uk property market chart book - twinfm€¦ · q boe inflation report q3 11-nov-15 m cml monthly...

Economics

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Chinese temperature turns a little cooler

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November 2015

UK Property Market Chart Book

rics.org/economicsUK Property Market Chart Book

2 © RICS Economics 2015 November 2015

ContentsEconomic comment .......................................................................... 3

Financial market indicators .............................................................. 4

Economy..........................................................................................5-6

Construction sector........................................................................7-8

Housing market.............................................................................9-10

Commercial property sector.......................................................11-12

RICS market survey and product suite...........................................13

Why the RICS surveys?‘The RICS poll - considered one of the most reliable guides to movements in house prices’ The Financial Times

‘The RICS survey - the best short-term lead indicator of house prices and activity in our view’ Goldman Sachs

‘The RICS Survey has been a good leading indicator for the direction of and inflection points in the IPD index, and therefore the UK commercial property market overall’ Morgan Stanley

‘The RICS Commercial Property Survey is an excellent predictor of future IPD total returns’ North Row Capital

Key property data release dates

Frequency Body Period covering Release date

M Markit UK Construction PMI October 03-Nov-15

Q RICS UK Commercial Property Market Survey Q3 03-Nov-15

M BIS Building Materials and Components October 04-Nov-15

M Halifax House Price Index October 05-Nov-15

M BoE Interest Rate Decision November 05-Nov-15

M BoE Quoted Rates October 10-Nov-15

Q BoE Inflation Report Q3 11-Nov-15

M CML Monthly Lending Trends October 11-Nov-15

M ONS Labour Market Statistics September 11-Nov-15

M RICS Residential Market Survey October 12-Nov-15

Q ONS Output in the Construction Industry Q3 13-Nov-15

M ONS House Price Index September 17-Nov-15

M ONS Consumer Price Inflation October 17-Nov-15

Q UK House Building Statistics Q3 19-Nov-15

M CML Gross Lending October 19-Nov-15

M HMRC Property Transactions October 24-Nov-15

M BBA High Street Banking October 25-Nov-15

M Land Registry House Price Index October 27-Nov-15

Q ONS Second Estimate of GDP Q3 27-Nov-15

M Nationwide House Price Index October 27-Nov-15

M BoE Bankstats October 30-Nov-15

M BoE Effective Interest Rates October 30-Nov-15



RICS Chief Economist Simon Rubinsohn’s view:

“On the face of it, the Chinese economy is still growing close to the 7% target yet the decision of the central bank (PBoC) to cut interest rates once again demonstrates a clear lack of faith that the underlying picture is anywhere near as robust as the headline numbers suggest. My suspicion is that there is more easing to come as the authorities grapple with a country in transition but ultimately, this assertive approach from policymakers should help deliver a soft landing for the economy. For the UK, these developments are arguably something of a mixed blessing. However, the bottom line is that poor newsflow from China will make it a little harder for the Bank of England to begin raising the base rate’’.

Recently released Q3 figures for Chinese GDP show growth beat market expectations, coming in at 6.9%. Although it is true that this represents the slowest pace of expansion in six years, it was only just below the government’s target for this year of around 7%. Given this, it might have been assumed that there would have been some relief in official circles that the economy appears to be holding up better than feared. Yet just a few days later, the PBoC clearly signalled its concerns by lowering its key benchmark interest rate for the sixth time in 12 months as well as cutting the reserve requirement ratio for commercial banks in an effort to encourage them to lend more freely.

Even without this emphatic response from the PBoC, there would be justifiable reasons for not putting too much faith in the headline GDP data. Key measures of sentiment including the closely watched Purchasing Managers Indices, consumer confidence indicators and the RICS China Commercial Property Monitor (which is highlighted in the chart) paint a more downbeat picture of the current economic environment.

What this means in terms of the underlying GDP performance it is hard to say and it is equally difficult to estimate with any confidence how much further growth might slow. However, it seems pretty clear from the higher frequency indicators of sentiment that the risks are heavily

Economic comment - Chinese temperature turns a little cooler

Forecasts 2014 2015(e) 2016(e)

GDP (% avg) 3 2.4 2.1

Inflation (% q4) 0.5 0.2 1.2

Unemployment (% q4) 5.7 5.2 5

Base Rate (% q4) 0.5 0.5 1

IPD Commercial CV (% q4/q4) 12 9 5

IPD Commercial Rents (% q4/q4) 3 5 4

ONS House Prices (% q4/q4) 10 6 5

HMRC Transactions (000s) 1220 1250 1250

Mortgage Repossessions (000s) 30 28 28

Construction Output (% avg) 9.5% 5 4

-30

-15

0

15

30

45

60

2011 2012 2013 2014 2015

China Commercial Property Market Sentiment

Occupier Sentiment Index

Investment Sentiment Index

Source: RICS

Index

Key metrics sink deeper into negative territory

skewed in one direction and that, in all probability, the authorities will need to take additional measures over the coming months as they attempt to help steer an economy transitioning from an investment-export focus to one where consumption plays a larger role.

The authorities also have the additional and not unrelated challenge presented by somewhat less supportive demographics which would, in any event, make it harder to deliver the sort of growth numbers we have become

China Commercial Property Sentiment Weakens Further

accustomed to the country recording in recent years. This is not news but it is still worth remembering that on the basis of UN figures, it looks likely that 2016 could be the first year in which China sees a decline in the size of its working age population. And alongside this, the dependency ratio which is already creeping upwards is set to rise rather more sharply over the coming years.

How this plays out for the UK, and indeed for other major economies around the world, remains to be seen. In the near term, the persistence of a softer growth trend would suggest that commodity prices are unlikely to rebound to any significant extent. As a result, even if ‘base effects’ do slowly begin to exert some upward pressure on inflation, it

is hard to see the headline rate getting anywhere near the Bank of England’s 2% target any time soon.

Predictably enough, the developments in China have begun to fuel stories of Chinese investors pulling back from overseas real estate investments. While there may be some evidence of this, the safe haven argument remains an equally appealing, if increasingly pricey one, particularly in the light of the recent stock market turmoil.

The latest RICS UK Commercial Market Survey, although it doesn’t disaggregate to the level necessary to observe the geography of the buyer, continues to point to a generally healthy appetite from overseas investors to acquire real estate. The Q3 results show the ‘net balance’ reading for foreign buyers standing at +25%, that is 25% more respondents reported an increase rather than a decrease in overseas interest in real estate in the third quarter.

Meanwhile in central London, the comparable figure is +40% which while down from recent highs still represents a firm level of enquiries. Perhaps not surprisinly against this backdrop, the expectations of respondents to the survey are for further healthy capital gains despite concerns being expressed about the increased valuation of some assets particularly those in the capital.



0

10

20

30

40

January 2015 April 2015 July 2015 October 2015

US S&P Volatility Index (VIX )

Source: Macrobond

0.0

0.5

1.0

1.5

2.0

2.5

1 7 13 19 25 31 37 43 49 55

Oct-14 Dec-14

Jul-15 Oct-15

Base Rate ExpectationsOIS Forwards %

Source: Bank of EnglandMonths

6000

8000

10000

12000

14000

January March May July September

China Equity Market FTSE China A Share, 200 Index

Source: Macrobond

0

1

2

3

2013 2014 2015

US Corporate Treasury Bond Spreads

Corporate AA-US Treasury 10 year

Corporate BBB-US Treasury 10 year

Source: Macrobond

%

Volatility in markets has settled down over the past month.

This has also been reflected in the behaviour of good quality corporate credit although there are more nerves further along the risk spectrum.

And the Chinese equity market has actually recovered some if its losses helped by the latest interest rate cut by the Peoples Bank of China.

For now, base rate expectations remain as flat as they have been with the markets not betting on a move from the Bank anytime over the next twelve months.

Financial Market Indicators - The pressures ease again....for now



0

50

100

150

200

250

300

350

400

450

500

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2000 2002 2004 2006 2008 2010 2012 2014

Quarterly Growth Rate (LHS)

Gross Domestic Product (RHS)

£bnQuarterly % change

UK Gross Domestic Product

Source: ONS

The first estimate of Q3 2015 GDP showed the UK economy grew at a quarterly rate of 0.5%.

Employment continues to rise and the number of unfilled vacancies is at its highest since records began in 2001.

That said, the expansion has become increasingly reliant on the dominant services sector with construction contracting and industrial production nearly stagnant.

The improving labour market has driven an acceleration in wage growth, with private sector earnings up 3.2% over the past year.

Economy - Inflationary pressures remain subdued

300000

350000

400000

450000

500000

550000

600000

650000

700000

750000

800000

69

70

71

72

73

74

2001 2003 2005 2007 2009 2011 2013 2015

Employment Rate (LHS)

Unfilled Vacancies (RHS)

Source: ONS

% No. of VacanciesUK Employment and Vacancies

0

2

4

6

2007 2009 2011 2013 2015

Source: ONS

Annual % changePrivate Sector Average Weekly Earnings

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Total GDP Industrial Production Construction Services

Contribution to Q3 2015 GDP Growth by Sector

Source: ONS

%



-30

-20

-10

0

10

20

30

2008 2010 2012 2014

Annual % change

External Environment - Uk Trading Partners

CPB World Trade Monitor Euro Area Imports

UK exports

Source: ONS, CPB

-25

-20

-15

-10

-5

0

5

10

15

-160

-120

-80

-40

0

40

80

120

2007 2009 2011 2013 2015

OECD Business Confidence (Adv 3 quarters - LHS)*

Business Investment (RHS)

Index

Business Confidence and Investment

Source: OECD, ONS

Annual % change

*weighted average of OECD sector confidence indicators

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

-2

-1

0

1

2

3

4

5

6

2007 2009 2011 2013 2015

Retail Sales* (LHS)

Consumer Confidence (RHS)

Retail Sales*

*excluding fuel

Annual % change( 3-month average volumes)

Source: ONS

Index

Nevertheless, the UK returned to deflation during September and price pressures look likely to remain weak for some time yet.

While domestic conditions remain firm, exporters continue to struggle from weak euro area demand.

Strong business confidence points to a sustained pick up in business investment through the first half of 2016

A combination of low inflation, rising wages and elevated consumer confidence continues to drive robust growth in retail sales.

Economy

-1

0

1

2

3

4

5

6

2007 2009 2011 2013 2015

Headline inflationCore inflationInflation target

Annual % change

Source: ONS

Consumer Prices



-20

-15

-10

-5

0

5

10

15

2001 2003 2005 2007 2009 2011 2013 2015

Construction Output

Source: ONS

Annual % change

Official data, albeit only still provisional, suggests that construction output fell by more than two per percent in the third quarter of the year compared to the second.

Workloads and employment are projected to continue to grow strongly over the next year albeit a little less so than in the recent past.

The third quarter RICS Construction Survey shows workloads rising most strongly in private housing and commercial development.

This doesn’t chime with the major guages of sentiment in the sector including the RICS survey; reflecting this, we expect the ONS numbers to be revised upwards.

-20

0

20

40

60

80

2010 2011 2012 2013 2014 2015

RICS Workloads and Employment Expectations

Workloads

Employment

Source: RICS

Net balance %

30

40

50

60

70

-60

-40

-20

0

20

40

60

2009 2010 2011 2012 2013 2014 2015

Construction Sentiment

RICS Workloads (LHS)PMI Activity (RHS)

Source: RICS, Markit

Net balance % Index

0

10

20

30

40

50

Pri Hous Pri Comm Infra Pri Ind Pub Non-Hous Pub Hous

RICS Workloads by SectorNet balance %

Source: RICS

Construction Sector - Skill shortages remain prevalent



Two familiar themes continue to come out top in the RICS survey when it comes to factors limiting output in the construction sector.

The latest data suggests housing development in London is continuing to pick-up speed even if it is still well short of the 50k per annum target.

Shortages of skilled labour remains acute in construction across a number of professions and trades.

Respondents to the RICS survey expect Roads and Rail to see the strongest growth in the infrastructure sector.

Construction Sector

0

10

20

30

40

Roads Rail Electricity Water andSewage

Gas, Air, Comms Harbours

% of Respondents

Source: RICS

Infrastructure sector - strongest projected growth over next twelve months

0

2000

4000

6000

8000

10000

12000

2009 2010 2011 2012 2013 2014 2015

London Housing Starts

Actual

Four Quarter Average

Source: Molior

Per quarter

0

20

40

60

80

Finance Labour Planning Competition Materials Lack of Demand

Factors Limiting Activity

Source: RICS

% responding yes

0

20

40

60

80

2013 2014 2015

Skill Shortages

BricklayersQSOther ProfessionalsCarpenters

Source: RICS

% responding yes



-2

0

2

4

6

8

10

12

14

2013 2014 2015

Measures of House Price Inflation

HalifaxNationwideONSLand Registry

Source: Macrobond

Annual % change

40

50

60

70

80

90

2000 2003 2006 2009 2012 2015

Average Stock Per Surveyor Branch

Source: RICS

-15

-10

-5

0

5

10

15

20

25

-100

-80

-60

-40

-20

0

20

40

60

80

2003 2006 2009 2012 2015

%Net balance %RICS House Price Indicators and House Price Inflation

Price Balance Buyer Enquiries-New Instructions House Price Inflation (RHS)Source: RICS, ONS

0

5

10

15

20

25

30

35

40

45

Lack ofchoice

Economicuncertainty

Stretchedaffordability

Lack of newbuild

No supplyshortage

Transactioncosts

Buy-to-letmarket

Mortgagefinance

Negativeequity

Equityinvestment

% of Respondents

Source: RICS

Reasons why new sales instructions continue to fall

Key house price indices are far from consistent in telling a clear picture as to what is happening to prices.

Tight supply conditions remain a major driver of house price inflation with inventory on agents books continuing to hit new lows.

Nevertheless, the main RICS lead indicators suggest house price inflation will accelerate over the next six to twelve months.

A key reason why second hand stock is not coming to the market is that prospective vendors cannot find anything they want to buy.

Housing Market - Demand rises as price pressure builds



-80

-60

-40

-20

0

20

40

60

80

100

-80

-60

-40

-20

0

20

40

60

80

100

2000 2003 2006 2009 2012 2015

Annual % changeNet balance %RICS Housing Transaction Indicators and Sales Growth

New Buyer Enquiries Newly Agreed Sales LR Sales (RHS)RICS, Land Registry

10

15

20

25

30

35

2013 2014 2015

%Five Year Projected Increase in House Prices and Rents

Prices RentsSource: RICS

Mortgage Market Review Recommendations Introduced

0

20

40

60

80

100

2006 2008 2010 2012 2014

% Mortgage Rate Type for New Loans

Fixed Discounted Tracker SVRSource: CML

-2

-1

0

1

2

3

4

5

6

-100

-80

-60

-40

-20

0

20

40

60

80

2006 2008 2010 2012 2014

London Rent Expectations and Rents

Rent Expectations (LHS)

Private Rental Index (RHS)

Source: RICS

Net balance % Annual % change

RICS indicators suggest that transactions activity will move a little higher into the new year.

Lack of supply is helping to keep medium term expectations for both house prices and rents elevated.

New borrowers are protecting themselves against a rise in the cost of borrowing.

Near term, rental growth in the capital may lose some momentum having climbed to its highest level since the early part of 2013.

Housing Market



-12

-8

-4

0

4

8

-90

-70

-50

-30

-10

10

30

50

2001 2003 2005 2007 2009 2011 2013 2015

RICS Rent Expectation and IPD Rents

RICS Rent Expectations (Adv. 3q -LHS)

IPD Rental Values (RHS)

Net balance % Annual change %

Source: RICS

-40

-20

0

20

40

60

80

2012 2013 2014 2015

Rent Expectations by Area

LondonSouthMidlandsNorthScotland

Net balance %

Source: RICS

-20

-15

-10

-5

0

5

10

15

20

-100

-75

-50

-25

0

25

50

75

100

2001 2003 2005 2007 2009 2011 2013 2015

RICS London Office Rent Expectations and IPD Rents

RICS Central London Office RentExpectations (Adv. 3q -LHS)

IPD Rental Values Office InnerLondon (RHS)

Net balance % Annual change %

Source: RICS

-30

-15

0

15

30

45

60

2012 2013 2014 2015

Rent Expectations by Sector

OfficeIndustrialRetail

Source: RICS

Net balance %

The retail area of the market continues to exhibit more modest rental projections relative to the office and industrial sectors.

Surveyor expectations also suggest rents will continue to rise at a double digit annual pace in the central London office market over the near term.

Although near term rental expectations are comfortably positive across all parts of the UK, London continues to display the strongest projections.

Commercial Property Sector - Rental growth to accelerate furtherThe strength of the RICS rent expectations data points to rental growth continuing to accelerate through the first half 2016.



-120

-100

-80

-60

-40

-20

0

20

40

60

80

2008 2009 2010 2011 2012 2013 2014 2015

OfficeIndustrialRetail

Net balance %

Source: RICS

Capital Value Expectations by sector

0

10

20

30

40

50

60

70

Very Cheap Cheap Fair Value Expensive Very Expensive

Q2 2015

Q3 2015

% of Respondents

National perceptions of current price levels

Source: RICS

Investment has dipped in recent quarters bringing to an end the continous improvement in the four quarter sum of volumes which dated back to 2012.

The mismatch between supply and demand is placing upward pressure on capital values, with expecations firmly positive (albeit less so for retail) across each sector.

Neverthless, RICS survey evidence suggests investment enquiries remain strong and continue to outstrip growth in supply across all sectors

Despite strong capital value growth since 2013, the vast majority of contributors to the RICS commercial survey feel real estate is around fair value at present.

Commercial Property Sector

-40

-30

-20

-10

0

10

20

30

40

50

60

Offices Industrials Retails

Investment EnquiriesSupply for Sale

Net balance %

Source: RICS

Investment Demand and Supply

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

0

5,000

10,000

15,000

20,000

25,000

2001 2003 2005 2007 2009 2011 2013 2015

Quarterly Investment Volumes (LHS)

Four Quarter Rolling Sum (RHS)

Source: IBVL

Commercial Property Investment

£m£m

© RICS Economics 2015 November 2015


13

Market Surveys and Reports The Economics Team

RICS Economics’ market surveys and reports are available for free from the RICS web site www.rics.org/economics

These include:

• The monthly UK Residential Market Survey www.rics.org/housingmarketsurvey

• The quarterly UK Construction Market Survey www.rics.org/constructionmarketsurvey

• The quarterly UK Commercial Market Survey www.rics.org/commercialmarketsurvey

• The semi-annual UK Rural Market Survey www.rics.org/ruralmarketsurvey

• The quarterly Global Commercial Market Monitor www.rics.org/globalpropertysurvey

• The monthly RICS/ Ci Portuguese Housing Market Survey www.rics.org/portuguesemarketsurvey

• The monthly Hong Kong Residential Market Survey http://www.rics.org/hong-kong-residential-market-survey

• The quarterly Canada Construction Market Surveys www.rics.org/constructionmarketsurvey

Advertising and sponsorship opportunitiesIf your company or organisation is interested in being associated with the chart book and you would like to discuss potential opportunities, please contact us at [email protected]

Simon Rubinsohn, Chief Economist [email protected] +44 (0)20 7334 3774

Jeffrey Matsu, Senior Economist [email protected] +44 (0)20 76971644

Andy Wu, Senior Economist [email protected], +852 (0)211 70697

Michael Hanley, Economist [email protected], +44 (0)20 7695 1684

Tarrant Parsons, Economist, [email protected], + 44 (0)20 7695 1585

Janet Guilfoyle, Surveys Administrator, [email protected], +44 (0) 20 7334 3890



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