Correct correction?

It is interesting to see that the fall in transaction volumes in central London has been underway for months. According to Costar News…

The research from Cushman & Wakefield shows that £7.45bn was transacted in the first six months of 2016, compared to £13.3bn over the same period last year, representing a fall of 43.92%. The year-on-year figures for Q2 are even starker: with £3.88bn transacted in London over the three-month period compared to £8.65bn in Q2 2015, equating to a 55.17% drop in volumes. Over the longer term, the Q2 figures represent a 21.5% decline on the five-year quarterly average.

In the longer term, 2015 seems to have been a ‘high-water mark’. I’m surprised that there wasn’t a bigger drop in the quarter before the referendum compared to the medium term average. 2016 is unlikely to be as good a year for investment agents as 2015. That’s likely to mean a significant bonus correction next year.

We’re pretty sure that real estate markets are usually in some degree of disequilibrium. So, is the current crisis triggering an overdue correction towards more efficient pricing or is the crisis creating a shift from efficient pricing? With ten year bond yields going below 1% presumably because of a flight to safety, the income returns from direct and indirect commercial real estate must look attractive.

If we look at the listed markets, Land Securities shares are currently at about the same level as they were in February THIS year – approx £9.90! So, there doesn’t seem to have been a major correction by any means here. If you go back to March 2009, they bottomed out at £3.70. They’d gone up to £8.40 within a couple of years.   The housebuilders have had a bigger price drop after the referendum – but their share prices are about where they were 18 months ago.

S&P’s downgrading of UK debt because of its perceptions that there would be a “less predictable, stable, and effective policy framework in the UK” rings truer. However, it does seem an overreaction given that the AAA rating remained during the GFC.


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