VULTURE FUNDS CIRCLE THE MARKET 2008

Buy-to-let investors, investment clubs and other categories of private investor were squeezed out of the market in 2008 by the radical curtailing of bank lending. In the first half of 2008 there was very little
investment activity at all in Midtown, City and Docklands. In the second half, however, vulture funds which had been expected to enter the market once values fell, did begin to bid aggressively for bulk units, as well as for individual units at auction. By the end of 2008, however, there was little evidence of sales at deep discount. When we say aggressive, we mean that they are offering to buy bulk units in Midtown, City and Docklands at up to 40% below the developer’s or vendor’s asking price.We expect vulture funds to have
limited success in 2009 in Midtown and the City, instead they will turn their attention to Docklands bearing in mind the potential upside of the Olympics in 2012.

The yield curve flattened, however, in the second half of 2008 as rents came under pressure. With the expectation of further reductions in rents and capital values outlined in the Market Prospects section (opposite) yields are likely to remain in and around 6% in the short term. Investors were encouraged, of course, by the three significant cuts in the Bank of England Base Rate of half a point on 8th October
2008, one and a half points on 6th November and 1 point on 4th December 2008. Broadly speaking, however, experienced investors tell us that they are looking for residential gross initial yields exceeding
8% before considering acquiring residential stock.

Accordingly, established property investment companies with funds available have not been sufficiently tempted by the discounts available on residential rental portfolios across London, but instead have preferred to preserve their cash and buying power for later in this cycle. This risk-averse attitude mirrors the majority of individual landlords and owner-occupiers, who have little enthusiasm for discounting given London’s position as the pre-eminent World City – they expect the market to bounce back!

In a competitive market property investors became increasingly conscious in 2008 of the need for asset management, portfolio management and building management. Hurford Salvi Carr’s property management division is now our largest department and manages over 120 residential blocks across London and the south east for a range of investor clients.