UK ECONOMY SOLID IN THE FACE OF GLOBAL WEAKNESS
There is unequivocal evidence that the London residential market slowed down in 2015, even as the UK economy proved one of the strongest in the developed world. As we expected, the slowdown in transactions, which began in mid 2014, turned out to be something more fundamental than pre-election nerves. Indeed for some, fears of a bubble in the prime housing markets refuse to be quelled with UBS still ranking London number one in its ‘Real Estate Bubble Index’.
Our view is more sanguine. Some price adjustment is almost inevitable after a prolonged period of strong growth, primarily because vendors become hooked on over-ambitious asking prices but we expect a stable market, with reduced demand counter-balanced by lack of supply. In our markets, owners are rarely forced sellers and if prices are under pressure, owners tend to hold on to their assets until the market recovers.
This is particularly true of investors who continue to receive rental income while they wait for capital growth to resume. In fact, most investors in Central London tend to retain their hard-won stake in the London housing market for the long term.
The Chancellor’s announcement in November’s Autumn Statement will only reinforce this tendency to hold long term, as from April 2016, the cost of acquiring any more investments will be subject to an extra 3% of SDLT, charged for ‘additional homes’. Better then, to hold on to existing investments than to trade in and out, especially in a low growth market when there is little scope to off-set against Capital Gains tax (CGT), in the short term.
Conditions had become less attractive to new investors in 2015, since yields dipped well below 4% with no immediate prospect of significant capital growth. This has been the most difficult sales market since 2008. The added cost of buying property imposed by the reform of Stamp Duty in December 2014, was already a significant factor in dampening demand in 2015 and now there is an additional 3% from April 2016. Put simply, this will extend the time an owner would need between buying and selling to recoup initial costs of purchase. So, anyone whose financial calculations rely on short term capital growth will be deterred from buying in Central London.
For instance, a professional posted to a job in London for say, two years, might have considered buying a second home for the duration of their posting and then selling it on but in the current market renting a property is probably the more cost effective option, unless the posting is extended beyond 5 years.
According to the Organisation for Economic Co-operation and Development (OECD), the UK now raises a larger proportion of its total tax revenue from property than any other of the 34 OECD nations. The OECD calculates the tax to GDP ratio for each country and, while the UK is ranked 18th overall, it is first for its property taxes with 12% of all tax revenue earned from property.
The Bank of England has made no secret of its desire to cool the buy to let market because of the risk it poses to the economy if interest rates rise. It does not however, wish to discourage the evolution of an institutional private rental sector and in the Autumn Statement owners with a portfolio of more than 15 properties were exempted from the SDLT surcharge.
“In the past decade the proportion of London households in the private rental sector rose from 14% to 30%”
Private renting continues to expand as a form of tenure across London. In the decade to 2014, the proportion of London households in the private rental sector rose from 14% to 30%, according to the English Housing Survey. Over the same period, owner occupation fell from 56.5% to 49.5% of households in London and the proportion of owners relying on mortgage finance declined from 39% to 27%, as cash purchases became more commonplace.
With a population that is projected to grow by 1.4 million in the next 15 years, it seems clear that the private rental sector has a growing role to play in housing London’s increasingly footloose and cosmopolitan residents, especially as average sale prices are beyond the means of so many.
For a growing number of Londoners, owning a home is not a realistic option. Affordability has become an issue for large swathes of the population. The London Help to Buy announced in the Autumn Statement, which offers an interest free loan on 40% of the purchase price to buyers of homes up to £600,000 once they have saved a 5% deposit, will help those who are in a position to raise debt for the balance.
This well-paid cohort of private renters is the primary target market for most institutional PRS investors and it is interesting to reflect on whether the government’s enthusiasm to create a nation of homeowners will undermine the rationale for Institutional PRS investment. It could also inadvertently push prices up to the £600,000 threshold.
Although there was a continuous flow of new homes delivered throughout the past five years in Central London, it has focussed almost exclusively on an affluent target market above £1,000 per sq ft, where developers are able to generate higher returns.
London remains attractive to investors and, despite some short term resistance to the additional up-front costs, we are confident that money will continue to flow into London as long as it represents a secure home for capital and there is no alternative investment class offering a better return.
Telephone: 020 7250 1012
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