huge auditorium so that all the tenants on Wolf State could share some lab space, some flexible office space would be a kind of a bit of a mixture, a bit of a vertical village type thing. But it's not easy. And there's a lot of big towers out there that are not fully occupied. You know, they might have somebody that currently pays the rent for the whole building, but they're not using the whole building. And when those leaders expire, there's going to be a question about who takes them on. 00:19:21 Speaker 1: If you will get interest rates if they go out, Does it make a huge difference to residential if interest rates go to five point five or six percent and above, or is that really the kind of stress that we'd see in commercial more than residential. 00:19:33 Speaker 2: It's probably not as quick for residential. And I said, one thing I thought was really interesting was the point of itut creams and credit because the other thing about the residential market is it is a similar story. And I mean, obviously there's never enough supply in the UK, but in terms of the cret that see the things you know on late two thousand and eight, the borders will not over stretched going into this spotillically. So one of the interesting things about how Britain obviously was kind of at this center of the two for nine talk cases. It's sort of meant that we spent the last fifteen years deal average and the law always and it's mainly only the government that's leveled up and the behalf of everyone else. So I mean, the consumers are in the businesses on the bills, the comminent of this, so on the funny ken of we that's why we haven't had the sort of the demolition you would have expected from reach's moving so quickly. 00:20:25 Speaker 4: And on the supply side, I mean, I totally agree with you. 00:20:28 Speaker 5: I think it's rates are definitely the kind of fundamental driver for house prices, but the supply is part of the picture. And when you look at the listed housebuilders, they've all massively taken their foot off the accelerator in terms of you know, how much they're planning to build and get The proportion of homes in this country that are built by the big four house builders is really unhealthily high. 00:20:51 Speaker 4: So when those. 00:20:52 Speaker 5: Guys say, right, you know, we're risk off, then that'll have a very quick impact in terms of overall new supply. I mean that the idea that we've got a three hundred thousand has a year target, we're not going to We haven't we. 00:21:04 Speaker 4: Haven't been hitting that anywhere. 00:21:05 Speaker 5: We're going to get so far off that over the next few years because they really have you know, again, they were very badly burned in two thousand and eight. They had these huge landbanks, so they had to write down massively and that was really ugly. Again like the read so I think the house build has largely learned their lessons. They've had, you know, smaller landbanks. They've been more quick to slow down on new land acquisitions. But yet the upshot will be that you'll have the added impact of lower supply that'll just helps prop up prices even more. 00:21:33 Speaker 1: Yeah, so I have ten million to give away to each of you. Where do you ten I'm so generous, maybe twenty million? 00:21:40 Speaker 2: Where do you put it? 00:21:42 Speaker 1: Would you invest it in real estate? Right now? 00:21:44 Speaker 3: John not. 00:21:49 Speaker 2: Because one thing I was going to see is the other good thing is that all the listed stuff so whose bill does created and you know, like and still very law and the reds also kind of ups and that's one of these things about the equity market and that obviously there's counts or the carvage and then when the car hasn't quit material. I mean, this is not personal advice thought the building. 00:22:20 Speaker 1: You're not buying that, you're not buying a property, You're you're investing property. 00:22:25 Speaker 5: This is the way I most regretted being restricted, like you've seen where the it's like, you know, fifty percent plus discounts to n a V in order prices would have to fall so far in order for that to not be a good deal. But public markets are public markets, and there's that same argument has been there for months and months. It has been but at some point the will and you know, people who are brave and willing to go and buy some property stocks now will probably again not not investment. 00:22:54 Speaker 4: There's potentially a lot of upside there. 00:22:56 Speaker 1: I can't believe you answered all of that seriously. I mean, someone say I'm making for a second in Scotland because of climate changeable. Thank you all, thanks for listening to this week's in the City. We'll be back next week in the meantime. If you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts, rate, review, and subscribe. This episode was hosted by me Francin Laqua. It was produced by Summersati with help from Jil Namazzi. Additional editing by Blake Maples. Special thanks to Jack Sitters, Sue Munden, and John Steppeck.