Property crisis like ‘09 not on the horizon - Orchard Street IM

Added 20th July 2016

Differences in debt and development are the primary indicators that the UK property crisis of ’09 is not going to repeat itself, said Philip Gadsden of Orchard Street Investment Management.

Property crisis like ‘09 not on the horizon - Orchard Street IM

Gadsden who manages the St. James’s Place Property Fund argued that no matter how tempting the parallels are between the UK property market circa ‘09 and post-EU Referendum in ‘16, “the situation is far from similar.”

Unlike 2009, Gadsden said rents are likely to remain consistent in the current scenario given the difference in development levels.

“Firstly, the sector has not seen the level of development that took place prior to 2009, much of which was speculative, so there is not an overhang of space at present. Indeed in many markets around the country there’s very little good quality prime space available to let, whether you’re talking offices or industrial space. So it is the classic supply/demand equation: without too much supply and with reasonable demand, rents are likely to remain stable,” he explained.

Equally important, most UK property companies currently have manageable levels of debt, said Gadsden.

“A second key difference is that back in 2009 the global financial crisis was caused by debt, but at present there is not an over-leveraging position in the British property market. If we look at listed UK property companies, the amount of on-balance sheet debt that they have is at a very comfortable level, and they can withstand very significant shocks to their businesses and not have a debt issue.”

Societe Generale delivered a similar message to Gadsden’s in a recent report. The bank argued that Brexit’s impact on the pricing of commercial real estate assets could be less severe than other recent crises where prices fell as much as 30% due to lower leverage, low yields and attractive buying opportunities made possible by weaker sterling. 

The London residential sector stands to experience a more severe downturn, the bank said, if non-British buyers decide to relocate in order to retain access to the EU’s single market.

According to Gadsden, even in the current climate, commercial real estate could be a beneficial long-term investment.

“If investors have a single-digit or a small double-digit exposure to real estate within a mixed portfolio, that comprises a sensible diversified exposure to our sector. Property is an asset class which over the long term offers total returns of 5% to 6% per annum, much of which comes as income and in the current market environment, it remains hard to achieve that elsewhere.”


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