How often do you see a research report on UK property kicked off by a Jimi Hendrix quote?
The third edition of JP Morgan’s annual European Property Handbook came out earlier this week, and it makes for poetic, if disturbing reading.
Here’s the rather lyrical start of the note, penned by JPM analysts Harm Meijer, Osmaan Malik and Pradeep Kumar:
In a world in which it seems almost every ‘light’ is engineered on ‘green’ and appears likely to stay that way for a while, we believe property prices will be boosted by government/bank policies — much more strongly than most market participants currently appear to expect and perhaps even more strongly than some can even imagine. Indeed, we forecast real estate values in the UK to jump by 10% in the next 12 months, albeit to unsustainable levels, and those on the Continent to stabilize. Yield compression is back; we forecast a 100bp reduction for the UK. In essence, our view is that future profits are being brought forward by the policies, building a highly vulnerable property market with a small margin for error.
If that’s not scary enough for you, though, here’s another datapoint from the JPM analysts.
The UK commercial property market had a loan-to-value ratio of a whopping 106 per cent at the end of June, they say, meaning the size of mortgage lenders’ loans exceeded their valuations of the actual properties.
If UK property prices do rise by that (albeit unsustainable) 10 per cent, the market will still have an LTV of 97 per cent.
Deleveraging takes its time, doesn’t it?
