Outlook 2017 – The year ahead for residential property
Robert Weaver, our Director of Property, is one of the UK’s most experienced property professionals. Formerly Global Director of Residential Property at RBS, he previously ran a £500m residential fund. Robert is a Fellow of the Royal Institution of Chartered Surveyors (RICS) and also a member of the residential committee of the British Property Federation.
Backed by the expertise of our in-house research team, here you can find out Robert’s views and opinions on what 2017 could look like for investors in UK residential.
Robert has deemed 2017, ‘the year of the regions’…
London: In the wake of Brexit
London is often deemed the capital city of the world. Unsurprisingly, its property market is affected by many more factors than the rest of the country, making it harder to predict what might happen. Here are some more immediate thoughts.
Firstly, all the froth will be blown off the top of the London market this year. Prime central London has been in high demand, and is, quite frankly, overpriced (this means areas like Kensington, Chelsea and Westminster). Prime central has seen some losses, and this will continue over the year. This wasn’t helped by the stamp duty changes of late 2014, which took the top rate to 12%, followed by an additional 3% for any secondary purchases.
In addition to this, profit focussed developers have managed to create an oversupply of swanky apartments in the city. I’d expect these large scale, high end developments in central London to struggle selling stock. Such properties were not what the capital needed in the midst of a housing crisis, and there isn’t enough market for them. These developers are likely to be forced to reduce their prices, and in general, the premium on new build properties will start to narrow. More affordable stock, however, will continue to be in demand.
For the rest of London, prices should stay fairly stable, with some modest levels of growth, particularly around Crossrail stations like Ealing and Woolwich to single out examples. Beyond this, mainstream areas such as Highgate, Clapham, Balham, Wimbledon, Kingston should stay strong because of their continued popularity, demand from owner occupiers, and ‘relative’ affordability. They act as transitional areas out of London – a wealth corridor to the suburbs as people seek more space. Overall, prices have remained resilient in London; the chronic shortage of housing supply isn’t going to disappear anytime soon, and transactions are down in the wake of Brexit, further reducing supply.
The rest of the UK: A hunt for yield
Increasingly interesting in the current climate are the major cities outside of London; including but not limited to Southampton, Bristol, Birmingham, Leeds, Liverpool, Manchester, Sheffield, and Nottingham. With strong local economies and large populations, these cities come from a low base and haven’t seen the growth that London has, so have room for some modest growth. Being largely pro-Brexit, sentiment in the housing market is also strong for these cities. Yield is also typically much higher in these cities, as house price growth has not been as seriously inflated as in London. Yield itself is a strong enough case for investment in these areas; with strong market fundamentals underpinning capital and creating the opportunity for medium to long term capital growth in addition.
In fact, in a slower growth environment, the hunt for yield ever strengthens. Yield tends to be stronger in regional areas, particularly further North, because house prices are driven by local economy, local demand, and local sentiment. The terrible shortage of housing in London is not a problem for these areas, so housing is more affordable, and yields are higher. Those seeking growth will still find attractive opportunities and can turn yield into capital appreciation by reinvesting their income.
Continued pressure on buy-to-let
The squeeze tightens further for buy-to-let investors, who may wish to consider different ways of accessing the market. An additional 3% on stamp duty, along with the removal of interest offsetting and new affordability tests on buy-to-let mortgages will discourage new investors from entering the buy-to-let market. This should mean more stock for first time buyers, so long as that stock is affordable. This also means that we must look to other ways of providing much needed rental stock, if buy-to-let is to be discouraged. Institutions will likely be called upon to fill this space.
Interest rates: Low for the long term
There really isn’t much to report, other than rates are likely to remain low, and for a long time. Our indebted economy and housing market could not sustain a meaningful increase at present. The clampdown that the government are making on mortgage borrowing criteria, and mortgage interest relief removal are likely to be more significant on the purse of the investor than interest rates.
Government commitments to new housing: A longer game
The Autumn statement of November 2016 announced a welcome boost to the housing market. Annual spend on housing is set to double – the highlights of which can be found in our blog, here. The commitment to deliver more affordable housing across a ‘wider range’ sounds like a sage commitment to increase much needed rental stock, as well as housing for first time buyers.
That said, none of these commitments will have any effect on the market in 2017. It usually takes at least 18 months to start seeing the first delivery of units with any scheme.
Technology, and the future of buy-to-let
We find ourselves in a dichotomy. The UK clearly loves to invest in property; residential property represents 20% of the average household investment portfolio, and this is without counting the homes we live in. Yet the government has, and is likely, to make buy-to-let increasingly more difficult to access, and less profitable.
Technology companies such as Property Partner are providing an opportunity to investors being pushed out of the market by making it far easier to access, providing the benefits of investing through a leverage SPV (special purpose vehicle), and offering investment-grade properties secured at a fair discount.
The government has already shown support for companies such as ours through the announcement of a National Productivity Investment Fund of £23bn aimed at “infrastructure and innovation”. They specifically call out that £400m will be injected into Venture Capital enterprises through the British Business Bank, unlocking £1 billion of new finance to help new technology firms grow. Our customers at Property Partner stand at the helm of a future that we are all building together, and 2017 is going to be an interesting year.
And on a personal note…
There are several changes that I would like to see. Whether or not they happen is another matter. These are:
• A review of the stamp duty environment; it’s extremely punitive. 12% for anything over £1.5m means that much of London is above this threshold. Then, there’s the additional 3% charge on second properties. Unfortunately, I don’t think these will be scrapped anytime soon.
• First time buyers are getting a raw deal in terms of mortgages with banks. At a sensible rate, they can still only get an 85% mortgage, and rates jump up materially between a 90% and 95% LTV. Then, they have to pass a stress test – one which I wouldn’t pass on my own home. First time buyers are the nuts and bolts of the housing market, they provide liquidity. Without that liquidity from the bottom, the market falters. I would love to see banks willing to lend sensibly at 95% mortgages. People need a chance to get on the ladder, and I think they need special mortgages for that.
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