This rule of thumb may be simplistic, but it does a surprisingly good job of explaining performance over the past decade. As we all know, debt was easy to come by until 2007, stoking strong gains in all things property-related. Then debt was abruptly withdrawn, sparking a sharp correction. Finally, after unprecedented interest-rate cuts and quantitative easing, equity returned, but only to those parts of the market it perceived as reasonably safe - anything in central London, and elite properties elsewhere. So the market split into the equity-dependent best, which bounced, and the mortgage-dependent rest, which continued to fall.
In the residential sphere, we can see this not just by comparing central London house prices with house prices in the rent of the country, or by comparing the performance of houses worth more than £500,000 with those worth less. We can even see it in the house price indices. The Nationwide and Halifax indices, which are based on the lenders' mortgage books, found that average house prices in August were, respectively, 0.7 per cent and 0.9 per cent lower than a year before. The LSL Acadametrics index, which is based on Land Registry data, found that prices were 2.6 per cent higher. The difference is probably due to cash transactions by investors and wealthy owner-occupiers in London. These are included in Land Registry data but not in the mortgage data.
The big question for property owners is how far the elastic between the best and the rest can stretch. This applies as much to shops and offices as to houses. The graph below - showing commercial property loans as a share of total UK bank debt - gives an insight into the debt-fuelled mass market. After the Lawson boom, it took until 1998 for banks to reduce their real-estate exposure to a point where they became willing to write net new mortgages again. The latest boom-and-bust cycle has been more extreme, and Basel III regulators are now hounding the banks to hold more capital against property loans. Yet property still accounts for 10.2 per cent of banks' balance sheets - more than at the 1991 peak. The only way is down.
An objection to this fatalistic argument is that new lenders have started to replace the banks. Some insurers, notably Aviva, have always had property-lending arms. But others have entered the market over the past year, including Legal & General, which made a £121m 10-year loan to Unite Group at 5.05 per cent. Property companies are keen to diversify their sources of capital, particularly away from banks, while insurers find that commercial property meets their requirements for yield and income security over a reasonably long time frame.
An even more recent trend has been for property companies to issue bonds directly to investors. British Land (BLND), Unibail-Rodamco (UL) and Capital Shopping Centres (CSCG) have all issued convertible bonds this month. Hammerson (HMSO) last week issued a plain-vanilla €500m (£398m) bond at a rate of just 2.75 per cent that was six times oversubscribed. Finally - and most interestingly for private investors - three smaller players, Primary Health Properties (PHP), CLS Holdings (CLI) and Workspace (WKP), have raised £50m-£75m each by issuing retail bonds.
This is clearly a positive trend for shareholders in real-estate investment trusts. Because the market cost of debt continues to fall, refinancing deals typically reduce interest payments and boost profits. It is also welcome news that property companies are less reliant on banks than they were during the 2008 credit crunch; in another wave of the banking crisis they would look stronger.
But these new sources of capital are only available to larger players. Institutional bonds require minimum issuance of £250m, notes Henrietta Podd at broker Canaccord. Insurers are notoriously risk-averse and can afford to cherry-pick the best borrowers. Neither the debt markets nor the insurers are interested in the swathes of distressed stock that sit on banks' balance sheets.
That means the new lenders are probably exacerbating the rift in the property market, not healing it. As the old saw goes, capital is available only to those that don't need it. In such markets, the rich get richer and the poor poorer. Value investors beware.
