2016 Property Review 20th December 2016

It has been a notably turbulent year with political events re-emerging as perhaps the dominant factor in how property decisions are made. Angus McIntosh, one of property's most thought-provoking commentators, provides an exclusive review of the year we have had and the year ahead for the UK's property markets.

Property is well placed to out-perform other investment asset classes in the medium term with average total returns likely to exceed 5% pa, which, when inflation (which may increase) is expected to remain relatively low, is very satisfactory.

Whilst the peak of commercial total returns was 2014 in this cycle, a slow down in the short-term to around 3%, is lower than predicted a year ago. Rental growth will also be muted, if there is any.

In these economic and politically unpredictable times, recently dominated by Brexit and "Trumponomics", hands on day-to-day tenant property management, and a very careful management of our towns and cities, will be even more important. Investment in better infrastructure will be paramount.


It’s been 35 years in the making. The economy and property market is full of uncertainty and recent political events have made calculating and quantifying the financial risks even more demanding.

How did we get into this mess?  The Corruption of Capitalism, a recent book by Guy Standing, bears an unfortunate title. Many players are not corrupt. Nevertheless it is a devastating critique of the mess we are in. Economic policies and new technology have created a "rentier" society, which is not free market capitalism; neo-liberalism has gone wrong.

The last 35 years or more of economic policies – based on privatisation, monetary policy and financial deregulation - have created far more market volatility than in the previous 35 years. To simply blame the problem on “globalisation” (which has been very beneficial) is naive.

Privatisation has resulted in some excellent improvements, but not always. Others have been a costly financial disaster, where the “rentiers” have leased back public assets, at their profit and at a much higher financial cost, to tax payers. Public sector gilt-edge bonds are a far cheaper form of finance

The new super-rich, digital and bio technology plutocrats are also examples of “rentiers”. They own very little, apart from the “intellectual property” and the control of systems they “rent” back to us all.

Monetary policy, largely relying on Central Bank interest rates to control the economy, has run out of steam. If there is another financial crisis, there are almost no tools left in the cupboard to fix it.

Financial deregulation reached its nemesis in 2008. Extreme austerity, imposed by the euro area since, has made Greece permanently bankrupt; it will never pay off its debt. Equally, Quantitative Easing, which was initially a masterstroke to save the financial world, has perpetuated the financial mess.

Quantitative Easing started well, but has resulted in: 


  • Interest rates being at an historic low.
  • £ Sterling being excessively high, until recently.
  • Government deficits have been, and remain, at an historic high. This will now increase further, as result of the Autumn Statement.
  • Low interest rates have driven up pension fund deficits.
  • Companies have plugged the shortfall, preventing further investment.
  • Companies have been buying their shares with cheap money – and by so doing increased investment market gearing.
  • Big banks are still too big to fail – under written by Government/Taxpayers. As Guy Standing notes, bankers have no written code of ethics, nor a professional body; they cannot be “struck off”, like Chartered Surveyors, for negligence. However, a few have been prosecuted for their “mistakes”, such as in the LIBOR markets.
  • The costs to the economy, business, UK Treasury, bank shareholders and taxpayer have been far higher than the supposed benefits of privitisation, Monetary Policies and Financial Deregulations including QE.
  • The level of unemployment (which is extremely low) is not the issue. Income and asset inequality has accelerated, both geographically, and by generations. Many in the new “gig” economy - where many now work part-time, are self-employed, are internees or are on zero hours contracts – pay far less tax than PAYE employees. The extremely high level of property taxes in the UK will not change. (12.9% of all taxes compared with only 3.5% on average in the OECD).
  • As Paul Johnson, of the Inst. Of Political Studies, has noted average real earnings are still below 2008 which will continue until beyond 2020. Middle income inequality accelerated dramatically in the 1980s since when its hardly changed. Since 1990 the very rich 1% - 3% have gained; their income share has moved from 6% to 9% (average CEO incomes have increased by 400%). Since 2007 the incomes of the over 60s have increased by 11% whilst those under 30 incomes have fallen by 7%, and home ownership has also fallen for them by 50%.
  • Finally, consumer lending has again been growing at its fastest rate in a decade. The debt bubble has been resurrected from the dead, which partly explains recent higher retail spending numbers.



We worry about Government debt, which is forecast to rise still further. The total UK debt mountain (Government, Private, Corporate and Financial) is now well over 1,000% to GDP. What happens to all this debt if interest rates also rise? I hope you enjoy horror movies.

We all know that the property market has also benefited from QE. Levels of debt lending to real estate are now back to the level prior to 2008.

It’s a statement of the obvious but the higher the level of debt to equities in the UK economy, the more volatile the returns from equities, and to some extent property. In the last 35 years, stock market booms and crashes have been far more frequent than in the previous 35 years.

What caused this high level of uncertainty? As president Bill Clinton famously said years ago, and has recently been frequently re-quoted as saying; "It's the economy stupid."  The list of failures over 35 years, and consequences set out above, says it all. Brexit and Trumponomics are just part of this much wider disillusionment with national and international economic management.

The Populous vote

As the Financial Times noted many months before the UK Referendum, since 2010 the voice of the populist vote has got stronger as a result of 35 years of economic monetary policies, the misuse of globalisation and technology. The global “plutocratic elite”, in finance, technology and in politics (such as on Capitol Hill in the USA, or in Brussels in the EU, or in Downing Street) were warned, but have remain enormously complacent.

The Arab Spring was the earliest manifestation of this discontent; the young lower income population – following a Middle East population explosion – when faced with higher food prices rose up against the elite. Events in Syria are partly the eventual outcome of this movement.

Mass migration is both partly a cause of, but not really the reason for, the economic disillusionment. But is used (just like events the 1930s) as the scapegoat, perhaps understandably, by those less well informed.

In the post First World War and the Depression of the 1930, Fascism and Communism were seen as simple solutions in Europe. As we know, there are, and never were, simple solutions.

Today, we see a similar phenomenon with extreme right wing or left wing views being expressed and believed. The Economist’s recent edition entitled Art of the lie noted that in the “post-truth” economy far more deliberate lies are being told and the electorate have voted for these issues, which they often know are not true, nor could ever happen. The world of “fake news” is here to stay.

BREXIT and Trumponomics and the up-coming elections across Europe in 2017 are just some of the wider uncertain challenges facing the economy and our property markets.

The old reality – a divide between the right-wing ruling classes, and the left-wing working classes - is history. The divide is now between those favouring free trade, the open movement of employment and wealth, versus a narrow tribal nationalism with the control of capital and people.

If, and it’s a big if, Trumponomics does fully follow this latter route, the USA will hurt many of those with low incomes who voted for Trump.


In the UK, the three phases of BREXIT uncertainty are: 


  • Phase One - What is BREXIT? We still don’t know what the UK is going to ask for in 2017? What will be the UK’s negotiating position?
  • Phase Two – We may trigger Article 50 in 2017 to leave the EU, but this is not certain. Is the EU also in breach of Article 50? This may be the outcome of the legal challenge in Ireland. There are then two years of further uncertainty. We don’t know who will represent the EU, nor whether all 27 remaining EU members will agree? It only took Canada seven years to agree its trading deal! Will the UK “fall off a cliff” or obtain a “transitional deal”? Does the UK also have to trigger Article 127 to leave the European Economic Area, which the Referendum never mentioned? Uncertainties are rife.
  • Phase Three - Post EU Membership is when the real fun starts. First, there’s a General Election in 2020. Then, the FT summed some of the other uncertainties as: How do we then re-entry into the WTO – World Trade Organization? What will be the new UK arrangement with 50+ countries, which already have trade arrangements with the EU, especially China, USA and other major players? And will President Elect Donald, help the UK or not? What trade tariffs might the UK then have to pay, to trade with the EU, sector by sector? As our trade with the EU has fallen from over 60% to below 45% in recent years, does this matter? Will the UK be allowed to use the EU “Financial Passport” arrangements? What happens to UK universities, where a high percent of staff come from the EU, and many research projects are part EU funded? How does the UK renegotiate its EU ties in foreign and defence policies, and co-operation on counter-terrorism and mass migration?


Other future global uncertainties include:


  • Quantitative Easing globally - when will interest rates start rising?
  • Neo-Liberal economics – the “marketisation” of society has failed? Will more interventionalist (Keynesian!) fiscal policies now gain ground? The Autumn Statement implied this might happen, and Trumponomics also envisages vast expenditure on infrastructure, just like Germany in the 1930s when the first autobahns were built.
  • China is slowing down - will there be a property market and banking crisis?
  • USA Presidential election – Trumponomics present a very unpredictable future, especially relating to world trade.
  • EU UK referendum – does it herald a divided Europe? Will the EU survive in its present form by 2020, with elections in France, Italy, Germany, Austria, the Netherland and more in this timeframe?
  • Scottish referendum – do we have a divided UK? Will there be another Scottish referendum?
  • Cyber War – this is potentially worse then a hot or cold war. Did Russia “hack” Hillary Clinton’s e mails?
  • Middle East – will the on-going collapse of failed states result in even more refugee migration to Europe?
  • Climate Change is a growing and a visible certainty – but will the Paris COP21 agreement be wrecked by the USA? The recent havoc and flooding caused by “Storm Angus”, is a manifestation of the changing climate.
  • Ever increasing insurance premiums, and increasing health worries about polluted air quality, at street level and within office and retail buildings, demonstrate these changes.
  • With oil prices now rising, the payback from the retrofitting of the Empire State Building in New York, indicate the enormous property investment opportunities.



There is a growing awareness that both the blitzkrieg of new technology, and its war of attrition, is radically changing our lives and our property markets. Jeremy Rifkin’s books The Third Industrial Revolution and The Zero Marginal Cost Society, which have morphed into the fourth Industrial Revolution, sum up these ideas. As Anthony Hilton, in the Evening Standard, recently noted:

“Uber, does not own taxis, Alibaba, the biggest retailer, does not own shops, Facebook, does not create any content and Airbnb, does not own hotels”

All these new companies in the fourth Industrial Revolution required almost zero capital to get started. However, according to a recent report from Oxford Economics, the UK is likely to be a winner from this storm of change, as discussed later.

Residential property

The programme of privatising public housing has failed. Using Section 106 agreements and private finance, has pushed up all house prices. QE loves this asset price certainty and the shortage of stock, and lends even more to improve houses already built.

We need over 300,000 new homes a year to catch up with the backlog of under construction over the last 35 years. At least 2016 will see over 100,000 new dwellings, for the first time for some years, partly due to the conversion of old office buildings. The Autumn Statement indicated a change, but will we see more home built?

Meanwhile, existing owners in South East England sit and watch their home asset values rise, sometimes faster than their incomes. Non-owners rent, including those under 30, students, care homes etc. There will be even more of them to come, especially in Central (and within commuting distance of) London. This looks a dead-certainty as an investment area, at the right price.

On my recent visit to Hong Kong, I found Manchester to be the favoured location for overseas funds to buy. Current London house prices, at 14 times average salaries, compared with less than five times in other cities, are perceived as too expensive.

Despite recent SDLT changes, investment in houses to let, in some locations, looks a very good investment bet for the future.

Retail property

The demise of down-town retailing looks set to continue, accelerated in some areas by the massive rises in the UBR due in 2017. On-line retailing will grow. Only out-of-town retail warehouses, and major tourist destinations, should show reasonable investment returns over the medium, although the food and beverage market looks vulnerable.

Industrial and logistics property

This is set to out-perform almost all other property investment sectors, particularly driven by technological change. The shortage of land for good industrial stock, especially in South East England, will hold rental values.

On-Shoring and Near-Shoring manufacturing (at the demise of some Off-Shoring) is changing the structure of the property market. The fall of the £ Sterling will accelerate this trend. Higher-valued/knowledge-based manufacturing will expand.

Logistic facilities, feeding the on-line shopping appetite, especially with such a shortage of land near major population areas (plus the higher investment yields), will almost guarantee above average total returns, both in the short and medium term.

Office property

The uncertainties over Brexit, especially in London, at a time when the market was forecast to slow anyway, has made the uncertainty worse for finance orientated companies. But, whilst London may shrink as a finance centre due to BREXIT, its fin-tech we need to think about. Online computer technology is replacing the role of some banking functions. Fewer financial buildings will be needed.

However, the phenomenal rise of London (and to a lesser extent Manchester and other centres focused on the fouth industrial revolution) as a global tech hubs, has created an extra-ordinary level of leasing recently. Apple, Google, FaceBook and more, have announced further expansion plans, despite BREXIT and the possible restriction of non-UK qualified “knowledge worker” employees.

In recent years, over 30% of London office space has been leased to TMTs, with more now employed in this sector, than in Finance and Banking. This, and the collapse of £Sterling (which Roger Bootle says we must keep), may be why 80% of recent City investments have come from overseas’ money.

The investment potential in the wider Northern Powerhouse (Golden Diamond) region, from Liverpool to Hull, and Birmingham to Newcastle, is enormous. The loss of 310,000 graduates from this region to the south in ten years is a national disgrace. As is Birmingham having the worst employment rate in the UK at only 65% compared with a national figure of 71%. UK taxpayers must stop giving welfare hand outs, and give far more investment hand ups.

A comprehensive investment strategy, involving the vast number of excellent Universities, and dramatically improved infrastructure, linking the office centres in middle and north England, would create a larger version of the Netherland’s Randstad (round-town), but would be a global winner. The property market implications are vast.

Total returns

In the short-term all total returns will be disappointing, but some worse than others. In the medium term the outlook is very positive for some property sectors (including London shops and industrials, distribution warehouses and some of the new “alternative” sectors such as infrastructure, residential, student and care homes).

If interest rates rise, causing the bond market values to collapse, and the equity market is even more volatile, property will outperform both.

An Outlook: From Here to Uncertainty

Deborah Kerr and Burt Lancaster rolled in the waves in the film  From Here to Eternity during the attack on Pearl Harbor in December 1941, the culmination of the economic and politically uncertainties of the 1930.

There are parallels today with that era, but a far more globally connected world is less likely to finish up rolling in the waves. The property market, as an investment class, is likely to out perform other assets eventually, but not in the short but medium term.

Our wisdom of the past provides us with a framework to understand the opportunities for the future.

Angus McIntosh is Economist, Chartered Surveyor and Consultant at Real Estate Forecasting Ltd., Visiting Professor: Oxford Brookes University & Royal Agricultural University, Hong Kong Academy of Management.