THE UK RESIDENTIAL PROPERTY INVESTMENT MARKET
Nick Barnes, Head of Research 14th November 2018
Contents National investment market overview London & South East focus Outlook
National overview
UK residential property market is big & growing
•
Residential is by far the largest property type by value
•
In 2016 the Investment Property Forum produced the following statistics:
•
Commercial property (owner-occupied & invested):
£883 bn
[13%]
Residential property – PRS:
£1.11 trn
[16.3%]
Residential property – owner-occupied & social:
£4.81 trn
[70.7%]
The split between residential & commercial is widening in favour of residential: Total residential share (by value) in 2000 = 77% Total residential share (by value) in 2016 = 87%
Regional share of PRS: London + SE = 56.8%
Residential has performed well against mainstream assets over the long term
Who is investing in residential property? •
Highly fragmented market
•
BTL l/lords own ca. 80%-85% of PRS stock Average portfolio size of 3 properties (CML survey: Dec 2016) 62% of l/lords own just a single property (CML survey: Dec 2016) 95% of l/lords claim that renting is not their main occupation (CML survey: Dec 2016)
•Institutions own ca. 2%-3% of PRS stock •Remainder of prs stock owned by property companies, private equity
investment funds, SWFs, Family Offices •Variety of overseas investors: N. American, SE Asian, European, MENA,
African
What is driving investment?
•
Requirement for better returns in a low interest rate environment
•
Portfolio diversification
•
Institutions looking for long term secure income streams to match liabilities
•
Households looking to boost income – especially for retirement
•
Overseas investors looking to park capital in a safe haven
Current investment market trends •
Market remains dominated by small BTL l/lords – but tax & regulatory change is hurting this end of the market
•
Signs that smaller “part-time” / accidental l/lords” with mortgage debt are retreating from market
•
Increase in incorporation by many BTL l/lords to avoid tax hit: 72% of mortgages for house purchase were from companies in 1st half 2018 (Source: Kent Reliance)
•
New investment in buy-to-let property fell by 80% from £25 billion in 2015 to £5 billion in 2017 (Source: IMLA).
•
In contrast, institutional & major corporates are increasing their investment
•
Growth of Build-to-Rent sector: investors either funding development or acquiring blocks from developers
London & South East markets
Mainstream London market trends •
Rightmove London searches up 49% in 1st half 2018 v 1st half 2017
•
But transaction numbers down due to: •Affordability issues: average deposit in Q2 2018:
- FTBs = £90,405 - Home movers = £170,100 •Supply shortages – RICS reports below long run average stock levels •BTL investors less active
•
Bank of Mum & Dad and Help-to-Buy have helped sustain the market
•
High volume of re-mortgaging
Central London trends •
More buyer interest this year: Chestertons: Jan-Sep 2018 v Jan-Sep 2017: •registered applicants = +48% •Viewings
•
= +32%
But buyers remain cautious: Aug-Oct 2018 v Aug-Oct 2017: - Central London exchanges down by 15% (Lonres)
• •
Realistic pricing key to agreeing deals: Aug-Oct 2018 v Aug-Oct 2017 (Lonres): Central London: - achieved prices down by 6.7% - average discount of 11.2% on initial asking price - 50.3% of properties on market at 12th November had been reduced in price
•
However, “correctly” priced properties have attracted sealed bids
•
Investors more cautious with focus on higher yielding markets offering stronger growth potential & lower entry costs
London & South East residential sales Annualised data suggests 2018 sales will be 19% down on 2017
Annual house price growth: London v South East v UK Price growth slowing since 2014 – bar 2016 spike
Greater London v Prime London residential price growth
12 month price growth by London Borough (August 2018)
12 month rental growth by London borough (Nov 2018)
Gross initial yields by London borough (2-bed flat: Nov 2018)
SE locations within 30 minute train commute to London
Location (2-bed flat)
Purchase price
Annual rent
Gross yield
Romford
£264,801
£14,868
5.61%
Cheshunt
£255,535
£13,596
5.32%
Dartford
£245,231
£12,636
5.15%
Reading
£257,383
£13,044
5.07%
Harlow
£235,182
£11,508
4.89%
Woking
£304,649
£14,688
4.82%
High Wycombe
£245,548
£11,676
4.76%
Watford
£327,237
£15,024
4.59%
Maidenhead
£386,954
£16,776
4.34%
Brentwood
£333,372
£14,112
4.23%
Surbiton
£433,840
£17,904
4.13%
Walton-on-Thames
£354,144
£14,400
4.07%
Source: Zoopla & Chestertons Research
Where are foreign buyers coming from?
Source: University of York/Land Registry
Where have foreign investors been buying? Top 10 London boroughs by proportion of new homes’ sales to foreign buyers (2014-16)
Source: University of York/Land Registry
Market outlook
No shortage of predictions of market crash
Market threats •
Affordability – how much rent can tenants pay?
•
Govt “meddling”: - tax (SDLT on 2nd properties; phasing out tax relief on finance related costs) - regulatory (immigration checks; tighter mortgage lending criteria) - General Election - rent control under a Labour govt?
•
Cost of debt likely to rise
•
Oversupply risk in some regional markets – but unlikely in London & SE
•
Brexit led economic downturn
Market opportunities
Key economic indicators positive for 2019 •
GDP growth to accelerate to 1.5% in 2019 (Treasury’s panel of independent forecasters)
•
Inflation to fall to 2.0%
•
Unemployment rate to nudge upwards to 4.2% - still extremely low
•
Average earnings growth to accelerate to 3.0%, comfortably above inflation
•
Bank Rate to rise but “future increases …are likely to be at a gradual pace and to a limited extent”
London population at highest ever level (8.8m) and set to rise by 11.5% over next decade
Source: GLA
The PRS sector is also expanding
Supply & demand mismatch will drive London capital & rental value growth
Source: GLA & DCLG
Outlook for property values in 2019 London •PCL capital values to stabilise by end of 2019 - but no growth until Brexit clarity •Greater London achieved prices to see modest growth of around 1%-2% •PCL rents to return to modest growth in 2019 •Greater London rents to rise by 2%-3%
South East •Capital values to rise by 2%-3% •Rents to rise by 3%-4%
Thank you for listening Any questions?