Comment: Patience is still a virtue for property investors

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AFTER a 22 per cent rise in the FTSE 100 index from its low last year, could prime housing be the next asset class to recover? And might prime Scottish property now be approaching an inflection point after five years of decline and drift?

There are formidable and immediate obstacles to any sustained recovery here. In Scotland’s prime property sector – meaning houses worth more than £400,000 – there is a massive overhang of unsold property. This currently stands at 1,282, some 
20 per cent up on last year and towering over the figure of 614 in early 2010.

According to the Savills prime property index, values have fallen by an average of around 20 per cent since the peak. Prime sales in Edinburgh have fallen from 72 in 2010 to 54 last year. And asking prices are still far too high.

The firm’s research indicates a continued disconnect between supply and demand and that prices in certain areas “must experience a further fall of around 10 per cent if the entrenched glut of Scottish prime housing stock is to be reduced and a sustained recovery is to get under way”.

A sample of 2,000 prime properties on the Scottish market last year revealed the average price at which prime properties actually sold: £580,373, which was 9.4 per cent lower than the average asking price.

Against this background, overly-ambitious sellers are still on the hook. When recovery does come, it will be from a very low base. As Lucian Cook, Savills director of research, reminded the audience at the group’s annual property ­seminar in Edinburgh last week, housing transactions across the UK are 45 per cent lower than five years ago, prices have gone nowhere for three years and the average time a property spends on the market before a sale is 219 days, against just 143 in February 2009.

The market has also become dramatically polarised between central London – driven up to astonishing levels by overseas money – and the rest of the UK. Looking ahead, the firm sees a 20 per cent recovery in the five years to 2017, but a notably more muted 6 per cent in Scotland.

It is only now that we are seeing the full extent of the property slump here – Jamie Macnab, the firm’s director of country house sales in Scotland, told of a 47 per cent drop in transactions.

So it seems you would have to be an incurable optimist to believe this end of the market could be near a recovery. But there are several reasons to believe that the market here may now be at, or close to, a floor.

There is a recovery, albeit glacial, in the supply of mortgage finance. While this should help the non-prime sector more than the top end, greater mobility there helps lift all the boats, given time.

While 2012 was generally seen as another miserable period for the market, there were discernible signs of a recovery setting in during the final months and this looks to have continued.

In addition, distinct pockets of the country went against the overall trend – Aberdeenshire most notably. The number of prime sales rose in: Argyll & Bute (up 47 per cent); East Lothian (38 per cent); the Edinburgh areas of Inverleith (29 per cent), New Town (24 per cent) and Stockbridge (22 per cent); Dumfries & Galloway (41 per cent); and Renfrewshire (2 per cent).

Savills said: “These locations all comprise a high proportion of high quality prime, period housing in established, sought-after, best-in-class locations and offer a desirable lifestyle in some of the most beautiful parts of the Scottish countryside”.

There is also continuing growth in the number of non-Scottish and overseas property buyers – 14 per cent of purchasers of prime Edinburgh property came from overseas and 26 per cent of the £1 million-plus bracket property buyers across Scotland came from outside the country, a 9 per cent increase on last year. Overseas buyer interest is likely to be accelerated by the sharp falls seen in sterling over the first months of the year, making UK assets relatively more attractive to international buyers.

And while that stunning price gap between central London and the rest of the UK is unlikely to be unwound to the same extent as seen in previous “ripple” or catch-up periods, there are grounds to believe that prime Scottish property should be able to attract growing investment interest.

Finally, I believe that, when the market does turn, it may do so quite quickly. This may be augmented by high net worth individuals looking for alternative investment assets outside of equities following the strong run of the past year.

As for the Scottish commercial property market, the polarisation between prime and secondary property has intensified. But major office deals have still been achieved in city centres and the price falls are now offering investors rental yields of 7 per cent and above, compared with 1.75-2 per cent on ten-year gilts.

Here, too, despite large quantities of bank portfolio property to be off-loaded, a recovery in institutional interest may not be as far off as widely feared.

The overriding message in all classes remains: be very patient.