Outlook 2016 – The year ahead for residential property
Robert Weaver, our Director of Property, is one of the UK’s most experienced property professionals. Formerly Global Director of Residential Property at RBS, he previously ran a £500m residential fund. Robert is a Fellow of the Royal Institution of Chartered Surveyors (RICS) and also a member of the residential committee of the British Property Federation.
Backed by the expertise of our in-house research team, here you can find out Robert’s views and opinions on what 2016 could look like for investors in UK residential.
1. Is the current growth sustainable?
Everyone has an opinion on the matter, which makes it’s hard to distinguish between the hearsay and the research. Step outside of London, and any suggested instability is scaremongering, as growth is modest across the board. While prices are undoubtedly high in London and the Southeast, the fact of the matter is that demand still outstrips supply, and foreign investment continues to pour into the capital. Infrastructure projects such as Crossrail are also having a huge effect on prices – so the levels of growth are not unjustified. Moreover, the research powerhouses from Knight Frank and Savills predict strong growth, not just for this year – but for the next five years.
A bubble develops if people can’t afford to run what they’ve bought. At present, interest rates remain low, and people are being forced to be more sensible with their mortgages – so the outlook for the market seems positive for 2016 and beyond.
2. Interest rates: clear skies for borrowers?
The consensus seems to be ‘dovish’ rather than ‘hawkish’, meaning the likely continuation of a low interest rate environment and fairly clear skies ahead for borrowers in 2016. In December Mark Carney indicated that any rate rise in 2016 is likely to be later and more gradual than previously thought, which came in spite of the FED finally raising the US base rate by 0.25%. This should help to keep demand strong in the property market.
3. Osborne’s announcements: will the buy-to-let bath empty?
Buy-to-let landlords suffered a raw deal in 2015 as Osborne turned the taps off, and then pulled the plug out. First he cut mortgage interest relief in his Summer Budget, and then he hiked stamp duty for second homes in his Autumn Statement. The Bank of England looks set to wade in by further tightening buy-to-let mortgage lending criteria, and from March, the Financial Conduct Authority will start regulating the sector to comply with the EU’s Mortgage Credit Directive.
Buy-to-let is likely to become too expensive, and too stressful for most investors. Some may rush to complete purchases of new buy to let investments before the additional stamp duty rate comes in on April 6th, which could potentially cause prices to rise above trend in the first few months of the year. In the longer-term, we should start to see a professionalisation of the sector, and a move towards services such as Property Partner to help individual investors access the market.
It’s noteworthy that the stamp duty hikes are not intended to apply to ‘corporates or funds making significant investments in residential property, given the role of this investment in supporting the government’s housing agenda.’ It’s a signal that the government aims to move towards a more institutionalised rental market, more like those of Germany and Canada, because it avoids the problems that the UK currently faces. Read more about their reasons, here.
4. A regional view on growth
Price rises will continue to vary drastically by region. Areas such as the Midlands and the North East are unlikely to see the rates of price growth possible in and around London, where stock is low relative to demand, and buyers have more financial firepower. However, yields tend to be more attractive in these areas. In London and the Southeast, prices have continually outstripped rental growth, resulting in diminishing rental yields for investors.
In London, the South East and the East, many areas will continue to experience above average price growth as rapid gentrification continues in the capital’s less developed areas, and as middle class professionals look to settle down in well connected commuter hotspots. Overall, UK residential undoubtedly offers strong potential capital growth and solid income performance for investors with the knowledge and flexibility to invest in the right opportunities.
5. Hot property: locations to watch
Contrary to the popular three-word phrase, ‘location’ is not necessarily the keystone to a solid property investment – there’s much more to it than that.
Property is a total returns product, meaning that it provides income and capital returns – both of which can be amplified by gearing. It’s important to first consider the balance of these two aspects, and what your goals are. Capital growth has tended to be higher in big cities, where yields are lower, and vice-versa in slower-growing areas.
Among the other fundamental things to consider are employment hubs, and infrastructure projects. Birmingham will benefit hugely from HS2, and areas in and around London will continue to benefit from strong capital growth this year thanks to Crossrail. Hanwell and the regeneration areas around Woolwich Arsenal are particularly compelling Crossrail locations in my opinion. For higher-yielding properties, London is most definitely not your answer. Areas such as Lincoln, where house price growth is more modest, will be far better for income.
Finally, property is a ‘deals-led’ business, and it can often come down to the individual investment. What are the dynamics of the local market, and how does the property stand in comparison? What is the state of the property, and how does the potential income and capital return balance out? Quite often, you can mine diamonds in the most unexpected locations.
6. Fintech and property: a change for the better
Fresh oil is set to be applied to the rusty cogs of the property industry as Fintech slowly works its way into the system. New companies are revolutionising access to debt, offering sensible rates and quick turnaround, and creating healthy competition with the banks. This is to be applauded as house builders and developers have more choice, and can move more quickly.
What is happening at Property Partner is also revolutionary, and particularly relevant with all the changes that have happened for buy-to-let this year. We’ve designed a product that we believe works better on every level – for investors, for tenants, for developers, and the UK economy. You can find out more here about how we’ve made buy to let better for everyone.