RESIDENTIAL PROPERTY FOCUS Q2 2012 - GOLDEN OPPORTUNITY IS IT TIME TO COMMIT TO RESIDENTIAL INVESTMENT? - SAVILLS UK
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Savills Research
UK Residential
Residential
Property
Focus Q2 2012 Investment
Special
Examining the
yield potential
Golden opportunity across UK
housing
Is it time to commit to
residential investment?
Rental sector. Booming demand
Taxation: Budget measures 2012
Investment & development: Q&A
savills.co.uk/research
Q2 2012
Foreword
The rise and fall
of the UK mortgage
With the new property world dominated by
cash and not mortgage borrowing, the time Executive summary
for residential investment has finally arrived
The key findings in this issue
R
esidential property But what is the value of the income to
is now a two-way the owner? Tying up cash in an asset like ■ The private rental sector has historically been
street. An asset that housing is only worthwhile if it produces the province of the young, but more people
used to be viewed as a return greater than that available are remaining for longer in privately rented
something in which elsewhere – at equal or lower risk. accommodation because it’s cheaper for them to
you invested your income in order to rent, or in some cases because they really can’t
create capital has become a capital Finding hidden value afford to buy.
asset that people are putting equity For most owner-occupiers and private See pages 4/5
into in order to obtain an income. investors, there are very few alternative
When we first started to look at investments that are genuinely ‘as safe ■ Tenant demand for private rental accommodation is
residential property as an investable as houses’. Those that exist are very not only expanding but becoming more long-term, as
asset class 25 years ago, it was deeply low yielding. Consequently, any asset a result of the challenges of getting onto the property
unfashionable. There was only a tiny, with a net yield north of 3% and with the ladder. But what are the implications for the supply
vestigial market rented sector left in the prospect of longer-term capital growth, side of the private rental equation, and where are the
UK, following regulation-induced asset looks compelling. investor opportunities?
disposal by investing institutions. At Not so for many corporate and See pages 6/7
that time the flow of occupier behaviour institutional investors who still try to
was away from tenancies and into value residential property on the same ■ Stamp duty rates for higher value properties have
ownership. This trend began to reverse basis as commercial properties. But been on the rise since 1997. Receipts from housing
at the millennium so that in future it commercial property returns are more rose by 670% in the 10 years to 2007/08, while house
might come to be viewed only as a late volatile, show low rental growth and prices increased by just 180%. See pages 8/9
twentieth century phenomenon. depreciate at a much faster rate than
residential. IPD analysis shows that risk- ■ Continued stock constraints mean prices across
Mortgage rationing adjusted total returns have been higher prime London are above peak, driving strong growth in
Conventional wisdom has had it that for residential property and we think this £1million+ sales in locations outside core prime central
housing values are determined by two will remain the case in future. London which are increasingly attracting international
main variables: household incomes and Investment yields will be reset in the buyers. See page 10/11
mortgage interest rates. Low income next few years as a consequence, and
growth and high rates meant weak or residential property will be increasingly ■ Development opportunities exist in markets that
falling house prices; high income growth favoured by corporate investors. This have recovered most strongly to date, with least
and low interest rates meant rising means we expect to see increasing reliance on high loan to value mortgage debt, which
house prices. Any recent analysis of capital values for investment properties, remains in short supply.
the UK housing market since 2007 has especially as rental growth further See pages 12/13
shown that there is a third component in boosts income streams. As a result
this model – the supply of debt finance. there are big opportunities for new
Post credit-crunch a new form of
mortgage rationing, forgotten since the
investors who understand which stock
will perform in this environment and
Contents
1970s, has re-emerged. The imposition what is currently mispriced – and how 04 Rental Sector
of very low loan-to-value ratios and to find hidden value. After 25 years,
stringent qualification of applicants it looks as if the time for residential 06 Investment
has created a major barrier to housing investment has finally come. n 08 Stamp duty
accessibility. The cost of deposits has
overtaken the cost of debt repayments 10 Market forecasts
as the issue determining affordability. Yolande Barnes 12 Development
The subsequent growth in the number Head of Residential
of market-rented properties over the last Research 14 Buying vs Renting
five years has reminded us that the new 020 7409 8899
property world is dominated by cash ybarnes@savills.com
and not borrowing.
savills.co.uk/research 03
Residential Property Focus
Rental Sector
taking advantage Rental Britain, our report on the
private rental sector based on joint
research with Rightmove, highlights
of the rental boom
the key challenges facing tenants
in the private rental sector, and the
outlook for the coming years.
The increase in tenant demand in
the UK has been dramatic: over the
five years to the end of 2011, the
total value of housing in the private
rental sector was up 42%, while
T
the number of households renting
Private renting is becoming a way he past five years privately had leapt almost 50%, from
have had profound 3.4 to 4.8 million. And the trend is set
of life for a much wider spectrum effects on Britain’s to continue: by 2016 we estimate that
of people in the UK and the number private rental sector. figure will have risen to 5.9 million.
The combined impact
of tenants ‘trapped’ in the sector of the property market slump and Trapped tenants
shows no sign of decreasing the credit squeeze has boosted This shift in the way people access
longer-term demand from a whole accommodation is underpinned
Words by Lucian Cook tranche of Britons who in former by the retail lenders’ continuing
times would have rented from a reluctance to provide mortgages for
private landlord on a relatively prospective first time buyers at the
short-term basis, before buying high loan to value ratios (LTVs) they
their own first property or as a seek. Gross mortgage lending at
stopgap between moves. LTVs of 90% plus has fallen by 95%
since summer 2007, and the average
deposit paid by first time buyers has
more than doubled over that time. In
“Not only are more people renting, and London more than seven out of ten
for longer, but the social profile of tenants first time buyers now turn to their
parents for help in raising the capital.
is changing and broadening” Further, where lenders do make
available mortgages at suitably
Lucian Cook, Savills Research high loans to property value, they
charge an inflated price. At the end
of 2011, the interest rate on 90% LTV
GRAPH 1.1 discounted rate mortgages averaged
5.1% – two thirds more expensive
Investors filling the gap left by the buy to let mortgage drought
than the equivalent on 75% LTV, at
400 n Increase in outstanding buy to let mortgages Increase in UK’s private rented stock an average 3.0%.
The consequence is that although
the private rental sector has
350 historically been the province of the
young, more people are remaining
for longer in privately rented
Thousands of households
300
accommodation because it’s cheaper
for them to rent, or in some cases
250 because they really could not afford
to buy. More than half of private
rented sector tenants are believed to
200 be ‘trapped’ in this way – a quarter of
them aged over 40.
150
Moreover, not only are more
people renting, and for longer, but the
social profile of tenants is changing
100 and broadening. Private renting is
increasingly becoming a way of life
for a wide spectrum of people in their
50
30s and 40s.
0 Regional variations
00 01 02 03 04 05 06 07 08 09 10 11 However, there is huge variation
20 20 20 20 20 20 20 20 20 20 20 20
Graph source: Savills Research using CLG and CML data
in average rents paid across the
UK, though in general rents are
04Q2 2012
higher in centres nearer London. A
comparison of the 30 largest rental map 1.1
markets outside London shows that Rental affordability varies across the UK
the highest average monthly rent for
two-bedroom properties (£1,320 pcm Average 2 bed flat rent
in Elmbridge) is three times that of the as % of single persons
gross pay
lowest (£470 pcm in Bradford). The
differentials are even more marked n Over 50%
in London, with two-bed properties n 35% to 50%
almost five times more expensive in n 30% to 35%
Kensington & Chelsea (£4,020 pcm)
n 27.5% to 30%
than they are in Bexley (£830 pcm).
n 25% to 27.5%
In part these rental differences
reflect regional differences in income.
n 22.5% to 25%
The mean average single persons n Up to 22.5%
rent of a two-bedroom property as a
percentage of mean average income,
stands at an average 31% across the
UK as a whole, but that nationwide
average masks large disparities
when regional or local averages are
considered. In the North East and
East Midlands, this broad indicator of
rental affordability averages just 25%
of the average incomes for these
regions, while in the South East it
rises to 35% and in London, where
private tenants more regularly share
accommodation and renting is more
common in more affluent income
groups, it rockets up to 53%.
Question of affordability
Regional rental differentials,
however, cannot be fully explained
by variations in income. Another key
factor is the existing supply of private
rented accommodation, as well as
the extent of social housing provision.
Thus a high affordability ratio occurs
in areas where rental demand
markedly outstrips supply, pushing up
rents regardless of average income
levels.
The London market is particularly
skewed. For a start, the public sector
provides affordable housing for a
large tranche of households on lower
incomes, thereby taking them out
of the equation. In other words, the
average tenant in London’s private
sector is likely to be on a higher than
average income. At the same time, Map source: Savills Research, Rightmove
owner occupation in the London
market is lower than elsewhere,
relative to the rental market, reflecting rental accommodation lags well Keynes, and rental affordability there,
the high number of young people behind demand for it. Oxford is at 32%, is in line with the national
starting their careers there, and an extreme example, with the average average. Clearly, each local market
inflated property prices that make it rent on a two-bedroom property has its own dynamics and needs to
even harder for them to get on the amounting to 57% of average be understood on its own terms, but
ladder. income; another is Brighton & Hove, investors could start by identifying
where average rents are slightly less those with a high affordability ratio
Clear hotspots crippling at 47% of income. as areas likely to be suffering from a
Yet there are clear hotspots outside In contrast, the private rental shortage of good quality private rental
London too, where supply of private market is well catered for in Milton accommodation. n
savills.co.uk/research 05Residential Property Focus
Investment
higher yields
form of buy to let loans. Attention is
therefore increasingly focused on the
attractions of the private rental market
attract investors
for institutions and investment funds,
and to a lesser extent, those private
investors with equity.
The key factor in this respect, of
course, is the rental income yields
available, and how they compare
with alternative income-producing
asset classes. Historically, residential
T
property investment has attracted
As the residential rental market enant demand for private investors primarily on the basis of
rental accommodation strong house price growth, and has
continues to gain significance as is not only expanding struggled to attract income-seeking
an asset class, property investors but becoming more institutional investors because of the
long-term, as a result of low net yields available.
will increasingly look to income the challenges of getting onto the But the past years have seen a
generation as their measure of value property ladder. But what are the shift in market fundamentals. First,
implications for the supply side of tenant demand is fuelling sharp rises
Words by Jacqui Daly the private rental equation? in rent. Across the UK as a whole in
We estimate that £200 billion of 2011, rents rose by 5.2%, though
investment is required in the next London saw a 7.2% increase over
five years, if the demand for private the year. Rental demand is expected
renting is to be met. But banks to continue to outstrip supply in the
remain much more constrained in coming five years, keeping rents
their buy to let mortgage lending, and under upward pressure. At the same
it’s expected that only £50 billion of time, the housing market recovery
the required investment will take the remains sluggish and there’s little
sign of any dramatic upturn in capital
values looking ahead.
“Investors need to delve below the headline Improvement in yields
figures and have a clear grasp of the This combination is leading to some
improvement in yield levels nationally.
underlying complexities of particular markets” Our joint research with Rightmove
shows average gross income yield now
Jacqui Daly, Savills Research stands at 5.8% nationally, but there are
significant variations within the market
GRAPH 2.1 as a whole, for various reasons.
Gross Income Yields for 2 bedroom properties by region (2011) One factor is size: yields are
much higher on smaller properties,
n Average n Upper Quartile n Lower Quartile where owner-occupier demand has
8.0%
been hardest hit by the squeeze on
7.7% mortgage lending and rental demand is
naturally concentrated. Thus, income
7.3% 7.3% 7.3%
7.0% 7.0% yields on one-bedroom properties
average 6.7%.
6.7% 6.7% 6.8% Regional differences are relatively
6.5% 6.6%
6.2% 6.2% 6.3% slight, although yields tend to be higher
6.0% 6.0% 6.1%
in the North than in the South. But
5.9%
5.6% 5.7% 5.7% within regions there are also significant
5.4% 5.5%
5.3% variations in yield, according to the
5.0% 5.0% 5.1% 5.1% value of the local market.
4.8% 4.8% 4.9% 4.9% An analysis of yield on two-
4.6% 4.7%
4.4% bedroom properties according to
postcode reveals an average yield
4.0%
3.9%
of 7.8% in the 10% of postcodes
with the highest yields (where two-
bedroom property prices average
3.0% less than £100,000). This contrasts
South West Inner Outer East of Wales South East East Yorkshire and West North East North dramatically with the average 4.4%
London London England Mids The Humber Mids West
achieved in the lowest-yielding 10%
of postcodes (where two-bedroom
Graph source: Savills Research / Rightmove properties average £326,000).
06Q2 2012
There are therefore opportunities for
investors to improve on headline gross
yields, whether by buying smaller units
the Investment matrix
or in lower-value local markets. Large-
scale investors buying units in bulk are The prospective total 10-year investment returns
also able to boost yields by buying at a
discount to the vacant possession rate
table 2.1
(the price paid by an owner occupier).
The headline average gross yield of Investing in London
5.8% rises as high as 7.7% for those
Forecast Total Returns 2011-2021
investors in a position to negotiate
discounts through bulk purchases.
7.0% to 7.5% 7.5% to 8.0% 8.0% to 8.5% 8.5% to 9.0% Over 9.0%
A reliable income stream
Kensington
Proportion of Total Return coming from Rent
Of course, investors do not pocket their Less than
& Chelsea,
gross yields in entirety. After accounting 40% Westminster
for costs and void periods, the average
net yield for typical private landlords Barnet, Kingston, Islington, City
comes in at around 4.1%. 40% to Harrow, Camden, Wandsworth of London,
Hounslow
Nonetheless, relative to cash 45% Hammersmith & Richmond Southwark
Fulham Hackney
returns averaging less than 2%,
and given the outlook for a continuing
Croydon, Bexley,
mismatch between rental demand Havering, Sutton,
Lewisham
45% to Ealing
and supply over the coming five Brent, Enfield,
50% Lambeth
years, it’s perhaps unsurprising that Redbridge, Haringey,
Merton
Hillingdon, Bromley
investors are increasingly focusing
attention on the potential of the
private rental sector to generate a 50% to Greenwich Tower
Waltham Forest
reliable income stream. 55% Hamlets
A survey conducted by Rightmove
in October 2011 discovered that 55% to Barking and
Newham
over 40% of investors in residential 60% Dagenham
property pointed to attractive yields
as their primary reason for holding the Table source: Savills Research / Rightmove
asset class.
Total returns are of course also
table 2.2
influenced by capital growth in the
housing market, which averaged 6.7% Where to invest outside of London
a year over the past 30 years. Based Forecast Total Returns 2011-2021
on Savills house price forecasts, total
returns (net of rental expenses) are Less than Over
6.0% to 6.5% 6.5% to 7.0% 7.0% to 7.5% 7.5% to 8.0%
likely to average around 6.9% a year 6.0% 8.0%
over the coming 10 years.
But investors need to delve below Less Brighton &
Elmbridge
Proportion of Total Return coming from Rent
the headline figures and have a clear than 50% Hove
grasp of the underlying complexities
and trade-offs of particular markets. 50% to Bournemouth
Oxford Reading
Different locations will offer different Southend Bristol,
55% Southampton Woking
Colchester
combinations of rental yield against
capital growth prospects or capital
55% to Portsmouth Milton
stability, as well as opportunities Northampton
60% Medway Keynes
to enhance that yield further, for
example by focusing on specific
60% to Edinburgh
market segments. Stockport Cardiff
Leicester
Ultimately, as the residential rental 65% Nottingham
Warrington
market gains in significance as an
income-generating asset class, Newcastle,
65% to Leeds Coventry
it’s likely that investors will move Bradford
70% Manchester Birmingham
away from their historical focus Sheffield
on a property’s capital value to
owner occupiers, and concentrate Over Glasgow
Kirklees
70% Liverpool
increasingly on the income stream as
a measure of value, in line with other
income-producing assets such as Table source: Savills Research / Rightmove
bonds and commercial property. n
savills.co.uk/research 07Residential Property Focus
Stamp duty
the treasury’s
were already delivering 26% of the
stamp duty take, but accounting for
just 1.6% of recorded sales. Also,
weapon of choice
over one third of all inheritance
tax (IHT) receipts from residential
property came from less than 1%
of the housing stock held at death.
The red box shocks
Of these two taxes stamp duty has
been successive governments’
The 2012 Budget saw new rates of stamp duty introduced weapon of choice for the direct
taxation of property, and no surprise
for properties sold for more than £2million. But what effect that stamp duty was reviewed in the
will these measures have on prime residential property? Budget rather than introducing a new
more controversial tax.
N
Stamp duty rates for higher value
ever has the prime Policy Studies showed that not only properties have been repeatedly
Words by residential property would such a tax be complicated increased since 1997. As a result, tax
Lucian Cook market been more in and costly to administer given the receipts from housing rose by 670%
the spotlight in the nuances of valuation, but would also in the 10 years to 2007/08, while
run up to and wake of unfairly penalise asset rich, income house prices increased by just 180%.
a Budget than in March 2012. poor owners who had seen dramatic Since then stamp duty receipts
The focus was first turned on growth in the value of their homes have fallen as constrained access to
prime housing by the Liberal over their period of ownership. mortgage finance and weak buyer
Democrat proposals for a mansion Valuers would have had a feeding sentiment have led to greatly reduced
tax, championed by Vince Cable. frenzy, whilst once but no longer housing transactions, but more
The proposals were justified on the affluent pensioners could have been robust sales volumes in the prime
premise that taxing wealth in the really squeezed. markets, particularly in London,
form of immoveable property was Perhaps more pertinent to the and higher rates of duty for these
more efficient than taxing moveable wider debate is the extent to properties, have mitigated these falls.
income, that it would affect only which high value property already So, while tinkering with stamp
the very wealthy and that, in light of contributes to the tax take. Our duty for first time buyers has had
council tax receipts, such property analysis of HMRC data suggests little impact on Treasury receipts, an
made an unfairly modest contribution that even before the 5% stamp duty additional 1% stamp duty on sales
to tax receipts. rate was introduced in April 2011 for over £1million since April 2011 has
Our work with the Centre for properties over £1million, such sales added an estimated £290million to
the £1.2billion of receipts from top
end sales.
graph 3.1
Division of IHT Receipts from Residential Property (2009/10) Anti-avoidance
The fly in the ointment for the
n By IHT Contribution n By Number of Estates
Treasury was that the higher the tax
the greater the incentive to seek to
Estate Value > £2m 36% avoid tax.
(Av Resi Value £1.13m) 1% As mansion tax proposals lost
favour so attention turned to stamp
duty avoidance, and in particular the
Estate Value > £1m-£2m 29%
use of offshore corporate ownership.
(Av Resi Value £465k) 2%
Our pre Budget analysis suggested
the extent of stamp duty avoidance,
Estate 500K-£1m 31% however undesirable, had been
(Av Resi Value £349k) 7% overstated. We expected associated
loopholes to be closed in the Budget,
but we didn’t expect the chancellor
4%
Estate 300k-£500k to tackle the issue with such gusto.
(Av Resi Value £228k) 16% Raising stamp duty for properties
worth over £2million from 5% to 7%
Estate < £300k
was perhaps predictable, as was the
(Av Resi Value £126k) 88%
closure of some specific loopholes.
Equally, given a purchase of shares
0% 20% 40% 60% 80% 100% in a property holding company would
Proportion of estates/receipts
be difficult to tax, a 15% charge
on transferring that property into a
Graph source: Savills Research using HMRC data company in the first place is logical.
08Q2 2012
The international context
Taking a broader view, the only applies where a property Table 3.1
fundamental demand drivers is transferred into the ownership Stamp Duty or Equivalent for
of London as a global city were of a ‘non natural person’, namely a a Typical ‘Billionaire’ Residence
significantly boosted by other corporate vehicle.
measures in the Budget, such Purchase costs as % of Rank
property value
as lower rates of corporation Other global cities
tax, which significantly improve For those buying shares in an existing Singapore 13.1% 1
London’s global competitiveness. Special Purpose Vehicle stamp duty Sydney 10.5% 2
A 7% stamp duty charge will not be a consideration, rather they Mumbai 9.0% 3
does not cause London to be will be focused on the prospective
substantially out of kilter with annual charge and the effect of a London 7.0% 4
other global cities. Before the proposed CGT charge, if and when the Paris 6.5% 5
Budget, London was less expensive property is sold out of the corporate Hong Kong 5.3% 6
than Paris for property acquisition, vehicle. Though offset by ongoing
now it is marginally more expensive. stamp duty savings, the annual
Tokyo 5.3% 7
A 15% SDLT charge would charges would be high relative to other Shanghai 4.5% 8
make London significantly more global cities for our typical ‘billionaire’ New York 3.3% 9
expensive than its peers though residence in those circumstances
it should be remembered that this where they are charged.
Moscow 0.0% 10
But it didn’t stop there. A proposed
annual levy on corporate ownership “There is little doubt the Budget measures
of £2million+ property might best be
described as retro-active, targeting could present a challenge to the smooth
owners who had sought to avoid
stamp duty prior to the Budget.
recovery in prime central London markets”
Lucian Cook, Savills Research
The impact
Together the measures are likely to
significantly curtail the acquisition London markets to go through lulls at less common, the effect will be
of property through special purpose this stage of a market cycle however, lessened. There is also a distinct
vehicles, though it remains to be and we believe that these measures possibility we will see growing
seen whether property already are likely to be a catalyst for a period demand from Londoners wishing
owned in this way will be switched of relatively static prices, in line with to avoid the £2million price point,
into personal ownership. our existing published forecasts. making trading out to a larger
In their current format the Beyond central London, where £1million+ house an increasingly
proposals will also impact tax avoidance planning was much attractive option. n
established corporate and
graph 3.2
institutional investors with high value
residential holdings. Analysis of Transactions and Stamp Duty Receipts 2011
Undoubtedly, this was an
n By IHT Contribution n By Number of Estates
unintended consequence and
corporate and institutional investors 45%
caught by the new stamp duty
40%
banding, and at risk of being caught
Proportion of transactions/receipts
by the annual levy, will almost 35%
certainly seek exemption from these
provisions. 30%
The effect on the market remains 25%
to be seen, but these measures
could present something of 20%
challenge to a smooth recovery in
15%
the prime central London markets.
Our view, supported by early 10%
evidence in the market, is that they
will not undermine market demand 5%
or bring a significant amount of new
0%
stock to the market to the extent that
Up to £100k £100k - £200k £200k - £300k £300k - £500k £500k - £1m £1m+
sudden price falls are triggered.
It is common for the prime central Graph source: Savills Research using HMRC data
savills.co.uk/research 09Residential Property Focus
House price values
Market
FORECASTS
PRIME MARKETS
Five-year forecast values, 2012-2016
Change from 5 years to
2012 2013 2014 2015 2016
peak to 2011 2016
Prime Central London 16.9% 3.0% 0.0% 5.0% 6.5% 6.5% 22.7%
Prime Regional -17.1% -3.0% 2.5% 4.0% 5.5% 5.5% 15.1%
Prime South East -13.0% -2.5% 3.0% 6.5% 6.5% 6.5% 21.3%
Prime South West -21.7% -3.5% 2.0% 4.0% 4.5% 5.5% 12.9%
Prime East -19.8% -2.5% 2.5% 4.0% 4.5% 6.0% 15.1%
Prime Midlands/North -24.1% -6.0% 2.0% 2.0% 4.5% 5.0% 7.3%
Prime Scotland -18.6% -4.0% 1.0% 2.0% 3.0% 5.0% 7.0%
Source: Savills Research
Prime performance above peak, driving strong growth in were 35% below 2007 levels - a better
The prime markets have been much £1million+ transactions outside prime performance than the mainstream
more active than their mainstream central London which are increasingly market but much weaker than the South
counterparts. In 2011 sales of homes attracting international buyers. East where such sales were within 20%
worth £1million+ were within 8% of their In 2011 £1million+ sales were more of their previous peak.
2007 peak across England and Wales than 25% up on 2007 in Maida Vale, In 2011 all regions witnessed a
according to Land Registry data. Notting Hill, Camden/Regents Park and dearth of imported London wealth,
In London’s prime markets which Fulham. The prime domestic markets though there are now signs of a change,
have seen the strongest price growth of south west and west London have corresponding with a return of price
since the downturn, £1million+ also benefited, with £1million+ sales growth in the South East, particularly in
transaction levels exceeded 2007 levels in Battersea and Chiswick up by 28% some key commuter hotspots.
by 5%. Q1 2012 price growth compared to 2007. If these early signs of improvement
of 2.8% suggests London continues Generally, the further from London continue markets such as Sevenoaks,
to outperform. the more constrained the prime St Albans and Oxford, will see their tally
Continued stock constraints mean markets become. In Yorkshire and of £1million+ sales rise further beyond
prime London prices are consistently Humber £1million+ sales last year the records set in 2011. n
graph 4.1
Strength of Prime Market Recovery – Sales of £1m+ property 2011 vs 2007
London East of
105% England South East
81% South West Midlands The
83%
73% & Wales North
63% 47%
Graph source: Savills Research, Land Registry
10 Annual house price growth key: n Below 0% n 0% to 2% n 2% to 4% n 4% to 6% n 6% to 8% n 8% and overQ2 2012
mainstream MARKETS
Five-year forecast values, 2012-2016
Change from 5 years to
2012 2013 2014 2015 2016
peak to 2011 2016
UK -10.5% -2.0% 0.5% 1.0% 2.0% 4.5% 6.0%
London -1.8% -0.5% 1.0% 5.0% 6.0% 6.5% 19.1%
South East -6.3% -1.0% 1.0% 4.0% 5.0% 6.0% 15.7%
South West -9.8% -1.5% 0.5% 2.5% 3.5% 5.0% 10.3%
East -8.7% -1.0% 1.0% 3.5% 4.5% 5.5% 14.1%
East Midlands -11.0% -1.5% 0.5% 2.0% 3.0% 5.0% 9.2%
West Midlands -11.5% -2.0% -1.0% 0.0% 0.0% 3.5% 0.4%
North East -14.0% -2.5% -1.5% -1.5% -0.5% 3.0% -3.1%
North West -14.9% -2.0% -1.0% -1.0% 0.0% 3.5% -0.6%
Yorks & Humber -14.0% -2.0% -1.5% -1.0% -1.0% 3.0% -2.6%
Wales -12.7% -2.0% 0.5% 0.5% 1.5% 4.5% 5.0%
Scotland -10.6% -4.0% 0.0% 0.0% 0.5% 2.0% -1.6%
Source: Savills Research forecasts based on Nationwide actuals
The mainstream view graph 4.2
Though still 46% below the pre crunch UK Housing Transactions
average for the period, housing
n Monthly Transactions Seasonally Adjusted
transactions in the first quarter of 180
2012 were at their highest level since
160
2008. This corresponds with improved
demand for mortgage finance reported 140
UK Transactions (000’s)
by the Bank of England in their Q1 120
Credit Conditions Survey.
However, at a national level the 100
Nationwide, Halifax and Land Registry 80
data all suggest UK average house
60
prices little improved, with supply and
demand both subdued, though broadly 40
balanced according to the RICS. 20
Land Registry figures continue to
0
show a wide divergence across the UK.
5 6 6 7 7 8 8 9 9 0 0 1 1 2
In Oxfordshire prices rose 2.8% in the p0 r0 p0 r0 p0 r0 p0 r0 p0 r1 p1 r1 p1 r1
Se Ma Se Ma Se Ma Se Ma Se Ma Se Ma Se Ma
year to February 2012 to leave them just
4.8% below peak. By contrast prices Graph source: Savills Research/Land Registry
fell by 9.0% in County Durham to leave
them 29% below their peak.
TABLE 4.1
London continues to be the
strongest regional market, but there Mainstream House Prices
is huge divergence in activity levels
Q1 2012 Compared to
across the city. In Islington annual
transaction levels are running at 82% of Average house price 1 year ago 5 years ago
their pre crunch norm while in Barking
and Dagenham they are down 57% England & Wales £160,889 -1.1% -6.8%
With little sign of improvement in
the availability of mortgage finance Kensington & Chelsea £973,856 +12.4% +41%
and an increase in the standard
variable rate of interest charged by
Oxfordshire £240,551 +2.8% +0.9%
some lenders, there seems little
prospect of a sustained improvement
Durham £82,932 -9.0% -25.1%
in mainstream market activity over the
next two years at least, as reflected in
our house price forecasts. n Table source: Land Registry
savills.co.uk/research 11Residential Property Focus
Development
WHERE BEST
New homes will generally be sold
most easily into markets that have
recovered most strongly to date,
TO DEVELOP?
with least reliance on high loan to
value mortgage debt, which remains
in short supply.
Q
Are all the development
opportunities found in
stronger markets?
A
No. The flipside of investing
Q
Scarcity of deliverable land with Prospects for and developing in stronger
development and markets is that there is more
consent is a constraint in low delivery, investment vary across competition to acquire investment
strong markets, so prospects are the country, at a local level. stock and land. The higher investment
To find the best development yields available in weaker markets can
good for those who can get land opportunities, should the same underpin performance, particularly
with consent to the point of delivery selection criteria be used as for if growth is driven by the strength of
investment? adjacent markets. Conversely, a well
Words by Jim Ward
A
located development site in a weaker
To some extent, yes. We market can deliver good sales rates,
expect the markets that but with less competition to acquire
are currently strongest to the land.
continue to show the highest rates
Q
of growth in house prices, rents and Where are the
land values during the next five years. best development
opportunities in
stronger markets?
“A well located development site in a weaker
A
Development volumes
market can deliver good sales rates, but with have bounced back most
less competition to acquire the land” sharply in the stronger
markets, with a 6% shift in housing
Jim Ward, Savills Research delivery towards the strongest
markets, compared with the peak
delivery year of 2007/08.
Examples are Ashford, South
graph 5.1
Norfolk (including development on
Recovery in House Building and Market Activity the fringe of Norwich) and Cornwall,
l Size of dot = 5 yr average delivery as a percentage of housing stock underpinned by a robust recovery in
120% market activity and the availability
High High
of deliverable land.
110% delivery, delivery,
weaker
Ashford
stronger In contrast, delivery in markets
100% market market such as Oxford, Solihull and
Corby
Wokingham have stayed relatively
Additions to housing stock vs 2005/08 average
90% low, despite strong market recovery.
South Norfolk
Cornwall
Scarcity of deliverable land with
80% Basingstoke & Deane
consent is a constraint in these
Milton Keynes
70% Peterborough markets, so development prospects
are good for those who can get land
60% with consent to the point of delivery.
50%
Other markets with strong market
Hackney recovery but below par levels
Wandsworth York
40% Islington of delivery include Mid Sussex,
Solihull Guildford Guildford and York. In London,
Salford Mid Sussex
30% Oxford Islington, Hackney and Wandsworth
Wokingham
have delivered less than might have
20% Low Low
delivery, Liverpool
delivery, been expected given their market
10% weaker Manchester stronger strength.
market market
Q
0%
30% 35% 40% 45% 50% 55% 60% 65% 70% Does NewBuy
mortgage indemnity
Residential transactions vs peak
open up opportunities
Graph source: Savills Research, HM Land Registry in other markets?
12Q2 2012
A
The upturn in delivery has
also been above par in high
delivery markets such as
Peterborough, Corby, Milton Keynes
and Basingstoke, where overall market
activity has not recovered so strongly,
constrained by scarcity of mortgage
finance.
Equity loans, including FirstBuy and
Homebuy, have been an important part
of delivery rates in these markets, so
developers that offer these products
are well placed to compete. NewBuy
mortgage indemnity has the potential to
extend the positive impact.
Q
Will the new National
Planning Policy
Framework lead to more
financially viable consents?
A
The guiding principle of
the new framework is the
so-called golden thread
of the presumption in favour of
sustainable development. The
document’s forward sees planning
as a creative exercise in achieving
sustainable development, rather than
simply an exercise in scrutiny.
This should, in theory, lead to an
increase in the number of viable
planning consents, but much will
depend on whether the Secretary of
State embraces the creative tone of the This is a clear signal that downturn, because of their greater
framework’s preamble, as appeals work assessments of Plan viability should requirements for both scarce
their way through the new system. represent the reality of the economics development finance and costly
Among the positive features of the of development in the current market. infrastructure. As the steady pace of
new framework is the requirement for This is potentially the most important refinancing of banks and developers
Local Plans to meet the full objectively section of the new framework, as it continues during the next five years,
assessed needs for both market and should ensure that development is not and market recovery ensues in due
affordable housing, with reference to stifled by unrealistic policy aspirations course, balanced against higher build
market signals of the balance between that go beyond what is required for costs, then a growing proportion of
supply and demand. sustainable development. sites will become deliverable, providing
This is in contrast to the evidence land for the higher number of new
Q
base for existing policy, which rarely Are the larger strategic homes completions that we are
makes use of such market evidence. sites now being projecting. Whether this materialises
The addition of such evidence will justify developed? will be a central test of the new National
A
higher housing requirements in some Planning Policy Framework.
markets, particularly once employment Much of the development
Q
related inmigration and travel to work opportunity is in strategic What about surplus
patterns between local authorities have sites of more than 250 public sector land?
been properly factored in. unit capacity, which provide a total Are there opportunities?
A
A further positive feature is the development capacity of 1.5 million
requirement for the Plan to be based on new homes nationally. Surplus public sector land
a financially viable five year land supply These sites account for some 45% is also part of the land
(plus a buffer), whereby policies should of the five year land supply pipeline opportunity, albeit that much
not threaten that viability. identified by local authorities, where is in mid to lower strength markets.
The assessment of viability should, specific sites have been identified in Of the land identified by Government
having taken account of the normal Annual Monitoring Reports. Some 53% as having a development capacity of
cost of development and mitigation, of their capacity is in stronger markets 100,000 new homes, 65% lies in the
provide competitive returns to a willing and many of these are close to higher local authorities with below average
land owner and a willing developer, value markets. market strength, so structuring the
such that development is facilitated These sites have been difficult right land deal and planning consent
throughout the economic cycle. to bring forward since the 2007/08 will be crucial. n
savills.co.uk/research 13Residential Property Focus
Market dynamics
buying vs Savills research team
renting Please contact us for further information
“There are big opportunities for
To buy or to rent? A simple question, new investors who understand
but a complex answer which stock will perform in this
environment and what is currently
O
ne of the features of the housing market since the
Yolande Barnes
mispriced – and how to find
downturn has been that some households have hidden value.”
Head of Research
chosen to rent, either taking a break from home
020 7409 8899 Yolande Barnes
ownership or in the case of the lucky first time buyers sitting
ybarnes@savills.com
on a sizeable deposit, delaying the decision to make their first
move onto the housing ladder.
For both groups the relative costs of buying versus the
costs of renting is critical both at a given entry point and in
“Never has the prime residential
the future. Simply comparing mortgage interest costs against property market been more in the
rental costs is a start point. For example, for someone looking spotlight in the run up to and wake
to buy a two bedroom property at £150,000 with a 25%
deposit, interest payments of just under £4,000 per annum of a Budget than in 2012.”
would compare favourably to rent of £9,150, assuming a Lucian Cook Lucian Cook
rental yield of 6.1%. Director
This simple analysis suggests that despite high lenders’ 020 7016 3837
margins, the so-called ‘dead money’ of renting is a high price lcook@savills.com
to pay. But this is before taking account of the additional
costs of ownership, such as repairs and insurance, or the
cost of funding mortgage repayments at a time when interest-
only mortgages are a rare commodity.
“Development volumes have
Buyers should also take account of the income their bounced back most sharply in the
deposits would deliver if invested rather than being tied into a stronger markets, with a 6% shift
property. On the basis of the same example that would swing
the balance in favour of renting, with home ownership costing
in housing delivery towards the
£1,300 more than renting over the course of a year. Jim Ward strong markets, compared with the
Director peak delivery year of 2007/2008.”
Watching the market 020 7049 8841
At the peak of the market the additional cost of buying was
Jim Ward
jward@savills.com
substantially higher because both mortgage rates and returns
on savings were higher and the relationship between house
prices and rents had become out of kilter.
Scroll back 10 years and the cash comparison was much
more like today’s, though lower house prices meant lower
capital repayments, making it cheaper to buy than to rent both
before and after accounting for the costs of ownership.
What distinguishes then from now are the house price
growth prospects. In 2001, prices rose by 25%. A decision
to delay moving and staying in rented accommodation could Jacqui Daly Neal Hudson
therefore be very costly indeed. By contrast, with further small Director Associate Director
house price falls forecast in the short term, there is no rush 020 7016 3779 020 7409 8865
to beat price growth – just one among many reasons why jdaly@savills.com nhudson@savills.com
housing transactions remain depressed.
Prospective buyers should watch the market carefully.
As house price growth returns so the balance will shift again.
This will be seen first in London and the South East where
house price growth is expected to return more quickly and
more strongly. And this is likely to be particularly relevant to
those more mature households who have taken time out of
Katy Warrick Faisal Choudhry
home ownership. Despite lower rental yields, and therefore
Associate Director Associate Director
lower relative rental costs, recovery is expected to be stronger
020 7016 3884 0141 222 5880
in these equity rich sub-markets, potentially bringing such
kwarrick@savills.com fchoudhry@savills.com
households back into the market ahead of first time buyers
lucky enough to be sitting on a deposit. n
14Date
Bespoke client research
Adding value to your property interests
The Savills UK Research team was providing bespoke research which
founded in the 1980s and now meets the exact brief.
operates in every area of real estate. We have provided reports,
We work with many clients providing information and presentations that
bespoke research which meets their help our clients to save or make
exact requirements. Our clients money from real estate projects and
include examples of all segments which have also helped to inform
of the public and private sector policy and shape strategies. n
Savills Research
UK Residential
Spotlight
South Wales Residential
Development Sales April 2012
SUMMARY
Local housing markets across South Wales remain on the steady road to recovery
Housing completions
01
Research publications
Our latest reports
n Special Report | Rental Britain
n Market in Minutes | Prime London Residential Markets
n Market in Minutes | Prime Regional Residential Markets
n Spotlight | Where Best To Develop and Invest in Residential Property
n Spotlight | South Wales Residential Development Sales
n Insights | World Cities Review
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