UK Commercial & Residential Property Markets Review: November 2018 | 1
UK Commercial & Residential Property Markets Review: November 2018 | 2
CONTENTS
Economic overview page 3
Residential property
- National sales page 4 - London sales page 7 - London new homes page 9 - National lettings page 10 - London lettings page 11
Commercial property
- London office market page 12 - Retail market page 13
Investment market
- Residential page 13 - Commercial page 14
Contact page 15
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ECONOMIC OVERVIEW
GDP Growth
As expected, recent data confirmed that GDP growth accelerated in Q3 and, at 0.6%, quarter-on- quarter growth was the strongest since 2016. In a surprisingly upbeat Budget, the Chancellor announced that “austerity is coming to an end”, and promised the first outright fiscal loosening for a decade in 2019/20. This should provide a welcome support to GDP growth, particularly next year - although the large fall in the PMIs in October suggests that the economy slowed sharply at the start of Q4.
The Treasury’s panel of independent forecasters held its November forecast GDP growth rate for 2018 at 1.3% and pointed to GDP growth accelerating to 1.5% in 2019. The underlying economic platform therefore appears relatively benign although the elephant in the room remains Brexit, both from an economic and a political perspective.
The current deal (withdrawal agreement and political declaration) has been signed off by the other 27 EU countries however, Theresa May needs to persuade MPs in her own Parliament to back it. A vote will now take place on 11th December. If the deal is rejected this could potentially trigger a No Confidence vote in Parliament with another General Election increasingly a likely result.
Even if it gets through Parliament, the deal also needs to be approved by the European Parliament - which will vote early next year although this is expected to be a rubber stamp job.
Figure 1: UK GDP growth outlook Source: HM Treasury Forecast Panel
3.0%
2.5%
2.0% 1.8% 1.7% 1.7% 1.6% 1.5% 1.5% 1.3%
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Inflation & interest rates
CPI inflation was unchanged at 2.4% in October but is comfortably below the 3.0% recorded in October 2017. RPI inflation was also unchanged at 3.3% but was lower than in October 2017 (4.0%).
The Bank of England’s Monetary Policy Committee held Bank Rate at 0.75% at its November meeting, but it is likely to creep up next year although the MPC has stated that “any future
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increases in Bank Rate are likely to be at a gradual pace and to a limited extent.” UK 3 month Libor rates have drifted upwards this month and as at 24th November stood at 0.89%, while 5 year swap rates have dropped to 1.29%.
Figure 2: Inflation & Bank Rate forecasts Source: HM Treasury Forecast Panel & ONS
4.00% 3.6% 3.50% 3.3% 3.3% 3.3% 3.0% 3.0% 3.1% 3.00% 2.4% 2.50% 2.0% 2.0% 2.0% 2.1% 2.00%
1.50% 1.92% 1.69% 1.00% 1.37% 1.12% 0.50% 0.75% 0.50% 0.00% 2017 2018 2019 2020 2021 2022
Bank Rate (q4) CPI RPI
Employment and earnings growth
The latest rolling quarter data from the Office for national Statistics (ONS) show that the employment rate, at 75.5%, is little changed compared with April to June 2018 but is higher than for a year earlier (75.0%). The unemployment rate, at 4.1%, is slightly higher than for April to June 2018 but lower than for a year earlier (4.3%).
Headline annual pay growth excluding bonuses has risen to its fastest pace since 2008. Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms have increased by 3.2% excluding bonuses, and by 3.0% including bonuses, compared with a year earlier. In real terms earnings increased by just 0.9% excluding bonuses, and by 0.8% including bonuses, compared with a year earlier.
RESIDENTIAL PROPERTY
National sales market
Suggestions that house prices are about to crash still appear unfounded. Of course, an economic crisis could trigger a collapse but for now employment levels remain high, average earnings growth is back in real growth territory and there is a widespread shortage of housing stock for sale. In the meantime, the Land Registry reports that national average house price growth accelerated in the 12 months to September – to 3.5% in the UK and to 2.8% in England.
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Figure 3: Average annual house price growth: UK & England Source: Land Registry/ONS
6%
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Figure 4: Average regional house price & annual price growth (September 2018) Source: Land Registry/ONS
£500,000 7.00% 6.10% 6.00% £450,000 6.00% £400,000 4.30% 5.00% £350,000 3.50% £300,000 3.30% 4.00% 2.60% £250,000 3.00% 2.00% 1.70% £200,000 2.00% £150,000 1.00% £100,000 -0.30% £50,000 0.00% £0 -1.00%
Ave price 12 month growth
The Midlands continues to exhibit the strongest regional growth in house prices with the West Midlands recording 12 month growth of 6.1% and the East Midlands 6.0% in September. London remains the only region where prices fell over the period and even then the drop was minimal (-0.3%).
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Figure 5: Mortgage approvals Source: UK Finance
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0
House purchase Remortgage
Mortgage lending volume for house purchase fell by 12.3% in September compared to the previous month and was 10.1% lower than in September 2017. Re-mortgaging (by volume) also fell back – by 14.7% compared to August and by 7.4% compared to a year ago.
Figure 6: UK & England residential property transactions Source: HMRC
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UK England
After a sharp drop in September, residential sales rebounded in October. In England, non-seasonally adjusted transaction numbers rose by 16% compared to the previous month and by 5.5% compared to October 2017. UK wide sales were up 14% month-on-month and were 4% higher than last October.
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Sales have held up remarkably well in spite of stock shortages, affordability issues and Brexit anxiety. Across the UK, transaction numbers in the first 10 months of the year are only 2.6% down on the corresponding period in 2017 and only 2.5% lower in England.
That sales have held up as well as they have is in large part due to a favourable mortgage market, the Bank of Mum & Dad and the Government’s Help-to-Buy initiative. However, without some kind of Government intervention - such as the introduction of the 3% surcharge on second properties which drove sales to their highest recorded quarterly level between January and March 2016 as buyers raced to complete before the end-March deadline (but which subsequently slowed the market) – or a substantial fall in asking prices it is hard to see sales volumes picking up in 2019.
London sales market
Annualised data from Land Registry for the first nine months point to a 13% reduction in sales in 2018 compared to 2017. This is in part due to low levels of available stock while affordability remains an issue. An average price of £482,000, according to Land Registry, means that average households find it even harder to buy in the capital. Nonetheless, data from UK Finance shows that more first time buyers are getting onto the housing ladder in London, reaching their highest level in three years with new mortgage numbers in Q3 2.6% higher than in the same period last year.
The larger proportion of high value properties means that the capital has suffered more than the rest of the country in the wake of tax increases, while Brexit has also had a greater impact due to the more international make-up of the population. It is encouraging, however, that there has been a noticeable increase in buyer interest in the latter half of the year, with registrations and viewings both up on last year.
The Autumn Budget proved disappointing for the housing market, despite lobbying from the industry to ease back on some of the punitive tax measures of the past few years. Help to Buy was extended for another two years after its scheduled end in March 2021, however the government “does not intend” to continue with the scheme beyond March 2023. More detail emerged on the Government’s plans to hike stamp duty for foreign buyers and a consultation will be published in January on a proposed 1% surcharge.
In the year to September, the Land Registry reports that sold prices in Greater London were broadly flat (-0.3%) and the average price in September was 1.4% higher than the average price in January this year. Although prices have fallen sharply in some boroughs this largely reflects a local oversupply of high-end new build homes. Suggestions that the whole market is crashing are therefore some way off the mark. Nonetheless, prices are unlikely to see much growth in 2019. However, neither should they suffer any dramatic decline, barring a major shock in the wider economy and while supply continues to lag behind demand.
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Figure 7: Annual price growth by London borough (September 2018) Source: Land Registry
Kensington And Chelsea Brent City of London Redbridge Bexley Richmond upon Thames Barking and Dagenham Kingston upon Thames Harrow Merton Ealing Tower Hamlets Havering Hounslow Sutton Enfield Bromley Newham Hillingdon Barnet Camden Croydon Waltham Forest Islington Lewisham Lambeth Hammersmith and Fulham City of Westminster Southwark Haringey Wandsworth Greenwich Hackney
-10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Source: Land Registry
[Note: the Kensington & Chelsea figure (18%) appears unrealistic once again]
Buyers have remained price sensitive this year and prices in the prime locations, especially in central London, have experienced further decline. In the period August to October 2018 average achieved prices were 9.7% lower for flats and 2.1% lower for houses compared to the same period in 2017 according to Lonres. As at 26th November, 52% of available properties had experienced a price reduction. However, there are signs that the gap between vendor and purchaser expectations is narrowing as the rate of decline has slowed.
Nonetheless, central London values could see further decline if vendors who require a quick sale give further ground on asking price. Meanwhile buyers, especially those who are looking for second homes and are often not under pressure to purchase, are likely to wait for more market certainty before acting. There are still currency advantages for foreign buyers which create an effective discount on UK property acquisitions, although the plans to introduce a further stamp duty surcharge and
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impose more onerous ownership disclosure requirements are not exactly sending out a “welcome to Britain” message.
However, when Brexit is out of the way and the dust has settled there is potential for prices to rebound as the undoubted pent up buyer demand senses value and gathers momentum. Sold prices are already 17% below their peak level of June 2014 and buyers are beginning to feel that the bottom of the market may not be far off. There is undoubted pent-up buyer demand waiting to be released once the uncertainties are behind us which is likely to encourage more vendors to market their properties.
New homes market
UK builders registered 43,578 new homes during the third quarter of 2018, according to the NHBC, the highest quarterly total since Q3 2007 and 15% up on the corresponding period last year. London, in particular, saw a dramatic increase in registrations, up 141% to 6,007, compared to the same period last year. This is partly due to a number of large developments being registered by housing associations and by investors focused on the private rental sector. However, national and London housing delivery is still well below government targets.
The Budget included a number of measures to help boost the supply of housing. One of the most significant was £1bn of funding to support lending by the British Business Bank to SME housebuilders. The government is also consulting on new permitted development rights for retail-to residential conversions and upwards extensions to existing buildings.
Figure 8: New home registrations: Q3 2018 Source: NHBC
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0 South East London South North East of West East Yorks & North East West West England Midlands Midlands Humber
Westminster City Council is looking at plans that would require developers of new hotels in the borough to provide affordable housing. The council is considering including the policy in its new City Plan, which is set to be published next month. It is understood that if the policy is enacted, the affordable housing element could be developed either on or off site.
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Kensington & Chelsea wants developers to provide 35% affordable housing and says it will operate an ‘openbook zone’, meaning that developers who claim it is unviable to provide 35% affordable housing will be required to prove this by showing their profits and other financial information.
Shopping centre owner Intu plans to develop around 5,000 PRS homes, together with almost 600 hotel rooms and office space, on 470 acres around six of its out-of-town centres. By developing homes for rent rather than for sale INTU will maintain control of the land around the centres whilst also gaining more customers on the doorstep. Intu also hopes to generate healthy income and is targeting a yield of around 5% on the initial 1,700 rented homes.
Canary Wharf Group is making its first forays into residential property. This includes a significant amount of build-to-rent (BTR) stock, which will be managed by the group's BTR arm, Vertus. Vertus is currently on site with three BTR assets comprising a total of 1,137 units, including what will be the UK’s largest BTR tower.
National lettings market
According to the Homelet Index, average rents across the UK rose by 2.1% in October 2018 when compared to the same month last year, taking the average monthly rent to £928. When London is excluded, the average UK rental value was £768, up 1.7% on last year. Rents rose in 11 out of the 12 regions covered in the research, with only the North East recording a fall (-2.5%) in the 12 months to October. In England, rents rose fastest in London (4.0%) and the South East (3.4%).
Figure 9: Average monthly asking rents & annual growth by region (October 2018) Source: Homelet
£1,800 5.0%
£1,600 4.0% 4.0% 3.4% £1,400 3.0% 2.7% £1,200 2.0% £1,000 1.6% 1.5% 0.8% 1.0% £800 0.7% 0.5% 0.0% £600 £400 -1.0% £200 -2.0% -2.5% £0 -3.0% Greater South South East West East Of North Yorks & North London East West Midlands Midlands England West Humber East
Ave rent 12 month growth (%)
The latest monthly survey from ARLA reveals that year-on-year, the number of tenants experiencing rent hikes continues to rise. 31% of renters saw their payments increase in September 2018, compared to 27% last year, although the figure is down on the record-high 40% seen in August.
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Demand from prospective tenants fell marginally in September, compared to August, however year on year this is down by 20%. As landlords continued to leave the market, the supply of properties managed by letting agents dropped to 194 per member branch in September, down from 197 in August.
London lettings market
According to Homelet, rents in London increased by 4% in October 2018 compared to the same month in 2017, taking the average rent to £1,619 a month. Average rental values in in the capital are now 74.5% higher than the UK average. When London is excluded they are 110.8% higher than the rest of the UK. Affordability has risen considerably over the past year, with Homelet estimating that rent accounted for 35.6% of household income in October compared to 30.9% in October 2017.
Figure 10: London borough monthly asking rents for 2-bed flats (as at 27 November 2018) Source: Zoopla
City of London £6,925 Westminster £4,823 Kensington & Chelsea £4,160 Hammersmith & Fulham £3,272 Camden £3,258 Tower Hamlets £2,713 Southwark £2,617 Islington £2,424 Hackney £2,309 Wandsworth £2,230 Lambeth £2,092 Richmond upon Thames £1,844 Ealing £1,790 Merton £1,789 Hounslow £1,713 Brent £1,690 Newham £1,683 Barnet £1,673 Haringey £1,655 Greenwich £1,650 Lewisham £1,514 Kingston upon Thames £1,514 Waltham Forest £1,414 Harrow £1,377 Enfield £1,369 Hillingdon £1,365 Redbridge £1,321 Bromley £1,280 Croydon £1,270 Barking & Dagenham £1,225 Sutton £1,205 Havering £1,172 Bexley £1,118 £0 £1,000 £2,000 £3,000 £4,000 £5,000 £6,000 £7,000 £8,000
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Tenant demand remains healthy in prime central London. Lonres reported a 39% jump in transactions between August and October compared to the previous three month period. Combined with further disposals by landlords, this increase in lettings resulted in an 11.5% reduction in available stock at the beginning of the last week in November compared to the same point a year ago.
Asking rents remain under downwards pressure, with an average discount of 3.1% on initial asking rent recorded between August and October and 36% of available properties as at 26th November having had a reduction on initial asking rent. Achieved rents, however, are nudging upwards having risen by 8% between August and October compared to the previous three month period.
COMMERCIAL PROPERTY
London office market
Central London office take-up was stable in October 2018 and above the 10-year average, and although the amount of space under offer fell by a little over 10% this also exceeded the 10 year average. Availability rose by 7% in October and was again dominated by second-hand space. The central London availability ratio stands at 6.5%, ranging from 10% in Docklands to 4.5% in Southbank.
Subletting activity in central London has remained high this year as occupiers continue to relocate to prime space. The amount of office space sub-let by tenants climbed from 17.4% of the total London office market at the end of 2016 to a high of 24.3% in the first quarter of this year. The growth in the number of occupiers offloading space has several drivers including consolidation, M&A activity, more efficient use of space and an attempt to attract and retain staff.
Central London office space completions hit their highest level since 2004 between April and September this year, in a period in which new construction starts rose by almost a quarter, according to Deloitte Real Estate’s latest London Office Crane Survey. 4.2m sq ft of new office space was completed in 32 new schemes over the period – the highest six monthly figure in 14 years. The survey identified a total of 11.8m sq ft of office space under construction in 80 schemes across central London by the end of September, 49% of which had been pre-let.
Canadian investment giant Ivanhoé Cambridge is reportedly working up plans to launch a co-working operation across its office portfolio. The group is considering a number of options including the introduction of its own brand, partnering with a specialist operator, and would be the latest in a string of landlords in the capital to enter the serviced / flexible office sector. The Crown Estate and Landsec are both due to launch their own brands later this year. Other companies either considering the move or that have already entered the market include British Land, Brockton Capital, Blackstone, HB Reavis and Great Portland Estates.
Prime rents in the West End currently average £115/sq ft per annum with a typical rent-free period of 22 months on a 10 year lease. Prime rents in the City are lower at £70/sq ft with a rent-free period of 24 months.
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Retail market
October’s official retail sales figures were weaker than expected. Retail sales volumes dropped by 0.5% on the month, in contrast to the consensus expectation for a 0.2% rise, pulling the annual rate down from 3.0% to 2.2%. The main driver of the fall in total sales was a 3% month-on-month drop in household goods sales, which dragged down non-food sales.
UK retail endured its 11th month of footfall decline as consumers held out for the Black Friday sales and Christmas shopping discounts. According to the latest BRC-Springboard Footfall and Vacancies Monitor, footfall in October fell 2% year-on-year. High street footfall fell by 2.3%, the third consecutive month of decline, while retail parks recorded a 0.2% fall after two months of positive growth. However, shopping centre footfall decline deepened to 3.3%, marking 19 months of consecutive decline.
Weak sales and the burden of high rates and debt continue to plague the retail sector. According to new research from PricewaterhouseCoopers and the Local Data Company, high street stores have been closing at a rate of 14 per day throughout the first half of 2018 and the sector’s troubles are “unlikely to abate” in the near future. Furthermore, store openings have dropped by a third and are now easily outpaced by closures. The South East and Greater London have been worst hit, while the East, North East and Midlands are not far behind.
On a brighter note, TK Maxx will open a shop on Oxford Street for the first time. The discount fashion retailer has struck a deal to fill the 30,000 sq ft store vacated by New Look at 203-207 Oxford Street. It has signed a 10-year lease for an annual rent of £2.5m at the four-floor store.
INVESTMENT MARKET
Residential
Buy-to-Let (BTL) landlords continue to offload stock, with ARLA reporting that an average of four landlords per member branch sold properties in September. A recent study from Paragon Mortgages calculated that the average size of landlord portfolios has dropped by 16% over the past four years as landlord confidence in the market has dropped.
The National Landlords Association (NLA) has calculated that the average BTL property will be £850 per annum less profitable as a result of recent Government policy changes to the sector. Landlords who remain in the sector are expected to counter this loss by raising rents and/or deleveraging with an overall 7% increase in rents the projected outcome.
In contrast, the institutional/large corporate end of the market continues to increase its commitment to the sector. Grainger has reportedly agreed to buy the stake in GRIP REIT it didn’t already own from Dutch pension fund APG for £396m. It already manages GRIP and currently has a 24.9% stake in the vehicle, which holds 35 properties with a gross asset value of £696m.
Aberdeen Standard Investments has committed to investing £1.8bn in residential property across Europe over the next four years as part of a wider strategy launched last year to double its €49bn real estate holdings by 2025.
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Figure 11: Residential gross yields: 2-bed flats (at 27 Nov 2018) Source: Zoopla/Chestertons Research
Barking and Dagenham 5.52% Havering 5.38% City of London 5.36% Hammersmith and Fulham 4.91% Bexley 4.90% Hillingdon 4.86% Sutton 4.85% Tower Hamlets 4.76% Redbridge 4.74% Ealing 4.64% Merton 4.62% Newham 4.57% City of Westminster 4.51% Croydon 4.50% Brent 4.46% Waltham Forest 4.38% Hounslow 4.36% Lewisham 4.33% Greenwich 4.28% Bromley 4.27% Harrow 4.25% Camden 4.20% Barnet 4.18% Kingston upon Thames 4.05% Richmond upon Thames 3.96% Islington 3.76% Haringey 3.74% Kensington And Chelsea 3.61% Hackney 3.59% Enfield 3.55% Southwark 3.49% Wandsworth 3.48% Lambeth 3.21%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%
Commercial
The City investment market was active in October and the £10bn barrier is likely to be broken for the calendar year, despite a shortage of properties available for sale. Investment volume in the West End was also up in October, albeit at a lower level than in the City. Investment in Midtown’s office market hit a record level in the third quarter of this year, boosted by overseas investor activity. Turnover was over 100% up on the same quarter last year, with overseas money accounting for 91% of the total.
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Among the major deals recorded in October were CDL’s acquisition of 125 Old Broad Street (offices & retail) for £385m at a yield of 4.59%, KB Securities purchase of 125 Shaftsbury (offices & retail) for £267m at a yield of 4.56% and Ella Valley Capital’s £179m purchase of 55 Gresham Street (offices) reflecting a yield of 3.95%.
Prime City office yields were stable at 4.0% in October. West End prime office yields were also unchanged at 3.25%.
The government has introduced special rules for overseas investors in UK property funds in the Finance Bill 2018-19. The changes mean that tax exempt overseas investors, such as pension funds, will not have to pay capital gains tax on disposals if they invest in the UK through a fund. The Bill also removes the exemption on paying corporation tax for overseas companies that own UK property. From April 2020, non-UK businesses holding UK property will pay income and corporation tax.
The Government has also introduced a new tax allowance for structures and buildings. Commercial property owners will be able to deduct, over time, the cost of new buildings and refurbishment from their taxable income.
The changes follow the Budget announcements which included Treasury proposals to give REITs an exemption to capital gains tax when they sell UK properties held in company structures.
CONTACT
Chestertons is one of London’s largest estate agencies and has a network of over 30 offices offering sales and lettings services, in addition to a strong international presence including Caribbean, Middle East, Monaco, France, Spain, Portugal, Switzerland and Australia. For further information please contact one of the following:
Nicholas Barnes John Woolley Head of Research Head of Valuation T: +44 (0) 20 3040 8406 T: +44 (0) 20 3040 8513 E: [email protected] E: [email protected]
The contents of this report are intended for the purpose of general information and should not be relied upon as the basis for decision taking on the part of the reader. Although every effort has been made to ensure the accuracy of the information contained within this report at the time of writing, no liability is accepted by Chesterton Global for any loss or damage resulting from its use. Reproduction of this report in whole or in part is not permitted without the prior written approval of Chesterton Global. November 2018.