A couple of years ago one of my friend’s daughters moved down to London. For some strange reason, my friend thought I was the right guy to ask for some property advice. The question was whether his daughter should buy a flat or rent one.
"Absolutely no doubt about it" I told him, "now is not the time to buy. Just look at the prices they’re asking - having to consider a five-times salary, interest-only, 100% mortgage as the only way to be able to buy is crazy. Not only that, but the economy is facing a black hole. It may seem as if everything is bubbling along nicely, but the whole thing is being driven by government borrowing. It’s only increased public spending that’s giving us growth, and sooner or later the day of reckoning will come. When the bubble bursts the buy-to-let market will also collapse and that will bring the first-time buyers market crashing down!"
Unfortunately his daughter took my advice. The flats that she was looking at were costing £250,000 at that time. Three months ago they were at £310,000!
They say that in life, timing is everything. And I was two years out with my prediction. The interesting thing is that last week those flats were at £295,000, but none were selling. The reason they weren’t selling wasn’t because everyone was scared out of the market. Quite the contrary, there were plenty of potential buyers who thought they were cheap at that price and wanted to buy. The fly in the ointment was that none of the buyers could get a mortgage. Even those with a reasonable deposit were being turned down by the very same institutions that, a few months back, had been chucking money about like confetti.
Very interesting (or not!) I hear you say, but what have your failures as a property tycoon got to do with petrol retailing? Well, the relevance is that, at the very same time I was proclaiming my prophecies about the housing market, I was also telling all and sundry that the prices being paid for petrol stations had gone berserk and couldn’t be justified. So are we about to see forecourt property values fall off the cliff?
The first thing that has to be said is that prices have been high for a number of different factors. First there has been the reason for the purchase. Where sites were being bought as building land for housing or flats you would have to think that the demand will almost completely dry up. As one house builder after another announces drastic redundancies it hardly seems likely that our sites, which usually have some attendant pollution problems, are likely to escape the shutdown.
However, the sites that were being bought for their convenience store value, either existing or potential, you would think would be a different matter. Although the economy is entering a belt-tightening phase, the great British public are essentially a lazy lot and I think it will take much worse conditions than these to seriously affect shopping habits. Having said that, fuel margins are so dire at the moment, the profitability of the forecourt must affect the overall earnings potential from the site. If demand for sites is likely to hold up reasonably well, what about the supply. When the cold winds blow some batten down the hatches while others bale out, and I think there will be a lot more sites coming to the market in the next few months.
The key will be whether the funding is available. Just as in the housing market, many banks have been very ’generous’ in the deals they have been offering for forecourt acquisitions. At best the interest rates being charged will be significantly higher. At worst the funds will just dry up. Whether this will hit the multiple operator more than the singleton is hard to say. I have a sneaky suspicion the latter will be more resilient.
So in summary, demand reasonablish; supply likely to increase; funding more difficult and more expensive. I would say our capital values are heading south. But then I’ve already told you how good my property predictions are!!!!