March 2018 - UK Commercial & Residential Property Markets Review
The Chancellor’s Spring Statement painted a surprisingly upbeat picture about the medium term outlook for the economy, announcing a “turning point” in the public finances and promising that Britain’s “best days lie ahead of us.” He announced that growth forecasts had been revised upwards, inflation would fall this year, public debt is shrinking and wages would rise faster than prices over the next five years. If the economy’s performance continued as expected he additionally hinted at a possible boost to public spending in the autumn.
The British Chambers of Commerce (BCC) has also raised its GDP growth forecast for this year, driven by slightly stronger than expected consumer spending and says the UK's export performance is expected to remain robust on the back of strong global growth. However, GDP growth is set to remain well below the historical average over the next few years. The BCC says productivity is expected to improve marginally over its forecast period but will remain subdued, hampered by deep rooted problems in the economy, including skills and labour shortages and chronic under investment in the UK's infrastructure.
The dominant services sector staged an unexpected rebound last month, hitting a four-month high after the worst start to the year in nearly a decade. The IHS/Markit CIPS UK Services purchasing managers’ index rose to 54.5 last month, from a 16-month low of 53 in January. The Treasury forecast panel GDP growth projection for 2018 remains unchanged at 1.5%.
On the Brexit front there was some positive news this month with the announcement that the UK and the EU had reached broad agreement on a transition deal which will last until December 2020. The deal was approved by EU-27 leaders at the European Council summit on March 22-23 but will only become legally binding once the withdrawal agreement is signed. However, the question of the Irish border remains unresolved.
This agreement nonetheless provides some clarity as to the outlook for UK business for nearly three years and should support business investment as it should mean the UK initially continues to operate as though it were inside the EU, until December 2020. The sting in the tail is that Barnier repeated that “nothing is agreed until everything is agreed”. The transition phase is one part of the package of negotiations that the UK and other European Parliaments will be asked to ratify at the end of this year. Barnier’s comments remind us that the negotiations are a “take-it-all” or “leave-it-all package”. As such, rejection of this deal by any of the Parliaments could still see the UK abruptly leaving the EU in 2019 with no deal.
Inflation & Interest Rates
Annual consumer price inflation slowed to 2.7% in February, down from 3.0% in the previous month. RPI inflation also decelerated – from 4.0% down to 3.6%. Nonetheless, the Treasury forecast panel’s 2018 inflation (CPI) forecast was raised this month to 2.4%, although still down on last year’s figure.
The Bank of England’s Monetary Policy Committee voted 7-2 to hold Bank Rate at 0.5% at its March meeting but hinted that it might need to be raised if inflation was not brought in line with the target 2% rate. UK 3 month Libor rates have risen since our last report and as at 13th March stood at 0.604%, while 5 year swap rates have fallen to 1.382%.
Employment and Earnings Growth
The latest official employment rate was 75.3%, higher than for a year earlier (74.6%) and the joint highest since comparable records began in 1971. The unemployment rate was 4.3%, down from 4.7% for a year earlier and the joint lowest since 1975.
Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms increased by 2.6% excluding bonuses, and by 2.8% including bonuses, compared with a year earlier. Average weekly earnings for employees in Great Britain in real terms fell by 0.2% excluding bonuses, but were unchanged including bonuses, compared with a year earlier.
National Sales Market
Latest Land Registry data shows that UK annual house price growth slowed marginally to 4.9% in January compared to 5.0% in December. The deceleration was more marked in England – down from 5.0% to 4.6%. This takes the average UK house price to £225,621 and to £242,286 in England. Semidetached properties (5.8%) recorded the strongest annual growth while flats (4.0%) saw the weakest growth.
Across the UK, the difference in annual price growth between new build and resale properties is striking: in the 12 months to November (latest available data) average new build sold prices rose by 14.2% compared to a rise of just 4.4% for resale properties. At regional level, annual price growth is strongest in the East Midlands (7.3%) and weakest in the North East (0.7%).
Buyer inquiries remain at a comparatively high level by recent standards which is impacting on asking prices. Rightmove reports that the average asking price of newly-marketed property increased by 1.5% in March following strong demand from home movers so far this year.
The first-time buyer and second-stepper sectors hit all-time asking price highs of £189,840 and £272,031 respectively, while overall average asking prices also reached record levels in four out of eleven regions. The increases are partially explained by a shortage of supply - with 5% fewer properties coming to market in March compared to the same period a year ago – plus buyers looking to beat the anticipated interest rate rises.
According to UK Finance, the number of re-mortgages in January 2018 rose by 19.1% compared to the same month a year earlier to reach a nine-year high. The increase was driven by a number of previous fixed rate mortgages which came to an end with borrowers locking into attractive deals amid expectations of further interest rate rises.
The number of mortgage loans to first-time buyers and home movers also increased compared to January 2017. The number of new first-time buyer mortgages rose by 7% in January and the average first-time buyer is 30 and has a gross household income of £41,000. New home mover mortgages rose by 6.4% and the average home mover is 39 with a gross household income of £55,000. Average loan to income multiples came down in January compared to the previous month – 3.61 for first time buyers and 3.42 for home movers. However, they are still higher than at January 2017.
Residential sales rose slightly in February – by 2% in the UK and by 3.2% in England, although they were down by 0.5% compared to February 2017 – according to HMRC data. Despite worsening affordability, sales in the first two months of this year are 3.6% higher than the corresponding average for the previous five years so the national market has not yet run out of steam.
London Sales Market
Annual house price growth accelerated to 2.2% in January – up from 1.8% in December – according to the Land Registry and once again defying those pundits who predict a crash. However, the number of sales has fallen for each of the last three reported months and although the data only goes up to November last year anecdotal evidence suggests this trend has not been reversed in subsequent months. Affordability issues and available stock shortages continue to weigh heavily on buyer demand.
The usual variation at borough level is apparent. The number of boroughs recording negative growth in the 12 months to January increased to 11, up from 7 in the previous month. The strongest growth is still in the outerlying boroughs – Redbridge (5.9%) and Merton (5.6%) – while the steepest decline is in the City (-7.9%) and Camden (-4.0%).
Asking prices for property coming to market in Greater London rose by 0.6% in March compared to the previous month, according to Rightmove. However, the annual growth rate continues to be in negative territory (-0.6%) for the seventh consecutive month. The usual spring rush to market has so far yet to occur as new seller numbers were down by 3% this month on the same period a year ago.
Only owners of two-bed flats appear more willing to come to market (+1%) so far in 2018 compared to 2017. In contrast, the number of 5-bed houses marketed so far this year is down 16% on 2017, while 4-bed houses have seen 6% fewer new sellers, followed by two-bed houses, which were down by 4%. Rightmove data also suggests that the average time taken to sell a property in London has risen over the past year, further indication of a slowing market.
The strong start to the year witnessed in the prime market has lost some of its steam over the past six weeks. Although applicant numbers and newly marketed stock in the first three weeks of March were both up on the corresponding period last year, transaction numbers have slowed and buyers are more hesitant. In a number of locations this reflects a lack of good quality properties but also has a lot to do with buyers’ perception that values will come down further.
As in the wider market, there are few signs of a “spring bounce” yet, although Easter is early this year which may spur more buyers into action. Moreover, we have lost several weekends in March due to bad weather which hopefully is behind us now. Values generally remain under downwards pressure although there are signs in some locations that they may be close to stabilizing as local stock shortages are strengthening vendors’ positions where demand is strongest.
London New Homes Market: Focus on Greenwich
Greenwich is home to one of London’s largest regeneration programmes, which will transform large former rundown areas into modern residential and commercial areas. Over 6,000 residential units were under construction coming into 2018 with just under a further 2,000 units having planning consent and awaiting construction start. The largest single project is Knight Dragon’s mixed usescheme which spreads along 1.6 miles of Thames waterfront. Over a period of around two decades, the project will ultimately deliver over 15,000 new homes along with a commercial district encompassing 3.5 million square feet of shops, hotels, schools and public facilities.
Average values are lower than on the north side of the river in Docklands and access to central London will be enhanced with the opening of a CrossRail station in neighbouring Woolwich in December 2018. Perhaps the only negative is the risk of shorter term oversupply which may depend on the timing of future phases of the larger developments.
Asking prices for new units vary considerably in Greenwich, depending on proximity to the waterfront. Waterfront properties currently average between £815/sq ft and £1,000/sq ft, with top values in excess of £1,500/sq ft. Away from the river, asking prices drop down to between £630/sq ft and £670/sq ft.
National Lettings Market
Nationwide annual rental growth slowed to 1.2% in February, compared to 2.4% in the previous month, according to the Homelet Index. The average UK rent now stands at £906 pcm, dropping to £758 pcm when London is excluded. At regional level, the strongest growth was recorded in the Midlands: East Midlands (3.9%) and West Midlands (2.5%). The weakest growth is in the South East (0.3%) and Yorks & Humber (0.6%).
There are some surprising variations in affordability across the country. Four regions have seen affordability – as measured by average household income to rent – reduce since last year, with the North East being the most notable having seen the ratio come down from 23.9% in February 2017 to 22.5% this year.
One of the frustrations in monitoring the private rented sector in the UK is the relative lack of transparency compared to the sales market. The Government has recently launched a major survey - The English Private Landlord Survey - which has been promoted as the most comprehensive study of the sector for a decade and will involve over 100,000 landlords and agents. This is a welcome sign that the Government is taking more interest in a sector which is expanding rapidly and which might hopefully lead to better official data monitoring.
London Lettings Market
The Homelet Index reports that annual rents in London increased by 1.1% in February, taking the average monthly rent in the capital to £1,537 pcm. Across the boroughs rental growth ranges from 7.9% in Lambeth and 7.8% in Westminster, down to -3.0% in Harrow and Hillingdon. The latest Homelet affordability monitor reveals that the ratio of household income taken up by rent in London has fallen compared to last year – from 32.1% to 31.8%.
The prime sector has shown little change since last month’s report: whilst the number of tenants looking for accommodation in the first 12 weeks of the year is up on the corresponding period in 2017, the number of agreed lets slightly lower. This reflects continued caution on the part of tenants who are increasingly focused on value for money rather than location, especially in the lower price bands.
This has impacted upon achieved rents which are still under downwards pressure in most submarkets. However, available stock continues to reduce which suggests that rents should stabilise as tenants experience more competition for properties. The rate of rental decline is slowing although it is not possible to call the bottom of the market yet.
London Office Market
The promising start to 2018 was maintained in February with Central London take-up around one fifth higher than in the previous month. Financial services and banking accounted for the lion’s share of take-up. However, the aggregate take-up figure for the first two months is the lowest recorded in the last five years and the development pipeline coming into March was a shade under 50% pre-let. Moreover, availability also rose to 6.25%, with submarkets varying from just over 10% in Docklands down to just over 3% in Southbank.
An emerging trend, not just in London but in major cities across the UK, is the growth in demand for flexible space. In 2017, flexible space accounted for around one fifth of all office take-up in central London, with WeWork being the largest taker of space in the capital over the past five years. There is likely to be increasing demand for co-working space from larger businesses, as more corporate occupiers change their working culture and look to take on shorter leases. Uncertainty around Brexit may also be driving some demand for flexible work space, as major corporate look to avoid long-term space commitments until the final details of Brexit are known. Demand for flexible work spaces is likely to be driven further by new lease accounting standards (IFRS 16) which require occupiers to capitalize rental liabilities on their balance sheets as leases under 12 months can be excluded.
Retail sales by volume increased by 0.8% in February 2018 compared with the previous month, with increases seen across all main sectors except non-food stores. The increase follows two monthly declines in December and January, resulting in an overall decrease of 0.4% in the three months to February. The year-on-year growth rate increased by 1.5% following a general slowdown when compared with an increase of 3.3% in February 2017. Retail sales by value rose by 0.8% compared to January and by 3.9% compared to February 2017.
The volume of online sales rose by 13.7% in the year to February. All four main sectors reported yearon-year growth in February with food stores reporting the strongest growth of 14.0%. Internet sales as a proportion of all retailing also increased to 17.2%, up from 15.6% in February 2017.
Store prices continued to rise on an annual measure for the 16th consecutive month in February, reaching 2.5%. However, there has been a slowdown in recent months since peaking in September 2017 at 3.3%. While there were price increases across all sectors, clothing and household goods stores were the only sectors to show an increase in price growth when compared with the previous month. All other sectors showed a reduction in store prices, except for total non-food stores, which remained unchanged.
Retail footfall continued to fall year-on-year in February across most retail destinations, even before the impact of the snow. According to the latest Footfall and Vacancies Monitor from the British Retail Consortium (BRC) and Springboard covering January 28 to February 24, footfall decreased by 0.5% year-on-year.
While it is a slowdown compared to the 1% growth seen in the same period last year, it was still less than a third of that recorded in January, lower than the three-month average of -2% decline, and lower that the 12 month average of -0.7%. Half of the UK’s regions saw growth in February although Greater London and the South East continued to experience decline of 1.1% and 1% respectively.
Retail parks outperformed all other shopping locations, with those in the West Midlands growing by 5.1%, South East by 4.8% and South West by 2.6%. High street footfall showed growth in three regions: East Midlands at 4.8%, Northern Ireland at 1.9% and the East at 1.8%. On the other hand, shopping centres were the weakest performing of all three shopping destinations, with the West Midlands (0.7%) being the only region that recorded growth.
Consumer spending over the past two months has seen the strongest reduction for the start of a year since the opening two months of 2012. According to Visa’s UK Consumer Spending Index, household spending recorded a 1.1% year-on-year fall in February, following a 1.2% decline in January. For the 10th month in a row, spending on the high street fell annually, with a 2.5% drop recorded, whilst online spending increased slightly (0.2%) compared with a year ago.
Recreation and culture spending dropped 6.1% year-on-year in February – the biggest fall since April 2010 – while spending also fell on clothing and footwear, household goods, transport and communication. Hotels, restaurants and bars were the silver lining in the figures, with spending up by 4.4% year-on-year. This was followed by a 4% uptick in miscellaneous goods and services, which includes health, beauty and jewelry.
Some more big names have appeared on the list of “distressed” retailers. Crisis talks to secure £40 million of funding for House of Fraser have reportedly collapsed as its major assets have already been pledged as collateral against existing debts. Mothercare, Carpetright, New Look, Moss Bros have all agreed CVA terms or reported profit warnings, while Next has experienced its “most challenging year” in 25 years.
On a brighter note, Battersea Power Station is set to become the city’s newest retail and leisure destination as developers have unveiled details of a £9 billion transformation. At an estimated cost of £2 million per day, once completed in 2020, Battersea Power Station will create 20,000 new jobs and become the third largest retail destination in central London.
Meanwhile, Westfield London has opened the doors to the first phase of its new 740,000 sq. ft. extension. The £600 million project opened six months ahead of schedule and is anchored by John Lewis’s 50th store. This marks the first of three phased openings at Westfield London, with the final phase due to open on the 10th anniversary of the shopping centre’s initial launch on 30th October 2018.
With the new tax year just around the corner, the impact of the phased reduction of tax relief on finance related costs for BTL landlords is apparent. Chestertons has seen an increase in requests from landlords with mortgaged investment properties for valuation, with a growing number subsequently placing their properties on the market. Admittedly, these are predominantly smaller landlords – either “accidental” or individuals for whom property is an investment rather than a business. Nonetheless, this group accounts for a significant proportion of the total privately rented stock across the country.
Landlords are also finding that the process of obtaining mortgage finance has become much more difficult. The requirements on portfolio landlords (defined as those with four or more buy-to-let mortgages) introduced in September 2017, are particularly onerous. These include additional affordability tests and providing supporting documentation such as business plans. It also means that underwriters must look at the landlord’s entire portfolio when considering new applications, not just the property needing to be financed. According to the National Landlords’ Association, 63% of landlords believe obtaining new buy-to-let mortgages is now more difficult, rising to 70% for portfolio landlords.
In addition, recent research from the Residential Landlord Association has found that of the almost 3,300 landlords responding to its survey, 69% said that the 3% stamp duty levy introduced in 2016 is still putting them off investing in further rental property. The issues facing landlords are reflected in recent mortgage lending statistics. There were 5,600 new buy-to-let house purchase mortgages completed in January 2018, some 5.1% fewer than in the same month a year earlier. In contrast, the number of buy-to-let re-mortgages completed in January was 17.9% higher than in the same month last year.
If there is a significant increase in the number of landlords looking to offload properties or entire portfolios, the question is who will buy them? Single properties could end up in owner-occupier hands while portfolios may well be acquired by larger investors who are set up as corporate entities. The rising tax bill may even force some small “part-time” landlords to simply hand back the keys to their mortgage lender.
At the institutional end of the market, Invesco Real Estate has been active so far this year. It is forward funding a development programme in Liverpool in partnership with residential developer Patten Properties and Panacea Property Development. The project will deliver 383 build-to-rent (BTR) units in the City Centre. The development was acquired for around £86m and is expected to be completed
in June 2020.
Meanwhile in London, Invesco and Meyer Homes have partnered on a 255 BTR project in West London. The forward-funded development in Hounslow, close to Heathrow Airport, was acquired for a reported £107m and is also due for completion in 2020.
In other news:
• AXA Investment Managers is still reportedly seeking to enter the UK BTR market whether by acquisition of standing investments or by funding new development.
• Clarion Housing Group has announced a five year plan to build a BTR portfolio of up to £800m with a focus on mid-market growth areas in London, the South East, West Midlands and Greater Manchester.
• Legal & General has taken full ownership of Cala Homes having bought out the 52.1% stake owned by Patron Capital for £315m.
• Places for People is poised to launch a new fund focused on the BTR sector which is expected to raise around £350m.
Preliminary data suggests February investment volumes remained strong albeit somewhat down on January. Overseas investors continue to account for almost half of all purchases. Portfolios, mixed use and residential assets remain in focus for both domestic and international investors. Prime office yields in the City and West End are broadly stable at 4.00% and 3.25% respectively.
The major deals of the past month were British Land’s acquisition of the 360,000 sq ft mixed-use Woolwich Estate, for a headline price of £103m from Mansford Property representing a net initial yield of 4.1%, and Hong Kong developer Nan Fung’s £300m purchase of the Regent Quarter office complex in King’s Cross for a yield of 4.35%. The latter deal was interesting in that there were 16 bidders and Nan Fung paid more than £20m over the asking price to secure the deal.
Elsewhere, the Lime Street Estate (comprising two office buildings with a combined floor space of just over 121,000 sq ft) has been placed on the market for £78m, reflecting a net initial yield of 7%. It is thought the sale may attract an investor looking for redevelopment potential. The location is within an area where high-density commercial development is encouraged and the previous owner carried out a feasibility study for a tower block of over 770,000 sq ft.
The Crown Estate is the latest major investor to target the growing flexible work space sector, following earlier forays by the likes of British Land and US private equity funds Blackstone and Carlyle. It will set up its own serviced office brand, initially setting aside space from within its existing London office portfolio. Other investors are likely to follow suit to cater for the changing requirements of office occupiers.
Chestertons offers a full range of property services, including residential and commercial sales and leasing. For inquiries, call +971 4 381 0200 or email at email@example.com.