In this week's blog, we look at the latest round of housing data and unpack some positive indications that not only have we passed peak pain, but the significant capital inflow may be just beginning in real estate and all its directly correlated markets.
Savills were on the tape last week indicating they believe that there is a relief rally already underway in housing; the rate of retracement is slowing even though 2024 is expected to yield a 4% drop overall year on year. They are targeting a recovery beginning by Q3, and part of this is the groupthink that the Bank of England will begin to row back on rate increases and ease pressure across all markets. That is seemingly the narrative being pushed by economists and the media alike, so it's a narrative we are more than happy to run with. Robert Gardner, the chief economist at Nationwide, has stated in the press, "People are becoming a little bit more optimistic. It's still going to be difficult for households, but hopefully, the squeeze on incomes will continue to lessen because growth is outpacing inflation" which is the type of bullish sentiment we are seeing slowly begin to compound in the press.
Looking at other credible voices on the tape pushing a bullish narrative, Pantheon Macroeconomics is now predicting a gentle rise in housing asset prices as the market rebalances. They reference on Bloomberg a point we have continually made regarding the housing boom in the aftermath of the pandemic being primarily attributed to a fiscal stimulus propelling the market, and what we have been seeing over the last 12 months isn't a decline; it's a retracement on assets that were circumstantially overvalued. One fact to back up this theory is that house prices are substantially higher now than before the pandemic. Looking back at the data from February 2020, the average home cost £230,609 – which is £50,000 less than in January 2024. With demand substantially outstripping supply, wages rising above inflation, and the Mortgage markets enticing more buyers by pricing in future rate slides, the softest of soft landings is seemingly evident, caveated with the rigours of analysing a moving set of circumstances; who knows what the morrow shall bring.
So, where is the evidence of fresh capital coming into the real estate markets aside from looking at house prices potentially stabilising? We look at the performance of other asset classes underpinned by global housing markets to measure investment sentiment. Interestingly, the Investors Chronicle recently ran a piece on Real Estate Investment Trusts and how there is evidence of investors coming back to the table on a global level, a considerable indicator of smart money's positive sentiment. It's important to remember that REITs have gotten for want of a better word - crushed in the ill-suited climate of the last 36 months; the perfect storm of rising rates and reduced occupancy in commercial properties post covid significantly jeopardised returns, but the Chronicle indicates that UBS global listed real estate performance posted its fourth best monthly performance since the worldwide liquidity issue post the 2008 financial crisis, all driven by the groupthink as mentioned earlier.
Looking closer to home at our market, at the FTSE 350 - Real Estate Investment Trusts REITs Constituents, evidentially, all the funds listed have had a torrid few years; however, looking at the quarterly share price movement from Q4 2023, there is a clear pattern of recovery across all listed funds. Globally, there are 1.9 trillion USD in REITs; the peer-to-peer market connected to Real Estate is a drop in the ocean by comparison, with the total worldwide P2P asset class coming in at 133 billion, and the UK P2P asset class connected to Real Estate only being a fraction of that. The room for upside expansion of the P2P asset class in the Private Credit boom we find ourselves in is a massive indicator of where this space could go.
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