UK: Confidence Crumbles - Smith & Williamson’s Sixth Annual Property Survey

Last Updated: 22 October 2008
Article by Nick Cartwright

Focusing on economic, regulatory and environmental issues, our sixth annual property survey reflects the current pessimism in the UK real estate market.

Conducted a year after the credit crunch began, our annual survey of confidence and business issues highlights the dire state of the UK economy. We surveyed over 180 senior decision makers representing the views of investors, traders and developers, surveyors, architects, lawyers and other professionals in the property industry.

The economy matters

Unsurprisingly, our respondents reported that UK economic performance is by far and away the most significant issue facing them. 93% said that it is one of the five most important issues facing the property industry, and 60% of those believe it to be the single most important issue. Given that economic growth is expected to be flat to negative for the foreseeable future, this cannot be good news.

Just behind UK economic performance, the next biggest issue facing the property world is the ability to raise finance. Over a third (37%) of respondents said their businesses will be constrained in the next 12 months due to lack of finance. The percentage of those looking to raise finance in the next 12 months has decreased slightly (from 42% in 2007 to 39% in 2008). Of those looking to raise finance, the majority regard clearing banks as the best source (figure 1).

In our experience, property businesses sitting on the sidelines holding cash are not yet willing to move back into the market. Sovereign and BRIC funds are likely to be in a position to become active in the market before others are ready or able to return. Most commentators believe a market turn is some way off.

"Worryingly, almost all of this year's respondents who intended to raise finance saw the banks as their primary source at the time of the survey. At Smith & Williamson, we have seen some bank lenders opening up for business again but on a tentative and very different basis in terms of gearing, rates and valuations. Banks are understandably uneasy that valuations are now coming in with disclaimers due to market uncertainty, which is indicative of the fragile nature of the market and the loss of appetite for risk. Until economic conditions and the banks' own balance sheets have improved, many banks cannot lend on property ventures as, frankly, they need the cash themselves," said Nick Cartwright, chair of Smith & Williamson's Property Group.

Confidence crumbles

Our survey confirms a widespread and growing lack of confidence in both the commercial and residential property sectors. A telling development in the property world is the number of property agents setting up insolvency business. Recent movers Cluttons have followed in the footsteps of Lambert Smith Hampton, CB Richard Ellis and DTZ.

The residential sector is particularly pessimistic, with those who are reasonably or very confident dropping from 86% in 2006, to 48% in 2007 and just 7% this year (figure 2).

"Market volatility means that it's a very challenging environment in which to undertake development projects that can take several years to complete. Many developers are not yet able to get projects off the drawing board," explained Nick Cartwright.

"Graham Beale of Nationwide has said that house prices might end up falling by as much as 25% from their peak in the autumn of 2007 and Andy Hornby of HBOS has predicted that the credit crunch, which is restricting lending, would last well into 2010. There are no dissenting voices among our respondents."

Nick continued, "The Government has belatedly announced measures to assist the UK real estate sector, including raising the stamp duty land tax (SDLT) threshold and buying houses at knockdown prices from builders through the Homes and Communities Agency. However, the Government's proposals have been widely criticised for being woefully inadequate. Gordon Brown and Alistair Darling may have done enough to save the banks but they certainly did it too late. We hope they can find some more time for real estate soon."

Confidence in the commercial property sector has also dropped dramatically in the last two years. In 2006, 91% responded that they were reasonably or very confident, in 2007 this percentage declined to 58%, and this year only 18% have said that they are reasonably confident.

This year, not a single respondent said they are 'very confident' about the outlook for either residential or commercial property (figure 3).

Meanwhile, the tables have turned for house builders and registered providers (RPs) – previously known as registered social landlords. Those RPs with strong balance sheets are now in the unusual position of being able to strike hard bargains with house builders anxious to do deals wherever possible.

Furthermore, the number of newbuilds has fallen even further behind the Government's targets, which begs the question of who is going to fund the desired increase in housing stock. Seasoned observers have noted that this under-supply is sowing the seeds of the next speculative boom. Accordingly, how the Government supports affordable housing now could be crucial for the UK residential property market for years to come.

Nick commented, "The UK real estate sector, along with the rest of the economy, is in a downturn. This, despite the compulsion to lend enshrined in the banks' rescue package, is unlikely to have reversed by the time our next property survey results come out and, in reality, the most we can expect by the autumn of 2009 is a few green buds of recovery."

Financial and tax issues

Tax continues to have a greater influence on business decisions than is desirable and frequently acts as a barrier to property transactions. This year, 88% of respondents reported that tax influences their decision on whether to sell a property or not. Last year the equivalent figure was 93% (figure 4).

"This slight decline may be due to market conditions reducing the importance of tax on profits," Nick commented. "The Brown-Darling partnership has significantly complicated property taxation and it remains to be seen whether they will come up with any meaningful provisions to assist the ailing UK property market directly in its hour of need."

"An indication of just how out of step the Treasury was with the realities of the property market is the abolition of empty property rates relief, which has led companies to demolish buildings rather than suffer the tax. By doing away with this relief, the Government expected to raise in the order of £1bn per annum from the property sector, which is approximately the amount it is proposing to put back in as part of its initial 'rescue plan'."

Our survey also reveals that the community infrastructure levy is slightly less unpopular with our respondents than the planning gain supplement was, with 60% of respondents viewing it as a disincentive to developers, compared to the 79% who felt the same way about the planning gain supplement.

Investment vehicles

As with previous years, Real Estate Investment Trusts (REITs) and the recently introduced Property Authorised Investment Funds (PAIFs) are not yet perceived as key to the property industry.

This year, less than a quarter of respondents thought that REITs will enhance investment opportunities for the property sector, compared with just over half last year. This decline may be due to the reduction in REIT share prices (the majority are back to a significant discount to net assets), or the overall state of the property market. The new PAIF regime offers a superior investment alternative to that of REITs and will hopefully be well received by the market. We discuss the benefits of PAIFs over REITs in our article, 'Driving investment forward' on the back page of this bulletin.


With several major construction projects underway in and around London, we asked our respondents a number of questions to gauge opinion on how they thought their businesses would be affected.

Crossrail is expected to have a beneficial impact on the City of London, with Thames Gateway the only direction in which London can expand outwards.

The Olympic Village, though economically less relevant, is very much a talisman and global advertisement for UK project management and construction.

In terms of Crossrail, 55% of those who stated a view thought that the project will have a positive or very positive effect on their business. Only 4% felt there would be a negative effect, while the remaining 41% think that Crossrail would have little impact on them. There are reports circulating that Crossrail will be delayed, again due to lack of finance.

This year only 27% (of those who expressed a view on this matter) think that the Olympic Village will have a positive or very positive influence on their business (down from 40% last year). However, 65% are ambivalent compared to 55% last year. We think that, at the moment, the Olympics are too remote for most businesses unless they are directly involved with it, although building costs have been rising to reflect the draw on materials and labour.

We also asked about the development of the Thames Gateway, as it is the largest regeneration project in Europe. Only 39% of respondents are positive or very positive about this project, with 3% of respondents negative. The remaining 58% anticipated little effect for their own organisation. Other than the fact that the Gateway development has a conspicuously low profile in the public domain, again it seems to be a project that either you are involved in and expect to benefit from, or not.

Overall, our survey suggests that the majority of respondents are largely ambivalent about the impact these projects will have on them. Crossrail is perceived to have the most positive impact on their businesses (figure 5).

A barometer of the London property market is the lack of, or slowing of activity on building sites. The most obvious casualty to date is the Cheese Grater in the City.

Going green

Our survey highlights that although the Government may be focusing more on environmentally-friendly developments, this is not a priority for the property industry in the current economic climate.

Respondents seem to be aware of the environmental legislation that could reduce their profit margins, such as energy performance certificates and carbon emission restrictions. However, there is less understanding of the benefits available from provisions such as enhanced capital allowances, land remediation relief, business premises renovation allowances and SDLT relief for zero-carbon housing (figure 6). As Nick explained, "Environmental tax reliefs can result in significant savings and will be increasingly relevant in a difficult economic climate."

At the moment, the lack of finance is the real pressing issue for property companies and the current perception is that environmental attributes will not add value to a property, only cost. This situation will, we hope, change over time.


Clearly the property sector is in the doldrums. The lack of bank funding and the parlous state of the UK economy are the key issues. Those with cash to spend on property are waiting for the green shoots of recovery. There was no indication from our survey that the industry was expecting a series of mergers and consolidations, but the next 12 months may see movement in this area. Property agents are already adjusting their cost bases (with redundancies), a trend that we expect to continue. Most of the UK house builders are reporting dire figures and downsizing operations. Cash is king. Land banks and completed units are going for a song but buyers are holding out for even lower prices and an economic recovery, which could involve a long wait. The real estate sector, along with the rest of the UK economy, is in a downturn. We are confident that the property world will bounce back but we are not confident about when.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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