UK real estate: Is the UK real estate market returning to the '70s?

The UK has surprisingly mimicked the 1970s in a number of ways during the past several months. Many are less enjoyable than others, yet some are. In terms of culture, ABBA has reformed (at least virtually). Jeans with flared legs are back in style.Unluckily, inflation has also increased, fueled in part by the conflict in Ukraine and a rise in the cost of gas and oil. Workers are on strike in protest of lower pay. There are concerns that the economy could enter a recession as a result of the Bank of England hiking interest rates.Some UK real estate investors wonder if we're ready to have another spectacular boom-and-bust cycle like the one that occurred in the 1970s. In our opinion, no.Overall, UK real estate is less indebted, more transparent, and has a wider investor base than it had in the 1970s, albeit recent years have seen a decline in construction activity. As a result, while we anticipate certain challenges for the real estate market, we do not anticipate the same level of difficulty as 50 years ago.

What took place in the 1970s?

The 1970s weren't a terrible decade for UK real estate when looked at as a whole.Between 1970 and 1980, the retail prices index (RPI), which measures inflation, averaged 13.8% a year (p. a.). Average annual total profits from UK real estate were 16.3%.However, a significant slump occurred in the middle of the decade, sandwiched between two periods of robust performance. Over the three years leading up to the end of 1973, real estate returns averaged 24.4% p.a. In real terms, this equated to 14.1% p. a. (adjusted for inflation). Over the four years leading up to the end of 1980, the real estate market returned 23.0% per annum (8.7% per annum in real terms).In contrast, for the three years leading up to the end of 1976, real estate total returns decreased to 0. 8% p. a. This translates to a real-world annual rate of -15.7%.

Why did performance fluctuate so much?

The robust performance in the beginning of the 1970s was mostly fueled by the "Barber boom," a period of fast economic growth. The Barber boom is the name given to a set of initiatives that then-Chancellor of the Exchequer Anthony Barber put out in an effort to make a "dash for growth." The measures were centered on aggressive fiscal policy, notably a number of tax cuts, with the goal of bringing about a quick period of economic expansion. It initially worked. The Barber boom first increased rents and occupier demand. However, from 1974 to 1975, the economy experienced a downturn. The cost of oil doubled. Coal and energy supply were halted due to a miners' strike. The minimum lending rate, which served as a precursor to base rate, was increased by the Bank of England (BoE) from 7.5% in June 1973 to 15% in October 1976. In 1973, 10-year government bond yields were 11%; in 1974, they were 17%; and in 1975–1976, they were 15%.The increase in interest rates had two effects on the capital values and returns of real estate. First, despite an increase in inflation to 20%, rental growth halted due to the impact on the economy and occupant demand. The conclusion of several speculative building projects also placed pressure on rents. Many projects that were begun before the recession and finished during it were doomed to sit empty since they couldn't draw in tenants to rent or sale properties.

Second, the increase in interest rates reduced the demand for real estate among investors. The relative appeal of real estate to institutions decreased when bond yields rose. Due to the increase in short-term interest rates, several property businesses with floating rate debt were unable to make payments on their debt. As a result, between 1973 and 19754, the all-property equivalent yield (i.e. cap rate) increased from roughly 6% to 9% location of new homes in London.A decline in real estate yields over 1977–1978, as interest rates decreased and the outlook for the economy improved, served as the initial catalyst for the second phase of good returns. Then, in 1979, rental growth took over, albeit it started to decrease in 1980 as the economy fell back into a recession of managing director chartered surveyors.

Can investors currently expect the same outcome?

Should investors anticipate a recurrence of the crash of 1974 in the face of very high inflation, rising interest rates, and a significant probability of recession?1974 had a 33% actual decline in capital values. Inflation of 8–10% during the following 12 months, as is assumed, would result in a 25–30% decline in capital values. Is that going to occur soon? There are undoubtedly a lot more elements at work. Much will depend on how the economy is doing and how much the BoE decides to hike interest rates in order to manage inflation. By early 2023, we anticipate the BoE will increase the base rate to 3% and then maintain it there. We anticipate a 3% increase in 10-year bond yields as well as house prices in estate agents housing market. Additionally, this is predicated on the UK avoiding a recurrence of the wage-price spiral experienced in the 1970s, when average incomes increased by 16% per year and high inflation became self-perpetuating.The real estate markets of today and the 1970s differ significantly in a number of other important ways as well. Here is a brief explanation of rising rates investment opportunity in local area of royal institution.