Whilst the price of shares has little direct effect on the property market, last week’s turbulent stock market movements are likely to affect property in a number of indirect ways, both good and bad.
The good news. It almost certainly delays the anticipated interest rate rises in both the UK and US. Obviously this is good for the discount rate. Also, in part, the fall in the price of shares was due to the realisation that the Chinese economy is not growing nearly as fast as forecast. This will further reduce demand for commodities which is already leading to currency weakness amongst many emerging market nations. One positive outcome will be a reduced and sustained low level for UK inflation, driving generous real wage growth for the UK workforce which will underpin consumer spending, supporting retail and leisure property.
The movement in stocks will also have heightened investors’ sensitivity to risk and makes safe regions and assets more attractive. This includes government bonds which are below 2.0% (UK) once more. Prime property may actually benefit from this. The scare might also slow down construction activity which would provide some support from rental values via a constraint on supply.
The less good news. Weaker emerging market currencies makes the UK more expensive for investors from these regions, which will reduce demand for some parts of the UK market. Also, weaker global growth should reduce pressure on rental values via a reduction in demand.
Of greatest concern is a reduction in global financial liquidity as emerging market currencies depreciate against the dollar. Debt denominated in dollars will be getting expensive, which will encourage deleveraging. This at a time when both the US and the UK were expected to start to raise interest rates.
For property specifically, provided rental growth doesn’t decline, which we think is unlikely for the market as a whole, the current yield profile looks sustainable. For all investment asset classes, including property, a significant reduction in liquidity would undermine asset values.
Although given the sensitivity of Central Banks in the mature markets to falls in asset values this would almost certainly elicit a policy response (more QE?) that would provide some support for values.
It is too early to assess the balance of these forces, but it does mark a departure from a number of major influences on the market over the last eight years which will have an effect on all investment returns.
Chief Investment Officer