Road to Recovery: Comparing the Outlook in the US and UK

In the UK, the supply of distressed real estate far outstrips demand, according to Rics, which may go at least part of the way to explaining why the UK's recovery is lagging behind the US...

Much has been written in recent weeks about the growing signs of recovery in US real estate markets, with positive residential construction data released last week (August 16th) and the Royal Institution of Chartered Surveyors' (Rics') latest Global Commercial Property Survey indicating the US is heading towards a much more positive period than the UK.

According to the Rics data, both rental and capital value growth expectations for the third quarter of the year are firmly in positive territory in the US, while the UK recorded negative readings in both these metrics. In addition to this, the predicted level of investment in commercial property assets in the US is much higher than for the UK in the three months from July to September. One factor that appears to be helping the US property market is the lack of distressed assets available, while investor demand for such premises remains high.

In the UK, the supply of distressed real estate far outstrips demand, according to Rics, which may go at least part of the way to explaining why the UK's recovery is lagging behind the US. Of course, the main factor holding back a turnaround in the fortunes of British property markets is the ongoing eurozone crisis. Even though the UK is one step removed from the troubles, this does not prevent it being associated with the economic crisis, thereby affecting investor sentiment.

Property economist at Capital Economics Ed Stansfield noted one of the reasons for the slower UK recovery could be the time it takes for markets to react to economic events. "Commercial property markets tend to react to developments in the wider economy with something of a lag - not least because one of the key drivers is employment, which tends to respond to changes in output with a lag," he said. However, there is not a negative outlook for the whole of the UK, as London's real estate market has benefited substantially from its liquidity and safe-haven status.

Mr Stansfield explained investors looking for property in Europe at present are being drawn to the locations with high liquidity, like London, as well as those that are "not directly exposed to complications from the potential of a eurozone break-up and a reversion to a national currency". Again, this favours the UK.

Managing director at Glentree International Trevor Abrahmsohn suggested one reason for talk of a US recovery could be down to analysts taking a general view of the market. He explained parts of the US are certainly moving in the right direction, but London is performing well on the global property investment scene too. "New York, Miami and parts of Los Angeles are on the way to recovery - with a long way to go. London is at an all-time high and the ripple effect will affect the outlying regions of the UK," he asserted. Mr Abrahmsohn added that it is difficult to compare the two countries, as they are so varied.

He pointed out that the US is comprised of numerous property markets, noting there are significant discrepancies between the regions. "Some are still in the doldrums and prices are at an all-time low, and others have recovered somewhat due to the substantial discounts available," Mr Abrahmsohn stated. This is backed up by data on the US's residential property sector published recently by Clear Capital, which revealed that although annual house price growth of 6.2 per cent was recorded in the west of the US in the second quarter, the mid-west posted a decline in values of 0.1 per cent. Meanwhile, the north-east and southern markets registered modest rises of 1.6 per cent and 1.8 per cent respectively.

This serves to highlight the regional variation in the US and, although the difference in the UK isn't on the same level, London remains streets ahead of regional destinations. Figures released by Jones Lang LaSalle earlier this month showed house price growth is strongest in the UK's capital and southern regions, although the country's residential property sector proved resilient in the first half of this year - with values increasing by between one and two per cent - despite the nation slipping back into recession.

In the US, vacancy rates of apartments continued to fall, while prices increased by 3.4 per cent year-on-year in Q2. However, the firm stated "demand will need to stay robust" if new housing schemes coming on to the market later this year and in 2013 are to be snapped up. This outlook contrasts with that for London at least, with Mr Abrahmsohn describing the level of new construction in the city as "pathetically inadequate", suggesting that a lack of finance and a complicated planning process are holding back the construction industry in Britain.

- Wednesday 22 August 2012

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