Transactional Friction

The Meaning of Liff, a comic dictionary by Douglas Adams and John Lloyd, was born out of the idea that there were many objects, experiences and ideas that had no specific word to describe them - and at the same time there existed, on signposts across Britain, hundreds of words in search of a meaning. For example, a Shoeburyness (n) is ‘The vague uncomfortable feeling you get when sitting on a seat that is still warm from somebody else’s bottom.’ A Munster (n) is ‘A person who continually brings up the subject of property prices.’ Sadly, normally, that’s us.

But in this new Brexit world the story is not prices, but turnover. LONRES is a firm that provides market data to the industry and as such has not only robust statistics but also a good feel for sentiment as they talk to their estate agent clients. The statistics are sobering for this year. Not too surprisingly in the second quarter of 2016, the number of transactions was down 42% on the same period the year before. Brexit is the obvious villain - but the problem would appear to be more structural as the turnover in the first half of 2015 was 17% down on the same period of 2014. The first quarter of this year should have bucked the trend when there was the rush to get deals through before the increase in Stamp Duty for second homes came into effect in April. In fact that period was down 3% on the same in 2014.

Forget Brexit - it’s Stamp Duty; and the people who are really feeling the pain are estate agents for whom turnover is their lifeblood. If you add price declines into the mix (more on this later), downward pressure on fees as they fight for market share and the rise of the online agencies like Purplebricks, it is beginning to look like a perfect storm. The pain is currently being felt in redundancies; the future pain will be suffered by commercial landlords as a raft of surplus offices come onto the retail market. If the defenestration of George Osborne had something to do with estate agents sticking pins into wax effigies of the chancellor, it would not be a surprise.

As ever, the statistics for the market as a whole need nuance. One way to think of this is as a market with two types of participants. On the one hand there are buyers who think in dollars and visit, rather than live in, their trophy; who are rich, rather than merely wealthy. On the other, there are those who live in their house or flat, work in London and think in pounds sterling. The first are taking advantage of a weak pound as buyers. However, the corollary of this is that if they are sellers they are looking at a dollar loss - which they are often unwilling to crystalize. The others are finding life expensive and are looking for bargains - if they are looking at all. Their default position is to stay where they are, given the costs of moving. From the high water mark in price terms, the range is between flat, or even up, for the best of the best - and minus 15%. Because interest rates are so low, there is little pain and no great incentive to sell - hence the slide in turnover and an unwillingness to price to the new reality. This is manifesting itself in a sort of market stagflation: strong pockets of demand meeting very little supply.

This is showing up in the rental market where there has been a 18% increase in the number of properties looking for tenants. These are ‘accidental’ landlords: they can’t - or won’t - sell, so they rent instead. But because of low interest rates they aren’t ‘desperate’ landlords who need to reduce their sale prices. The statistics are from rental agents only and understate the total amount of rental stock as they don’t include Airbnb or suchlike. It is often forgotten that the top end of the rental market is always constrained and dependent on the London economy - particularly the City. There could be an almost unlimited number of buyers from China or India but the number of tenants will always be finite - and vulnerable to the aftershock of Brexit if companies take their business elsewhere. As the pipeline of new build will inevitably swell the supply side, the secret is going to be nailing the tenant rather than maximising the rent. The true killer of yield is voids.

Our market, however, is not the whole market - and very much not the mass of developments aimed at investors in Asia. Limited supply at sensible prices means that buyers who want the best have to work much harder to find, and buy, what they want. This is where we come into our own. We have not been immune from the woes of the Russian economy but are benefiting from the strength of the dollar - and dollar proxies. As yields have shrunk in the residential market, those in the commercial market are looking attractive - especially if the individual tenant risk can be reduced in a portfolio. But the sweet spot is in the country market which, having lagged for many years while London roared, is now playing catch up. This is because it is easier to ameliorate the pain of Stamp Duty through mixed use, the time horizon tends to be in decades and the nagging worry that a move to the county might only be one way as values bifurcated has receded. The old cliche of supply being about death, debt or divorce is as valid as ever and some of the pent up demand of the last few years is now coming through.

But Stamp Duty remains the elephant in the room. No matter what gloss you put on it, it’s not doing anyone any good - not even the Treasury, whose receipts must have shrunk along with estate agents’ profits. Philip Hammond is a property man and hopefully pragmatic enough to realise that what may have looked like a populist vote winner to the previous incumbent of his job, with no victims that matter electorally, might be having unforeseen consequences in the employment market - and in the damage that too much transactional friction can do when it constrains movement of labour. Best not to hold your breath though; and be prepared for more political turbulence in this electoral season; like Trump. The Meaning of Liff must have had the Donald in mind with the word Scraptoft (n) ‘The absurd flap of hair a vain and balding man grows long above one ear to comb it plastered over the top of his head to the other ear.’