residential property focus q2 2012
TRANSCRIPT
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Svs Rsrch
UK Reidential
ReSidentialPRoPeRtyFocUsQ2 2012
G ppruI it time t mmit treidential invetment?
Rental sector. Booming demand
Taxation: Budget measures 2012
Investment & development: Q&Asvs.c.uk/rsrch
ivsmSpc
Examining theyield ptential
ar UKhuing
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v.c.uk/c 03
Q2 2012
With the new property world dominated bycash and not mortgage borrowing, the timeor residential investment has fnally arrived
ForewordThe rise and fall
of The UK morTgage
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When we rst started to look at
residential property as an investable
asset class 25 years ago, it was deeply
unashionable. There was only a tiny,
vestigial market rented sector let in the
UK, ollowing regulation-induced asset
disposal by investing institutions. At
that time the fow o occupier behaviourwas away rom tenancies and into
ownership. This trend began to reverse
at the millennium so that in uture it
might come to be viewed only as a late
twentieth century phenomenon.
mt tConventional wisdom has had it that
housing values are determined by two
main variables: household incomes and
mortgage interest rates. Low income
growth and high rates meant weak or
alling house prices; high income growth
and low interest rates meant risinghouse prices. Any recent analysis o
the UK housing market since 2007 has
shown that there is a third component in
this model the supply o debt nance.
Post credit-crunch a new orm o
mortgage rationing, orgotten since the
1970s, has re-emerged. The imposition
o very low loan-to-value ratios and
stringent qualication o applicants
has created a major barrier to housing
accessibility. The cost o deposits has
overtaken the cost o debt repayments
as the issue determining aordability.
The subsequent growth in the numbero market-rented properties over the last
ve years has reminded us that the new
property world is dominated by cash
and not borrowing.
But what is the value o the income to
the owner? Tying up cash in an asset like
housing is only worthwhile i it produces
a return greater than that available
elsewhere at equal or lower risk.
f vuFor most owner-occupiers and private
investors, there are very ew alternative
investments that are genuinely as sae
as houses. Those that exist are very
low yielding. Consequently, any asset
with a net yield north o 3% and with the
prospect o longer-term capital growth,
looks compelling.
Not so or many corporate and
institutional investors who still try tovalue residential property on the same
basis as commercial properties. But
commercial property returns are more
volatile, show low rental growth and
depreciate at a much aster rate than
residential. IPD analysis shows that risk-
adjusted total returns have been higher
or residential property and we think this
will remain the case in uture.
Investment yields will be reset in the
next ew years as a consequence, and
residential property will be increasingly
avoured by corporate investors. This
means we expect to see increasingcapital values or investment properties,
especially as rental growth urther
boosts income streams. As a result
there are big opportunities or new
investors who understand which stock
will perorm in this environment and
what is currently mispriced and how
to nd hidden value. Ater 25 years,
it looks as i the time or residential
investment has nally come. n
Y B
Head o ResidentialResearch
020 7409 8899
Executive summary
The key fndings in this issue
nThe private rental sector has historically been
the province o the young, but more people
are remaining or longer in privately rented
accommodation because its cheaper or them to
rent, or in some cases because they really cant
aord to buy.
See pages 4/5
nTenant demand or private rental accommodation is
not only expanding but becoming more long-term, as
a result o the challenges o getting onto the property
ladder. But what are the implications or the supply
side o the private rental equation, and where are the
investor opportunities?
See pages 6/7
nStamp duty rates or higher value properties have
been on the rise since 1997. Receipts rom housing
rose by 670% in the 10 years to 2007/08, while house
prices increased by just 180%. See pages 8/9
nContinued stock constraints mean prices across
prime London are above peak, driving strong growth in
1million+ sales in locations outside core prime central
London which are increasingly attracting international
buyers. See page 10/11
nDevelopment opportunities exist in markets that
have recovered most strongly to date, with least
reliance on high loan to value mortgage debt, whichremains in short supply.
See pages 12/13
Contents
04 Rental Sector
06 Investment
08 Stamp duty
10 Market orecasts
12 Development
14 Buying vs Renting
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04
Rs Prpry Fcus
Rental Sector
taking advantage
oF the Rental boom
t ps f yrs
pru
cs brs
pr r scr.
t c pc
prpry r sup
cr squz s s
r-r r w
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pr r ry
sr-r ss, r uy
r w frs prpry r s
spp w s.
Rental Britain, our report on the
private rental sector based on joint
research with Rightmove, highlights
the key challenges acing tenants
in the private rental sector, and the
outlook or the coming years.
The increase in tenant demand in
the UK has been dramatic: over the
ve years to the end o 2011, the
total value o housing in the private
rental sector was up 42%, while
the number o households renting
privately had leapt almost 50%, rom
3.4 to 4.8 million. And the trend is set
to continue: by 2016 we estimate that
gure will have risen to 5.9 million.
trpp sThis shit in the way people access
accommodation is underpinned
by the retail lenders continuing
reluctance to provide mortgages or
prospective rst time buyers at the
high loan to value ratios (LTVs) they
seek. Gross mortgage lending at
LTVs o 90% plus has allen by 95%
since summer 2007, and the average
deposit paid by rst time buyers has
more than doubled over that time. In
London more than seven out o ten
rst time buyers now turn to their
parents or help in raising the capital.
Further, where lenders do makeavailable mortgages at suitably
high loans to property value, they
charge an infated price. At the end
o 2011, the interest rate on 90% LTV
discounted rate mortgages averaged
5.1% two thirds more expensive
than the equivalent on 75% LTV, at
an average 3.0%.
The consequence is that although
the private rental sector has
historically been the province o the
young, more people are remaining
or longer in privately rented
accommodation because its cheaperor them to rent, or in some cases
because they really could not aord
to buy. More than hal o private
rented sector tenants are believed to
be trapped in this way a quarter o
them aged over 40.
Moreover, not only are more
people renting, and or longer, but the
social prole o tenants is changing
and broadening. Private renting is
increasingly becoming a way o lie
or a wide spectrum o people in their
30s and 40s.
R rsHowever, there is huge variation
in average rents paid across the
UK, though in general rents are
Not only are more people renting, andor longer, but the social profle o tenants
is changing and broadeningLucian Cook, Savills Research
Private renting is becoming a wayo lie or a much wider spectrumo people in the UK and the numbero tenants trapped in the sector
shows no sign o decreasing
Wrs y luc C
GRAPH 1.1
investors fllng the gap let by the buy to let mortgage drought
Graph source: Savills Research using CLG and CML data
n icrs us uy rs icrs Uks pr r sc
thousands
ofhouseho
lds
400
350
300
250
200
150
100
50
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
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ss.c.u/rsrc 05
Q2 2012
higher in centres nearer London. A
comparison o the 30 largest rental
markets outside London shows that
the highest average monthly rent or
two-bedroom properties (1,320 pcm
in Elmbridge) is three times that o the
lowest (470 pcm in Bradord). The
dierentials are even more marked
in London, with two-bed properties
almost ve times more expensive in
Kensington & Chelsea (4,020 pcm)
than they are in Bexley (830 pcm).
In part these rental dierences
refect regional dierences in income.
The mean average single persons
rent o a two-bedroom property as a
percentage o 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 o
rental aordability averages just 25%
o the average incomes or 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 afuent income
groups, it rockets up to 53%.
Qus ryRegional rental dierentials,
however, cannot be ully explained
by variations in income. Another key
actor is the existing supply o private
rented accommodation, as well as
the extent o social housing provision.
Thus a high aordability ratio occurs
in areas where rental demand
markedly outstrips supply, pushing up
rents regardless o average income
levels.
The London market is particularly
skewed. For a start, the public sector
provides aordable housing or alarge tranche o households on lower
incomes, thereby taking them out
o the equation. In other words, the
average tenant in Londons private
sector is likely to be on a higher than
average income. At the same time,
owner occupation in the London
market is lower than elsewhere,
relative to the rental market, refecting
the high number o young people
starting their careers there, and
infated property prices that make it
even harder or them to get on the
ladder.
Cr spsYet there are clear hotspots outside
London too, where supply o private
MAP 1.1
Rental aordablty vares across the Uk
Map source: Savills Research, Rightmove
rental accommodation lags well
behind demand or it. Oxord is
an extreme example, with the average
rent on a two-bedroom property
amounting to 57% o average
income; another is Brighton & Hove,where average rents are slightly less
crippling at 47% o income.
In contrast, the private rental
market is well catered or in Milton
Keynes, and rental aordability there,
at 32%, is in line with the national
average. Clearly, each local market
has its own dynamics and needs to
be understood on its own terms, but
investors could start by identiyingthose with a high aordability ratio
as areas likely to be suering rom a
shortage o good quality private rental
accommodation. n
Average 2 bed fat rentas % o single personsgross pay
nor 50%
n 35% 50%
n 30% 35%
n27.5% 30%
n25% 27.5%
n22.5% 25%
nUp 22.5%
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06
R Prpr Fu
Investment
higheR yields
attRact investoRs
t m fr pr
r mm
p
bu bm mr
-rm, ru f
f
prpr r. Bu w r
mp fr upp f
pr r qu?
W stimat that 200 billion o
invstmnt is rquird in th nxt
v yars, i th dmand or privat
rnting is to b mt. But banks
rmain much mor constraind in
thir buy to lt mortgag lnding, and
its xpctd that only 50 billion o
th rquird invstmnt will tak th
orm o buy to lt loans. Attntion is
thror incrasingly ocusd on th
attractions o th privat rntal markt
or institutions and invstmnt unds,
and to a lssr xtnt, thos privat
invstors with quity.
Th ky actor in this rspct, o
cours, is th rntal incom yilds
availabl, and how thy compar
with altrnativ incom-producing
asst classs. Historically, rsidntial
proprty invstmnt has attractd
invstors primarily on th basis o
strong hous pric growth, and has
struggld to attract incom-sking
institutional invstors bcaus o th
low nt yilds availabl.
But th past yars hav sn a
shit in markt undamntals. First,
tnant dmand is ulling sharp riss
in rnt. Across th UK as a whol in
2011, rnts ros by 5.2%, though
London saw a 7.2% incras ovr
th yar. Rntal dmand is xpctd
to continu to outstrip supply in th
coming v yars, kping rnts
undr upward prssur. At th sam
tim, th housing markt rcovry
rmains sluggish and thrs littl
sign o any dramatic upturn in capital
valus looking ahad.
imprm This combination is lading to som
improvmnt in yild lvls nationally.
Our joint rsarch with Rightmov
shows avrag gross incom yild now
stands at 5.8% nationally, but thr ar
signicant variations within th markt
as a whol, or various rasons.
On actor is siz: yilds ar
much highr on smallr proprtis,
whr ownr-occupir dmand has
bn hardst hit by th squz on
mortgag lnding and rntal dmand is
naturally concntratd. Thus, incom
yilds on on-bdroom proprtisavrag 6.7%.
Rgional dirncs ar rlativly
slight, although yilds tnd to b highr
in th North than in th South. But
within rgions thr ar also signicant
variations in yild, according to th
valu o th local markt.
An analysis o yild on two-
bdroom proprtis according to
postcod rvals an avrag yild
o 7.8% in th 10% o postcods
with th highst yilds (whr two-
bdroom proprty prics avrag
lss than 100,000). This contrastsdramatically with th avrag 4.4%
achivd in th lowst-yilding 10%
o postcods (whr two-bdroom
proprtis avrag 326,000).
Investors need to delve below the headlinefgures and have a clear grasp o theunderlying complexities o particular marketsJacqui Daly, Savills Research
As the residential rental marketcontinues to gain signifcance asan asset class, property investorswill increasingly look to income
generation as their measure o value
Wr b Jqu d
GRAPH 2.1
gross income yeds for 2 bedroom properes b reon (2011)
Graph sourc: Savills Rsarch / Rightmov
nAveragen Upper Quartilen Lower Quartile
su W irl
ourl
e fe
su e eM
W yrkr t humbr
WM
nr e nrW
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
7.0%
3.9%
5.4%
4.8%
5.7%
4.8%
5.7%
4.7%
5.6%
4.6%
5.5%
6.2%
4.4%
5.3%
4.9%
5.9%
4.9%
6.0%
5.0%
6.1%
5.1%
6.2%
5.1%
6.3%6.5%
6.7% 6.7%6.6%6.8%
7.3% 7.3% 7.3%
7.7%
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..uk/rr 07
Q2 2012
Thr ar thror opportunitis or
invstors to improv on hadlin gross
yilds, whthr by buying smallr units
or in lowr-valu local markts. Larg-
scal invstors buying units in bulk ar
also abl to boost yilds by buying at a
discount to th vacant possssion rat
(th pric paid by an ownr occupir).
Th hadlin avrag gross yild o
5.8% riss as high as 7.7% or thos
invstors in a position to ngotiat
discounts through bulk purchass.
a rb m rmO cours, invstors do not pockt thir
gross yilds in ntirty. Atr accounting
or costs and void priods, th avrag
nt yild or typical privat landlords
coms in at around 4.1%.
Nonthlss, rlativ to cash
rturns avraging lss than 2%,
and givn th outlook or a continuing
mismatch btwn rntal dmand
and supply ovr th coming v
yars, its prhaps unsurprising that
invstors ar incrasingly ocusing
attntion on th potntial o th
privat rntal sctor to gnrat a
rliabl incom stram.
A survy conductd by Rightmov
in Octobr 2011 discovrd that
ovr 40% o invstors in rsidntial
proprty pointd to attractiv yildsas thir primary rason or holding th
asst class.
Total rturns ar o cours also
infuncd by capital growth in th
housing markt, which avragd 6.7%
a yar ovr th past 30 yars. Basd
on Savills hous pric orcasts, total
rturns (nt o rntal xpnss) ar
likly to avrag around 6.9% a yar
ovr th coming 10 yars.
But invstors nd to dlv blow
th hadlin gurs and hav a clar
grasp o th undrlying complxitis
and trad-os o particular markts.Dirnt locations will or dirnt
combinations o rntal yild against
capital growth prospcts or capital
stability, as wll as opportunitis
to nhanc that yild urthr, or
xampl by ocusing on spcic
markt sgmnts.
Ultimatly, as th rsidntial rntal
markt gains in signicanc as an
incom-gnrating asst class,
its likly that invstors will mov
away rom thir historical ocus
on a proprtys capital valu to
ownr occupirs, and concntratincrasingly on th incom stram as
a masur o valu, in lin with othr
incom-producing assts such as
bonds and commrcial proprty. n
the investMent MatRix
The prospective total 10-year investment returns
TABLe 2.2
Where o nves ousde of london
TABLe 2.1
invesn n london
Tabl sourc: Savills Rsarch / Rightmov
Tabl sourc: Savills Rsarch / Rightmov
Forecas toa Reurns 2011-2021
l
6.0%6.0% 6.5% 6.5% 7.0% 7.0% 7.5% 7.5% 8.0%
or
8.0%
l
50%
Brighton &Hov
elmbridg
50%
55% SouthndBournmouth
Bristol,Colchstr
OxordSouthampton
RadingWoking
55%
60% Northampton Portsmouth
MdwayMilton
Kyns
60%
65%
edinburghStockportWarrington
CardiLicstr
Nottingham
65%
70%Bradord
Nwcastl,Lds
ManchstrShld
CovntryBirmingham
or70%
Kirkls GlasgowLivrpool
Forecas toa Reurns 2011-2021
7.0% 7.5% 7.5% 8.0% 8.0% 8.5% 8.5% 9.0% or 9.0%
l
40%
Knsington& Chlsa,
Wstminstr
40%
45%Hounslow
Barnt, Kingston,Harrow, Camdn,Hammrsmith &
Fulham
WandsworthRichmond
Islington, Cityo London,SouthwarkHackny
45%
50%
Croydon, Bxly,Havring, Sutton,
Brnt, enld,Rdbridg, Haringy,Hillingdon, Bromly
Lwishamealing
LambthMrton
50%
55%Waltham Forst
Grnwich TowrHamlts
55%
60%
Barking andDagnham
Nwham
ProporionoftoalReurncomingfromR
en
ProporionoftoalReurncomingfromR
en
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08
Reidential Prpert F
graph 3.1
Diviin f IHT Receipts from Residential Property (2009/10)
g souce: Svills resec usin hMrC dt
0% 20% 40% 60% 80% 100%
Etate Vale > 2m
(Av Rei Vale 1.13m)
Etate Vale > 1m-2m
(Av Rei Vale 465k)
Etate 500K-1m
(Av Rei Vale 349k)
Etate 300k-500k
(Av Rei Vale 228k)
Etate < 300k
(Av Rei Vale 126k)
36%
1%
29%
2%
31%
7%
4%
16%
88%
n By IHT Contribution n By Number of Estates
Prprtin f etate/reeipt
Never ha the prime
reidential prpert
market been mre in
the ptlight in the
rn p t and ake f
a Bdget than in Marh 2012.
Te ocus ws st tuned on
ime ousin by te Libel
Democt oosls o mnsion
tx, cmioned by Vince Cble.
Te oosls wee justied on te
emise tt txin welt in te
om o immoveble oety ws
moe ecient tn txin moveble
income, tt it would ect only
te vey welty nd tt, in lit ocouncil tx eceits, suc oety
mde n unily modest contibution
to tx eceits.
Ou wok wit te Cente o
policy Studies sowed tt not only
would suc tx be comlicted
nd costly to dministe iven te
nunces o vlution, but would lso
unily enlise sset ic, income
oo ownes wo d seen dmtic
owt in te vlue o tei omes
ove tei eiod o ownesi.
Vlues would ve d eedin
enzy, wilst once but no lone
fuent ensiones could ve been
elly squeezed.
pes moe etinent to te
wide debte is te extent to
wic i vlue oety ledy
contibutes to te tx tke. Ounlysis o hMrC dt suests
tt even beoe te 5% stm duty
te ws intoduced in ail 2011 o
oeties ove 1million, suc sles
wee ledy delivein 26% o te
stm duty tke, but ccountin o
just 1.6% o ecoded sles. also,
ove one tid o ll ineitnce
tx (IhT) eceits om esidentil
oety cme om less tn 1%
o te ousin stock eld t det.
The red bx hkO tese two txes stm duty s
been successive ovenments
weon o coice o te diect
txtion o oety, nd no suise
tt stm duty ws eviewed in te
Budet te tn intoducin new
moe contovesil tx.
Stm duty tes o ie vlue
oeties ve been eetedly
incesed since 1997. as esult, tx
eceits om ousin ose by 670%
in te 10 yes to 2007/08, wile
ouse ices incesed by just 180%.
Since ten stm duty eceits
ve llen s constined ccess to
mote nnce nd wek buye
sentiment ve led to etly educed
ousin tnsctions, but moe
obust sles volumes in te ime
mkets, ticully in London,
nd ie tes o duty o tese
oeties, ve mitited tese lls.
So, wile tinkein wit stm
duty o st time buyes s dlittle imct on Tesuy eceits, n
dditionl 1% stm duty on sles
ove 1million since ail 2011 s
dded n estimted 290million to
te 1.2billion o eceits om to
end sles.
Anti-avidaneTe fy in te ointment o te
Tesuy ws tt te ie te tx
te ete te incentive to seek to
void tx.
as mnsion tx oosls lost
vou so ttention tuned to stmduty voidnce, nd in ticul te
use o osoe coote ownesi.
Ou e Budet nlysis suested
te extent o stm duty voidnce,
oweve undesible, d been
ovestted. We exected ssocited
loooles to be closed in te Budet,
but we didnt exect te cncello
to tckle te issue wit suc usto.
risin stm duty o oeties
wot ove 2million om 5% to 7%
ws es edictble, s ws te
closue o some secic loooles.
Eqully, iven ucse o sesin oety oldin comny would
be dicult to tx, 15% ce
on tnsein tt oety into
comny in te st lce is loicl.
Stamp duty
THE TREAsuRys
wEAPoN oF cHoIcE
The 2012 Budget saw new rates of stamp duty introducedfor properties sold for more than 2million. But what effectwill these measures have on prime residential property?
wrd b
Lian ck
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avill..k/reearh 09
Q2 2012
graph 3.2
Anali f Tranatin and stamp Dt Reeipt 2011
g souce: Svills resec usin hMrC dt
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Proportion
oftransactions/receipts
up t 100k 100k - 200k 200k - 300k 300k - 500k 500k - 1m 1m+
n By IHT Contribution n By Number of Estates
But it didnt sto tee. a oosed
nnul levy on coote ownesi
o 2million+ oety mit best be
descibed s eto-ctive, tetin
ownes wo d sout to void
stm duty io to te Budet.
The impatToete te mesues e likely to
sinicntly cutil te cquisition
o oety tou secil uose
veicles, tou it emins to be
seen wete oety ledy
owned in tis wy will be switced
into esonl ownesi.
In tei cuent omt te
oosls will lso imct
estblised coote nd
institutionl investos wit i vlue
esidentil oldins.
Undoubtedly, tis ws n
unintended consequence ndcoote nd institutionl investos
cut by te new stm duty
bndin, nd t isk o bein cut
by te nnul levy, will lmost
cetinly seek exemtion om tese
ovisions.
Te eect on te mket emins
to be seen, but tese mesues
could esent sometin o
cllene to smoot ecovey in
te ime centl London mkets.
Ou view, suoted by ely
evidence in te mket, is tt tey
will not undemine mket demndo bin sinicnt mount o new
stock to te mket to te extent tt
sudden ice lls e tieed.
It is common o te ime centl
London mkets to o tou lulls t
tis ste o mket cycle oweve,
nd we believe tt tese mesues
e likely to be ctlyst o eiod
o eltively sttic ices, in line wit
ou existin ublised oecsts.
Beyond centl London, wee
tx voidnce lnnin ws muc
There is little doubt the Budget measurescould present a challenge to the smoothrecovery in prime central London marketsLucian Cook, Savills Research
less common, te eect will be
lessened. Tee is lso distinct
ossibility we will see owin
demnd om Londones wisin
to void te 2million ice oint,
mkin tdin out to le
1million+ ouse n incesinly
ttctive otion. n
The internatinal ntext
Tkin bode view, te
undmentl demnd dives
o London s lobl city wee
sinicntly boosted by ote
mesues in te Budet, suc
s lowe tes o cootion
tx, wic sinicntly imove
Londons lobl cometitiveness.
a 7% stm duty ce
does not cuse London to be
substntilly out o kilte wit
ote lobl cities. Beoe te
Budet, London ws less exensive
tn pis o oety cquisition,
now it is minlly moe exensive.
a 15% SDLT ce would
mke London sinicntly moe
exensive tn its ees tou
it sould be emembeed tt tis
only lies wee oety
is tnseed into te ownesi
o non ntul eson, nmely
coote veicle.
other glbal itieFo tose buyin ses in n existin
Secil puose Veicle stm duty
will not be considetion, te tey
will be ocused on te osective
nnul ce nd te eect o
oosed CgT ce, i nd wen te
oety is sold out o te coote
veicle. Tou oset by onoin
stm duty svins, te nnul
ces would be i eltive to ote
lobl cities o ou tyicl billionie
esidence in tose cicumstnces
wee tey e ced.
Prhae t a % fprpert vale
Rank
singapre 13.1% 1
sdne 10.5% 2
Mmbai 9.0% 3
Lndn 7.0% 4
Pari 6.5% 5
Hng Kng 5.3% 6
Tk 5.3% 7
shanghai 4.5% 8
Ne yrk 3.3% 9
M 0.0% 10
TaBLE 3.1
stamp Dt r Eqivalent fra Tpial Billinaire Reidene
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Residential Property Focus
Source: Savills Research
Annual house price growth key:nBelow 0% n0% to 2% n2% to 4% n4% to 6% n6% to 8% n8% and over
PRIME MARKETSFive-year forecast values, 2012-2016
House price values
MARKET
FORECASTS
Change frompeak to 2011
2012 2013 2014 2015 20165 years to
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%
Prime performanceThe prime markets have been much
more active than their mainstream
counterparts. In 2011 sales o homes
worth 1million+ were within 8% o their
2007 peak across England and Wales
according to Land Registry data.
In Londons prime markets which
have seen the strongest price growth
since the downturn, 1million+
transaction levels exceeded 2007 levels
by 5%. Q1 2012 price growth
o 2.8% suggests London continues
to outperorm.
Continued stock constraints meanprime London prices are consistently
above peak, driving strong growth in1million+ transactions outside prime
central London which are increasingly
attracting international buyers.
In 2011 1million+ sales were more
than 25% up on 2007 in Maida Vale,
Notting Hill, Camden/Regents Park and
Fulham. The prime domestic markets
o south west and west London have
also beneted, with 1million+ sales
in Battersea and Chiswick up by 28%
compared to 2007.
Generally, the urther rom London
the more constrained the prime
markets become. In Yorkshire andHumber 1million+ sales last year
were 35% below 2007 levels - a betterperormance than the mainstream
market but much weaker than the South
East where such sales were within 20%
o their previous peak.
In 2011 all regions witnessed a
dearth o imported London wealth,
though there are now signs o a change,
corresponding with a return o price
growth in the South East, particularly in
some key commuter hotspots.
I these early signs o improvement
continue markets such as Sevenoaks,
St Albans and Oxord, will see their tally
o 1million+ sales rise urther beyondthe records set in 2011. n
London105%
East ofEngland
83%South East
81% South West73%
Midlands& Wales
63%
TheNorth
47%
GRAPH 4.1
Strength of Prime Market Recovery Sales of 1m+ property 2011 vs 2007
Graph source: Savills Research, Land Registry
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savills.co.uk/research 11
Q2 2012
Source: Savills Research orecasts based on Nationwide actuals
MAINSTREAM MARKETSFive-year orecast values, 2012-2016
Change frompeak to 2011
2012 2013 2014 2015 20165 years to
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%
The mainstream viewThough still 46% below the pre crunch
average or the period, housing
transactions in the rst quarter o
2012 were at their highest level since
2008. This corresponds with improveddemand or mortgage nance reported
by the Bank o England in their Q1
Credit Conditions Survey.
However, at a national level the
Nationwide, Haliax and Land Registry
data all suggest UK average house
prices little improved, with supply and
demand both subdued, though broadly
balanced according to the RICS.
Land Registry gures continue to
show a wide divergence across the UK.
In Oxordshire prices rose 2.8% in the
year to February 2012 to leave them just
4.8% below peak. By contrast pricesell by 9.0% in County Durham to leave
them 29% below their peak.
London continues to be the
strongest regional market, but there
is huge divergence in activity levels
across the city. In Islington annual
transaction levels are running at 82% o
their pre crunch norm while in Barking
and Dagenham they are down 57%
With little sign o improvement in
the availability o mortgage nance
and an increase in the standard
variable rate o interest charged by
some lenders, there seems littleprospect o a sustained improvement
in mainstream market activity over the
next two years at least, as refected in
our house price orecasts. n
Graph source: Savills Research/Land Registry
Table source: Land Registry
GRAPH 4.2
UK Housing Transactions
TABLE 4.1
Mainstream House Prices
UKT
ransactions(000s)
nMonthly Transactions Seasonally Adjusted
180
160
140
120
100
80
60
40
20
0
Sep0
5Se
p06
Mar0
6Ma
r07
Sep0
7Ma
r09
Mar1
0Ma
r11
Sep0
8Se
p09
Sep1
0Se
p11
Mar1
2Ma
r08
Q1 2012 Compared to
Average house price 1 year ago 5 years ago
England & Wales 160,889 -1.1% -6.8%
Kensington & Chelsea 973,856 +12.4% +41%
Oxfordshire 240,551 +2.8% +0.9%
Durham 82,932 -9.0% -25.1%
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Residential Property Focus
Development
WHERE BEST
TO DEVELOP?
QProspects or
development andinvestment vary across
the country, at a local level.To fnd the best development
opportunities, should the sameselection criteria be used as or
investment?
ATosome extent, yes. We
exect the makets that
ae cuently stongest to
continue to show the highest ates
o gowth in house ices, ents and
land values duing the next ve yeas.
New homes will geneally be sold
most easily into makets that have
ecoveed most stongly to date,
with least eliance on high loan to
value motgage debt, which emains
in shot suly.
QAre all the development
opportunities ound instronger markets?
ANo. The fiside o investing
and develoing in stonge
makets is that thee is moe
cometition to acquie investment
stock and land. The highe investment
yields available in weake makets can
undein eomance, aticulaly
i gowth is diven by the stength o
adjacent makets. Convesely, a well
located develoment site in a weake
maket can delive good sales ates,
but with less cometition to acquie
the land.
QWhere are the
best developmentopportunities in
stronger markets?
ADeveloment volumes
have bounced back most
shaly in the stongemakets, with a 6% shit in housing
delivey towads the stongest
makets, comaed with the eak
delivey yea o 2007/08.
Examles ae Ashod, South
Noolk (including develoment on
the inge o Nowich) and Conwall,
undeinned by a obust ecovey in
maket activity and the availability
o deliveable land.
In contast, delivey in makets
such as Oxod, Solihull and
Wokingham have stayed elatively
low, desite stong maket ecovey.Scacity o deliveable land with
consent is a constaint in these
makets, so develoment osects
ae good o those who can get land
with consent to the oint o delivey.
Othe makets with stong maket
ecovey but below a levels
o delivey include Mid Sussex,
Guildod and Yok. In London,
Islington, Hackney and Wandswoth
have deliveed less than might have
been exected given thei maket
stength.
QDoes NewBuy
mortgage indemnityopen up opportunities
in other markets?
A well located development site in a weakermarket can deliver good sales rates, but withless competition to acquire the landJim Ward, Savills Research
Scarcity of deliverable land withconsent is a constraint in low delivery,strong markets, so prospects aregood for those who can get land
with consent to the point of delivery
Words by Jim Ward
GrApH 5.1
Recovery in House Building and Market Activity
Gah souce: Savills reseach, HM Land registy
30% 35% 40% 45% 50% 55% 60% 65% 70%
Additionsto
housing
stockvs2005/08average
Residential transactions vs peak
lSize o dot = 5 yr average delivery as a percentage o housing stock
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Ashord
South Norolk
Oxord
Corby
Milton KeynesPeterborough
Salord
Liverpool
Manchester
Basingstoke & DeaneCornwall
Islington
Hackney
Guildord
YorkWandsworth
Mid Sussex
Highdelivery,weakermarket
Lowdelivery,weaker
market
Lowdelivery,stronger
market
Highdelivery,strongermarket
Wokingham
Solihull
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Rsdnal Propry Focs
14
To buy or to rent? A simple question,but a complex answer
One o the eatures o the housing market since the
downturn has been that some households have
chosen to rent, either taking a break rom home
ownership or in the case o the lucky frst time buyers sitting
on a sizeable deposit, delaying the decision to make their frst
move onto the housing ladder.
For both groups the relative costs o buying versus the
costs o renting is critical both at a given entry point and in
the uture. Simply comparing mortgage interest costs against
rental costs is a start point. For example, or someone looking
to buy a two bedroom property at 150,000 with a 25%
deposit, interest payments o just under 4,000 per annum
would compare avourably to rent o 9,150, assuming a
rental yield o 6.1%.
This simple analysis suggests that despite high lenders
margins, the so-called dead money o renting is a high price
to pay. But this is beore taking account o the additional
costs o ownership, such as repairs and insurance, or the
cost o unding mortgage repayments at a time when interest-
only mortgages are a rare commodity.
Buyers should also take account o the income theirdeposits would deliver i invested rather than being tied into a
property. On the basis o the same example that would swing
the balance in avour o renting, with home ownership costing
1,300 more than renting over the course o a year.
Wachn h markAt the peak o the market the additional cost o buying was
substantially higher because both mortgage rates and returns
on savings were higher and the relationship between house
prices and rents had become out o kilter.
Scroll back 10 years and the cash comparison was much
more like todays, though lower house prices meant lower
capital repayments, making it cheaper to buy than to rent both
beore and ater accounting or the costs o ownership.What distinguishes then rom now are the house price
growth prospects. In 2001, prices rose by 25%. A decision
to delay moving and staying in rented accommodation could
thereore be very costly indeed. By contrast, with urther small
house price alls orecast in the short term, there is no rush
to beat price growth just one among many reasons why
housing transactions remain depressed.
Prospective buyers should watch the market careully.
As house price growth returns so the balance will shit again.
This will be seen frst 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 o
home ownership. Despite lower rental yields, and thereorelower relative rental costs, recovery is expected to be stronger
in these equity rich sub-markets, potentially bringing such
households back into the market ahead o frst time buyers
lucky enough to be sitting on a deposit.n
Salls rsarch am
Please contact us for further information
Jacq Daly
Director
020 7016 3779
Nal Hdson
Associate Director
020 7409 8865
Kay Warrck
Associate Director
020 7016 3884
Yoland Barns
Head o Research
020 7409 8899
There are big opportunities ornew investors who understandwhich stock will perorm in thisenvironment and what is currentlymispriced and how to fndhidden value.Yolande Barnes
Lcan Cook
Director
020 7016 3837
Never has the prime residential
property market been more in the
spotlight in the run up to and wake
o a Budget than in 2012.Lucian Cook
Jm Ward
Director
020 7049 8841
Development volumes have
bounced back most sharply in thestronger markets, with a 6% shit
in housing delivery towards the
strong markets, compared with the
peak delivery year o 2007/2008.Jim Ward
BuYiNg vSReNtiNg
Market dynamics
Fasal Chodhry
Associate Director
0141 222 5880
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Date
01
Spotlight
South Wales ResidentialDevelopment Sales April 2012
SavillsResearchUKResidential
Housingcompletio ns
SUMMARY
Local housing marketsacrossSouthWalesremainonthe steady roadto recovery
n Spcal Rpor | Rnal Bran
n Mark n Mns | Prm London Rsdnal Marks
n Mark n Mns | Prm Ronal Rsdnal Marks
n Spolh | Whr Bs to Dlop and ins n Rsdnal Propryn Spolh | Soh Wals Rsdnal Dlopmn Sals
n inshs | World Cs Rw
For more inormation, visit savills.co.uk/research
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