Going for gold?

The euphoria surrounding London's triumphant attainment of the 2012 Olympic Games lasted less than twenty four hours. The following day we came face to face with the contorted and grotesque face of international terrorism. Innocent commuters died, many more were maimed. Suddenly sport seemed less important and yet the coming sporting extravaganza is likely to have more lasting impact on the economy.

Both Halifax and the Royal Institution of Chartered Surveyors believe there will be a profound and long-lasting impact on house prices in the area around the games. Each of the previous four host cities have seen house prices rise by more than the national average over the five year period in the run-up to the Olympic games. The level of outperformance was, on average, 18%.

Tim Crawford, group economist at Halifax, said, "Hosting an Olympic games encourages city regeneration and is usually accompanied by an improvement in facilities and transport links. These factors tend to be positive for house prices. Homeowners in Hackney and Stratford, could potentially reap similar benefits to other Olympic precincts over the longer term."

According to the Olympic organisers, there will be an estimated 5,000 new homes on the site post the Olympics. There are also proposals for a 45 percent increase in capacity on the London Underground's Jubilee line along with plans for the creation of a transport hub in Stratford only seven minutes by train from Kings Cross station and designed to carry 320,000 people per hour.

RICS (the royal institution of chartered surveyors) also believes that house prices will rise in the area around the Olympics. It says that the Lea Valley where much of the Olympic-related development will be focused will be the main beneficiary. Prices in the area have already been increasing and a surge is "now inevitable", it says.

City fund managers also believe that the Olympiad will have a positive influence on the economy at large. Nigel Lanning, Manager, The Merchants Trust PLC, a UK Growth & Income investment trust; said, "Clearly we are looking at very long term economic effects here and the chances are that there will be excessive enthusiasm in areas like construction and transport related shares in the short run. I suspect the impact will be to enhance the growth prospects for an already economically advantaged part of the UK, i.e. the South East. But it will ensure that much needed infrastructure investment will be made around London, almost regardless of the financing costs. This will be to the longer term advantage of the economy at large. In the medium term, we commuters will probably face further disruption.

"The major positive impact is likely to be on national morale. It has been shown in the past that such events promote economic confidence and this could well boost the UKs relative growth rate. However one has to temper ones views by saying that the capital cost involved will be colossal and PFI financiers are not going to be able to find such sums, which means they will be on the Governments balance sheet. Thus there could well be adverse an impact on the gilt market nearer the time. Overall it has to be a net positive."

Colin McLean of SVM Asset Management, manager of SVM UK Active Fund plc, a UK Growth investment trust; said, "The London Olympics will be good news for a number of portfolio investments of SVM UK Active Fund. The Fund has good exposure to construction businesses that should benefit, including Balfour Beatty and Galliford Try. Ultimately there should be benefits for transport groups with London exposure and the Fund holds Go Ahead Group and Stagecoach Group. Travel and leisure businesses in the portfolio should also have a favourable inpact."

One note of caution is being sounded by Jeremy Batstone of Charles Stanley Stockbrokers. Likening the Stratford regeneration to that of the Millennium Dome, he points out that, "In the case of the Dome, despite the successful development of a brownfield site and a brand new transport link the place has evolved into an empty tent, a windswept car park and an under-used tube station."

His main concern is the likelihood of cost overruns. For those who live in London, it is worth bearing in mind that the Greater London Authority has committed every London home owner to the strong likelihood of substantial council tax hikes (it is estimated that every "band D" dweller may face an additional £1,300 to help make the books balance).

Batstone believes that the direct net boost to UK economic output from an increase in employment, greater capital expenditure and a flood of tourists may amount to c£10 billion. Set this against the overall size of the UK economy, at £1,200 billion, the boost is clearly going to be pretty small. Furthermore, the positive economic effects are likely to be spread out over the period 2007-12 and beyond, indicating that the overall boost to Gross Domestic Product (GDP) might be less than 0.1% per annum.

11 July 2005 © Moneyextra.com

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