Real Estate Market of the United Kingdom - Case Study Example

Real Estate Market of the United Kingdom Table of Contents Overview 2 Economic health of the Real Estate Markets 4 Predictions 7 Discussion 8 References 10 Bibliography 10 Introduction It is rightly perceived by the experts of almost all of the industries that the word ‘change’ is the only constant thing in the present world of today. Thanks to the massive developments in the fields of information technology and the communication process, the terms and the tricks of almost all of the business segments are fast changing. With the effects of globalization at its all time high, the international geographical boundaries among the different nations are becoming extinct for the purpose of trade and commerce. The reach of the customer has increased by great extent with inter-net and the flow of information is like never before. Sitting at one’s home, one can easily buy and sale goods as well as services to parties located at other countries or continents with the help of technology. Such changes have coupled all the major economies of the world. Even if any internal disaster happens to any economy internally, the effect is felt to the other major economies. The real estate market of the Scotland and the United Kingdom as a whole is neither an exception. The report studies the real estate investment with the major economic theories and the upcoming trends of the global economy. Overview The economy of the United Kingdom is one of the most prominent economies in the world. Along with England, Scotland is an important constituent of the United Kingdom economy. Being a developed nation, the country faced economic slowdown because of the credit crunch due to the housing bubble and sub – prime crisis in the United States, thanks again to the coupling theory. Consequently, the economy was majorly hit by the financial crisis and many of the citizens lost their jobs as the multi – national corporations initiated cuts in both the number of employees as well as at the wage front. Under such circumstances, the theory of economics suggests that as the citizens had lesser disposable income with job cuts and lesser pays, they will have lesser savings and tight - budgeted expenditures. Such lesser outflow of cash by the salaries will reduce the demand of all and sundry as people would not like to be spendthrift at tougher times. Lesser demand would further instigate the manufacturing and the service companies to further contract their means of production which ultimately ends up with more job cuts and pink slips. This calls for a vicious circle. The major trend that is observed among the economies all over the world is that of forming trading entities with the neighboring nations or similar minded countries. This essentially contributes to the positive foreign exchanges and also helps to benefit from the leverages of the free trade zone. The United Kingdom forms an important part of the largest trading entity i.e. the European Union. The country had received largest foreign direct investments in the year of 2008 in various fields amidst the financial slowdown. The country has also considerably topped the list of exporting and importing over the years. In the year of 2009, the country has been the second largest exporter of consumer services and the tenth largest exporter of merchandise. In the fields of imports too, the nation held the position of third and that of sixth respectively. The economic growth of United Kingdom over the period of last ten years had been phenomenal. The growth rate was badly hampered by the ongoing financial depression and the global meltdown. When compared to the growth rate of the European Union as a whole, it is observed that the nation always surpassed European Union till the year of 2006 but then onwards, it is the European Union that has been on lead even though marginally. In the year of 1999, the United Kingdom had a growth rate of 3.5% and it reached almost 3.9% in 2000 but since then it fell until 2002 when it was just above 2%. In 2004, it went to 3% only to fall again below 2.5% in the year of 2005. Just before the credit crunch, the rate was above 2.5% but the financial slowdown brought it downwards to just above 0.5% in the year of 2008. The other important indicator of the economy is the bank rate. If one compares and contrasts the bank rate over the period of last ten years of the United Kingdom, it is viewed that the rate was as high as 6% in the year of 2000 – 2001. Then there was a steady decline (from 6% to 4% just within few months) until 2004 when the rate reached 3.5%. Again the rates went higher, just below 5% and remained so till 2007. In 2008, the bank rates went as high as 5.75%. But then, with the advent of the financial slowdown, the rates experienced stiff decline and settled at mere 0.5% in the year of 2009. It might be apprehended that the rates were reduced so much by the central bank of the country so that the general investor do not turn away their faces from investing in the shares (UK Trade & Investment, 2009). In order to avoid such fluctuating behaviour of the bank as well as the share market, many of the investors have bought real estate properties in Great Britain as well as Scotland. Real estate properties are expected to be appreciated to great value when the market rectifies and gains confidence. Therefore, it can be said without much hesitation that the investment in real estate is being viewed as the most lucrative investment opportunity at present in the United Kingdom. Economic health of the Real Estate Markets The client of the case study seems to have high investment in the real estate markets of Scotland. The investments are all located at the commercial arenas of the top three cities of Scotland namely Aberdeen, Edinburgh and Glasgow. The investments that the clients made once, was definitely too lucrative. But at present, thanks to the financial slow down and job cuts and pay cuts all around, it is perceived that the office spaces have become almost over - subscribed in the region. The market scenario of Aberdeen, the third largest city of Scotland, where the client has the majority stake is quite positive. While it is agreed by the leading real estate consulting firms that the market of Aberdeen is not immuned to the overall economic depression and the lack of confidence of the general public and the investors over the market, yet it also noted that even fight against all odds, the market of Aberdeen had remarkably well performance in the year of 2008. The city is considered to have the highest office space pricings in the next five years compared to all other cities of Scotland. The figures from Knight Frank, one of the largest property dealers suggest that even amidst slow down, the city had a positive growth rate with respect to office spaces, 25% higher than 2007 that totaled to 550,000 square feet. The rent of the office space at Aberdeen ranged in between £ 12.89 to £ 30.00 with the average of £ 18 to £ 22 (Knight Frank, 2009). The client holds around 2 hectares of land in an industrial estate which certainly worth him a lot. Therefore, the investment at the city of Aberdeen keeps his investment green and he is on profit. But the case is quite different with the other two major commercial cities of Scotland namely Glasgow and Edinburgh. The local market news clearly suggests that the office space of Glasgow is over subscribed. The supply has been much more than the demand of the office spaces in Glasgow, resulting in the rapidly falling prices. According to CoStar, another firm in the similar industry, demand has fallen in all the segments of commercial spaces namely retail, office and industrial real estate (Minyanville, n.d.). The client has a secondary office space of 5000 square meter which is being marketed for lease rental and it should be agreed that the client and his marketers would have to try very hard to get the desired level of lease price under such economic circumstances. The commercial space of Edinburgh is located at the prime office location and is rented to a personal finance company presently. Analysis of the rates of the commercial estates in the city of Edinburgh is also not exciting and depicts a clear picture of falling prices. Therefore, the client should try to keep his tenant intact until and unless the rental does not go high. Predictions The predictions of the real estate depend upon whole lot of factors. In this regard, one can think of the real estate industry of the United States that it had few years back. The prices were soaring high. But all of a sudden, the prices fell tremendously low. So low that even the owners did not bother if the banks took control of the house because of non - payment of other debts which ultimately led to the sub – prime crisis. The case of the United Kingdom is much stable thanks to the stronger regulations by the financial regulating authorities. But the case in contention is that of commercial properties and not the residential ones. Now, as because of the financial slowdown, there are pink slips and job cuts everywhere, the confidence of the corporations and the companies are somewhat affected. As a result, the demand for the office spaces is falling fast except the city of Aberdeen. The theory suggests, with the increasing supply and falling demand, the price of any commodity is bound to fall in perfect competition and the same is happening in Scotland for commercial real estate property. The research firms are of the belief that such effect of the financial slowdown will continue even in this year of 2010. And, it can be expected that from the year of 2011, the scenario would regain its vitality as the market should regain confidence by then. Discussion The analysis of the present real estate market of the United Kingdom with special emphasis on the three cities of Aberdeen, Glasgow and Edinburgh of Scotland along with the future market trends and predictions encapsulates the volatility of the real estate investments. In the segment of the commercial real estate, the pricing depends on whole lot of variables. The demand of the office space and the supply of the office space might be the basic features but not the only two. The function of price also depends upon the external and internal economic environment, the tastes and the preferences of the customers (the place of setting the office), the availability of the substitute premises. Another important consideration in regard to the commercial real estate property is that of the classification of short run or the long run. Ideally, short run is such a period of time (generally of 12 months) where the supplier cannot adjust his end to meet the shifts on the demand side. The modern economists and the valuation experts are of the view that the entire period in the life of real estate property should be considered as short run as the supplier does not get any time to respond to the changing needs of the demanders. Conclusion Real estate has been one of the most booming sectors for the last few years. At present, the industry worldwide has been rocked by the ongoing financial slowdown as the citizens are spending much judiciously than ever before. The case with the client, who has three commercial properties at the three largest cities of Scotland, is expected to hold or let the property on rent in these trying times of the industry and not to sale. It is prudent to expect that the price of the real estate would again go up after couple of years and the client should wait till that time. References Knight Frank, 2009. Aberdeen. Research. [Online] Available at: http://resources.knightfrank.com/GetResearchResource.ashx?id=11471 [Accessed 15 February 2010]. Minyanville, No Date. Commercial Real Estate Saturation Point Glasgow KY. Economy. [Online] Available at: http://local.minyanville.com/Commercial_Real_Estate_Saturation_Point_Glasgow_KY-r1199326-Glasgow_KY.html [Accessed 15 February 2010]. UK Trade & Investment, 2009. The UK Economy at a Glance. Information Sheet. [Online] Available at: http://www.ukinvest.gov.uk/Information-sheets/4018290/en-GB.pdf [Accessed 15 February 2010]. Bibliography Ball, M., Lizieri, C and MacGregor, B. D. 1998. The Economics of Commercial Property Markets. Routledge: London. Balchin, P. N., Kieve, J. L. and Bull, G. H. 1995. Urban Land Economics and Public Policy. Macmillan: London. 5th Ed Evans, A. 1985. Urban Economics. Basil Blackwell: Oxford. Harvey, J. and Jowsey, E. 2004. Urban Land Economics. Palgrave: Basingstoke. 6th Ed. Read More