FORECASTS FOR 2013
The Sales Market
2012 ended with the residential markets in a more robust state than we had anticipated at the beginning of the year, or indeed at the half year, when confidence was dampened by the rain-sodden spring.
The upshot was a year in which price growth was moderate, in marked contrast to the exceptional growth reported in 2011. This has formed a more solid and stable platform for the year ahead. Our forecast for 2013 is that property prices in Midtown, City and Docklands will remain unchanged as the market adjusts to the higher pricing which we see as healthy and sustainable.
The sensational headlines generated about residential markets in central London are usually associated with the super prime market in West London. Those markets do have a knock-on effect on confidence and they also create an excitement around investment but the buyers in our markets have a range of options and sales remain scarce at levels above £1,400/sq ft in Midtown, £1,000/sq ft in City or £700/sq ft in Docklands. Where premium prices are above these levels they usually include valuable terraces, car parking spaces, or exceptional views.
The emergence of a new high-rise residential corridor starting at the Angel Islington running down City Road through Shoreditch and Broadgate to Aldgate, is welcome and will expand the supply of quality accommodation along the City’s north and easterly borders. Pricing in these shiny new towers remains to be tested but we expect a large percentage of the sales to be concluded in the Far East where high-rise living is sought after.
The Rental Market
We were optimistic at the end of 2011 in our forecasts for rents as we saw a market where demand was rising but the stock of rental properties had not expanded in tandem. We expected that to fuel rising rents for another year but prospective tenants proved to be unwilling, or unable, to pay more and chose instead to seek out alternative parts of London. The market became price sensitive particularly for two bed properties and for this reason rents began and ended 2012 at very similar levels.
Now we believe that there is a better platform for further growth in 2013. It remains the case that demand is outstripping supply and tenants have had a year to acclimatise to the new higher rental levels. In other words, we expect rents to rise for the same reasons that we put forward at the beginning of 2012 but the movement was deferred by a year.
It is not unusual, after a growth spurt, for the market to need time to adjust to new pricing. Rental markets can be highly responsive to price changes because, unlike owner-occupiers, tenants have not made long term commitments. When rental values rose too quickly, tenants began to look elsewhere. The most obvious sign was the increase in the number of tenancies that ended at the 12 month point which had the effect of reducing the average stay to 24 months from 30 months. We expect rents to rise by 5% in 2013 and that most of this increase will occur during the traditional spike in Q3.
Threats and Opportunities
We highlight here a few emerging trends that are likely to impact on the sales and/or the rental markets in London. Some of these are long term and others rather shorter but all are worth bearing in mind when contemplating investment decisions.
GLA Economics, predict that employment will increase in London at an average of 1% per annum over the next 20 years, with strong growth in Information technology and business services. These sectors are key drivers in Midtown, City and Docklands , although we should point out that forecasts for the financial sector are indicating decline. We see growth in the tech sector underpinning both the sales and the rental markets in our area.
Interest rates have remained low at 0.5% since March 2009 and the Bank of England has not indicated that it will change its position until the economy shows signs of real recovery. In fact the November minutes of the Monetary Policy Committee (MPC) suggested that it had considered a further cut. There were some positive economic indicators in the autumn figures but these were far from secure and many commentators remain braced for a further reversal. Indeed the Governor of the Bank of England stated in November 2012 that we should expect zig-zagging and that, while the economy is probably on the road to recovery, it will be slow.
The Coalition will, in our view, last the course of its term but as the general election approaches, ministers will be reluctant to take risks with the economy and so we anticipate a benign environment.
There is always the prospect that international conflict could hit the stock market and a very real threat of unrest and instability in the Eurozone that could affect UK export markets. The strikes and public demonstrations in Spain, Italy, Portugal and Greece in November revealed real tensions and rising public resentment towards austerity measures. Berlin and Brussels seem to be wholly focussed on preserving the Euro but it looks increasingly likely that European national governments will have to make concessions to public opinion. At the same time, the UK is in a political dispute over its contributions to the EU budget.
It is necessary to be aware of potential changes to the regulation of the private rental sector because it will have an impact, initially on net income and, as long as the market is under supply pressure, it will feed through to rental values. The reforms are, as yet, more than 12 months away but it is inevitable that the sector will be scrutinised as it expands and affects wider sections of society. ARLA (The Association of Residential Letting Agents) is supporting greater regulation of the sector and in particular the statutory regulation of letting agents as described earlier in this report.
Finally, we highlight the importance of transport infrastructure on the future of residential markets in Midtown, City and Docklands. Specifically the arrival of Crossrail with its stations in each of the three markets – Tottenham Court Road, Farringdon and Canary Wharf, will underpin property values. It is not due for completion until 2018 but its profile is ever higher and most prospective buyers and tenants are now aware of its potential to greatly improve the connectivity particularly with Heathrow and Canary Wharf as well as other locations on the east-west axis of London.