Trying times for property investors

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Property is a significant source and store of wealth for high net worth individuals around the world, a major destination for their capital and, in many cases, a source of huge pleasure and enjoyment. It is a long-term investment that offers the potential for income, capital gains and a hedge against inflation.

Upping the ante 4 of 15 Executive summary 2 of 15

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

But for investors in most areas of global property, the past few years have been torrid. In the US, the S&P/Case-Shiller House Price Index, which is a composite of single-family home price indices for the nine US Census divisions, fell by 32 per cent from its high in the second quarter of 2006 to the first quarter of 2009. More recently, however, it has shown some signs of stabilising, rising slightly in the second quarter of 2009 for the first time in three years. The Federal Housing Finance Agency’s monthly House Price Index, which is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac, showed that in August, prices were 0.3 per cent lower than in the month before and 3.6 per cent lower than a year before. As of August, prices were 10.7 per cent below the April 2007 peak.

In the UK, the Nationwide House Price Index fell from 367 in the fourth quarter of 2007 to 298.7 in the first quarter of 2009, a drop of 19 per cent. Again, there was stabilisation in the second quarter of the year. That stabilisation is also seen in the August House Price Index issued by the Department for Communities and Local Government. It found that prices rose 0.5 per cent from July to August, however August prices were still down 5.6 per cent from the year before.

Following the trend in the US and Europe, the property market in Dubai, which had enjoyed a spectacular boom over the past three years, has also suffered. According to Colliers International, global affiliation of independently owned real estate services firms, there was a year-on-year decline of 48 per cent between the second quarter of 2008 and the second quarter of 2009.

Other regions of the world have fared somewhat better. During 2009, house prices have been booming in China, for example, thanks in large part to a massive government stimulus package. According to the National Bureau of Statistics, house prices rose by 2 per cent from July to August 2009 in the nation’s biggest cities, double the increase from June to July. There are concerns, however, that the massive liquidity that has been injected into the market could cause an asset price bubble to form, as loose monetary conditions helped support unsustainable rises in the western world.

If prices are starting to stabilise in some residential markets, the picture for commercial property is more mixed. With unemployment continuing to rise in many markets, albeit at a slower pace, demand for commercial property in general is likely to remain muted and lag behind a broader economic recovery. The IPD Global Property Index, which measures the combined performance of commercial property markets in 23 countries, fell significantly in US dollar terms during 2008, showing returns of -10.1 per cent compared with 16 per cent in 2007. The UK fared particularly badly, showing a return of -22.1 per cent. However, demand for well-let, prime property is starting to recover in some places, with the IPD UK Monthly Index rising 0.2 per cent in August, the first time it has been positive in 26 months.

The picture for the real estate investment trust market is also mixed. Since the second quarter of 2009, the FTSE NAREIT Equity REIT index, which tracks US real estate investment trusts (REITs), has shown strong returns, after falling heavily following the collapse of Lehman Brothers in September 2008. The index dropped by more than two-thirds between mid-September 2008 and early March 2009 but rose 30 per cent in the second quarter and more than 40 per cent in the third quarter. The pick-up in performance has been fuelled by a broader recovery in equity markets and a wave of equity issuance, as the industry recapitalises itself, often to take advantage of distressed assets in the property market. However the index is still about 25 per cent lower than it was a year ago and there are many challenges ahead for the market, including weak balance sheets and looming debt maturities.