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Distressed property sales key indicator of market position

Assetz believes the distressed property market has just passed its lowest point, in terms of achieving the lowest possible price for buyers of residential property.

Many housebuilders are running out of completed stock, while others are successfully renegotiating their banking covenants, taking some of the pressure away to sell at prices well below cost of build. Future stock will only get built if prices are above cost, which means it will be some considerable time before new supply comes onto the market.

House price indices, which show house price falls ranging from 10 – 16% in 2008, will continue to show falls for some months to come, but investors and home buyers should appreciate that these indices are significantly delayed in terms of data capture, by as much as three months.

A buyer who waits for two or three consecutive rising months from a house price index, will probably have missed the bottom of the market by at least six months. In addition, the pricing in the distressed market will have improved significantly by the time house prices start to turn up, meaning the bargains available today will be long gone.

Stuart Law, Chief Executive of Assetz, said: "If the distressed property market had a house price index, it would have already reached the bottom and there are clear signs that these prices are beginning to turn upwards. There are multiple bidders for much residential distressed property – an early warning indicator that the wider market trend will change in the near future. Savvy investors know they will secure the best price while consumer sentiment is at its worst, not when the press is reporting a market recovery. Professionals need to read the early warning signs, by watching the auction houses and monitoring the sale prices of distressed property."

The distressed sales market as a whole was under the most pressure from September 2008 to January 2009. During this period, interest rate cuts have made it more affordable for people to stay in their homes, reducing their need to sell, while developers who are refinancing their businesses are not as desperate to dispose of stock, or have already raised the cash they need. There will still be further distressed sales in the market for a long time to come but the huge discounts created by a dearth of buyers are beginning to moderate.

The Government is even now offering substantial guarantees against loans to businesses and guarantees to banks for mortgage lending and Assetz expects this to be extended to large corporates, including housebuilders. This will significantly improve their borrowing position and take the pressure away from selling at such low prices.

Stuart Law said: "I would recommend investors to use rental yields to value investments in 2009. Much distressed property is offering excellent returns for investors, typically in the region of 8 – 9% gross yield per annum and a long way above the 5% gross yield achieved a year or two ago. However, those who wait for the housing market indices to register a trend of positive growth will have missed the best buying opportunities."

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