Interest rates, unemployment and lack of finance likely to hold up global recovery market

3 June 2009, Property Wire

The first six months of 2009 has brought mixed result for global property markets but with tentative signs of growing confidence there is talk of signs of recovery.

But others, most notably Dubai, are still very much on the downturn and analysts struggle to find any signs of improvement. However, some emerging markets like Brazil and Turkey are seeing renewed interest from property investors.

Property Wire has spoken to analysts and real estate professionals in key markets and asked them what they believe will happen in second half of 2009.

In the UK economists and analysts have tried to play down small rises in property prices and point out that prices are still way below where they were at the peak of the market in spring 2008. Indeed there is a lot of caution and concern that the UK market is experiencing a small blip that could be cancelled out in the second half of 2009.

Research from Winkworth Estate Agents shows that property demand is rising. The number of viewings required to sell a property reached an all time high in January and February, as buyers started to show renewed interest in property, but weren’t yet confident enough to purchase. In the last two months, the research shows that the number of viewings required to sell a property has reduced substantially, as property demand has heightened.

However, Dominic Agace, managing director of Winkworth Franchising Ltd, points out that although activity levels have improved significantly he does not expect a further surge in 2009 and towards the end of the year they are likely to fall back again.

‘The ongoing cost and restriction of personal and commercial finance, combined with unemployment figures, will restrict any price growth in 2009,’ he said.

It may be an estate agent’s cliché, but location, location, location is what matters at the moment. Properties in prime locations, in favored streets in particular areas, may experience price growth this year, according to Agace.

In these cases competition, driven by buyers looking to take advantage of property discounts and low interest rates, will push prices up due to a lack of alternative suitable properties – without price growth properties are being held back from the market.

But he added; ‘These properties are an exception to the norm however, and I do not view price growth as a market-wide trend for 2009.’

Winkworths predicts greater activity levels in 2009, equating to an average of 10 to 15% more transactions than in 2008. But, volumes will still be lower than in 2006 and 2007. ‘I don’t expect volumes to return to 2006/7 levels for several years,’ said Agace.

‘Nevertheless, in this period of Government intervention and low interest rates, there is a great opportunity for those with 20% equity plus to buy and sell prior to any potential interest rate rises next year, and this is driving much of the demand.’

Research from Knight Frank also indicates improvements in the first half of 2009. According to Liam Bailey, head of residential research at Knight Frank, the freefall in prices has ended. But prices are not the key to recovery, he points out. It is transaction levels that need to be examined.

‘It is only when liquidity in the market improves that we will be able to point to a sustainable recovery. While signals from the mortgage market and from completions data are encouraging, this is only a start and there is some way to go before we can say we are on an upward path,’ Bailey explained.

He too predicts prices will fall again in the second half of 2009. ‘It seems inevitable that prices will edge lower in the UK through this year. However, future price falls are likely to be capped at 5% to 10% and the low point in pricing is likely to be reached during Q1 2010,’ he said.

Finance is the key to recovery. ‘The most significant issue for the market remains access to mortgage finance. With lower interest rates and lower mortgage rates the picture is improving, but for those without access to a significant deposit (and that still means 25% of the purchase price) rates are still relatively high,’ said Bailey.

‘The situation on mortgage finance availability is expected to remain tight through 2009 and into 2010 – but the direction will be towards an easing of constraints by the second half of 2010 which would begin to permit greater sales activity in the market. Interest rates could well be rising by this time, which might counteract the impact of easier credit.’

Camilla Dell of Black Brick Property Solutions says that what will happen depends on supply, unemployment and interest rates. ‘At the moment the market in prime central London is being driven by a shortage of stock. If the demand for London property continues and no new properties come onto the market, then this will support prices going forward and we will see the market bottom out and even start to see modest growth in prices as 2009 progresses,’ she explained.

‘However, if interest rates go up, combined with rising unemployment, we could start to see more properties come onto the market and an increase in forced sales and repossessions. This could result in prices falling further, possibly by another 10 to 15%,’ she added.

When it comes to emerging markets the picture looks brighter. Property prices in Turkey have remained static and the market is still buoyant with new developments continually being launched.

Although Turkey is keen to the join the European union and analysts have claimed that membership will boost the country’s real estate market it is Turkey’s current position outside the Euro zone that makes it attractive to property investors, especially from the UK, according to Robert Nixon, executive director of Nirvana International.

‘We have seen a continued interest in property in Turkey from UK buyers. I think this will carry over into the second half of 2009, as investors continue to look for value for money and to markets that are sound investment prospects,’ he said.

‘It is likely that Istanbul, in particular, will be the focus of attention towards the end of 2009 as the city is gearing up to be European Capital of Culture for 2010. Brazil as another example. It is a country that has been less affected in economic terms than many nations. President Lula da Silva’s $15.1 billion programme to build a million affordable homes has boosted confidence, according to Samantha Gore, head of sales and marketing for Brazil experts uv10.

‘The Brazilian property market never really slowed down as much as elsewhere and has been somewhat insulated from the global recession. Major Brazilian construction companies are right now showing good profits, in contrast to the mass bankruptcies in countries like Spain,’ she said.

She said the beginning of 2009 was quieter but foreign property investors are now returning. ‘The overseas buyer is back out in force but more discerning than before about quality and also location. For us the outlook for 2009 is very bright, particularly as the UK and US economies appear to have reached some kind of bottom and confidence is returning to the market,’ added Gore.

Also the fact that it has just been confirmed that Natal is to be a host city for the 2014 football World Cup will boost interest in the north east of Spain from property investors.

Spain has suffered more than other property markets and many do not expect much of a change in coming months. But for those with the funds to invest their are a lot of bargains, according to Chris Mercer, founder of Mercers, who has over 25 years of experience in selling freehold Spanish properties.

‘For those in a position to buy, 2009 is going to be an excellent year. Second home hunters will be able to pick up quality property at extremely attractive prices,’ he said.

He is reporting an increased in sales inquiries from Spanish, British and other North European potential buyers but points out that this is not a general trend and applies to lifestyle buyers.

‘I doubt that this will change until the middle 2010 leaving those motivated by lifestyle as the main buyers,’ he added.

The biggest hurdle for the Spanish property market in the second half of 2009 is lack of confidence, says Andrew Benitz, founder of Titan Properties and a former research analyst with Deutsche Bank.

‘There are plenty of clients out there with both the desire and the cash to buy Spanish property, it’s just a question of restoring their confidence to spend it,’ he said.

Like Mercer, he believes that a recovery in the Spanish property market will be led by lifestyle buyers from the UK. ‘With interest rates at record lows in the UK, people with cash in the bank are now looking for alternative investment opportunities and property is at the top of the list for good quality long term investments,’ he explained.

‘Everyone wants a deal and they are around but the property bargain hunter must consider the dynamics of the local market prior to purchase. For example a 10% discount on a property in western Costa de la Luz, where median prices have yet to fall, is clearly a better deal than a 25% discount on a property in Costa del Sol, where median prices have fallen by more than 30%,’ he added.

The good news for Spain is that vendors and developers are now at least open to offers, a scenario that never occurred as little as a year or so ago. Another problem standing in the way of the British buyer is the exchange rate. ‘A stronger pound would certainly help more deals to be done and hopefully that’s not too far off,’ said Benitz.

Although the decline in property prices in Dubai seems to be slowing there is not much optimism for the market that was still booming this time last year. ‘We expect to see further downward pressure on prices and rents throughout the summer months, although the level of decline is likely to be in single figures,’ said Matthew Green, head of research and consultancy UAE at CB Richard Ellis.

One of the reasons is that interest in off plan property has all but disappeared as investor confidence has dried up and speculators have deserted the market. ‘Those few investors still in the market are now more focussed on either completed property or projects set to finish within the year,’ added Green.

A considerable volume of new residential supply is set for completion and handover during 2009; this includes 4,500 units at Executive Towers alone. ‘This level of new supply is likely to compound the already oversupplied market and hinder any potential recovery in the short term,’ predicted Green.

Raya Mamarbachi, Director of Simplyzigzag.com, one of the largest online property brokers in Europe and the UAE, agrees. ‘Dubai has been hit hard by the financial crisis, with supply outstripping demand. Foreigners and locals continue to lose their jobs, and media outlets continue to bombard readers with doom and gloom headline. This is causing anxiety and hesitation in the market. With such shaky headlines, buyers are less inclined to invest,’ he explained.

Indeed Dubai has suffered the biggest reversal among global property markets according to Knight Frank’s new global report. Residential property prices in the Emirate fell 32% in the 12 months to the end of March, compared to a rise of 48% the previous year.

Dubai is a classic case of where people are trying to talk up the market. A survey by Emirates Business published this week found that more than 80% of real estate chief executives in the UAE expect better returns in the second half of 2009.

The 17% who said they expect the second half of the year to be at the same level as the first half are perhaps those that are living in the real world.

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