UK Commercial & Residential Property Markets Review: January 2019 | 1
UK Commercial & Residential Property Markets Review: January 2019 | 2
CONTENTS
Economic overview page 3
Residential property
- National sales page 5 - London sales page 7 - New homes page 9 - National lettings page 10 - London lettings page 12
Commercial property
- London office market page 13 - Retail market page 13
Investment market
- Residential page 15 - Commercial page 16
Contact page 16
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ECONOMIC OVERVIEW
GDP Growth
GDP growth slowed to 0.3% in the final quarter of 2018, its lowest rate in six months. Manufacturers suffered their longest period of monthly falls in output since the financial crisis as they were hit by weaker overseas demand, with car production and the pharmaceutical industry both performing poorly.
In addition to the Brexit headwinds, which are dampening business investment and consumer confidence, there are signs that the global economy is stuttering from the ongoing trade spat between the US and China, and a slowdown in a number of developed economies – notably China, Japan and Germany .
Despite this backcloth, the Treasury’s panel of independent forecasters estimated outturn GDP growth rate for 2018 was again held at 1.3% in January as was the 2019 forecast rate of 1.5%.
With less than three months to go before the UK’s scheduled exit from the EU, it is exasperating that we still don’t know what is going to happen. There are various possible outcomes, with differing degrees of likelihood, ranging from a modified deal acceptable to the UK and Brussels to “No Deal.” The domestic political rancour could also result in a General Election and a change of Government which could be very damaging for the property industry. It is also not beyond the realms of possibility that we will remain in the EU, especially if a new government is elected and with or without a second referendum.
Figure 1: UK GDP growth outlook Source: HM Treasury Forecast Panel
3.0%
2.5%
2.0% 1.8% 1.7% 1.6% 1.5% 1.5% 1.3%
1.0%
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Inflation & interest rates
Annual inflation dropped again in December to its lowest rate in nearly two years – CPI was down to 2.1% and RPI down to 2.7%. The Treasury’s forecast panel projects that CPI inflation will
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fall to 1.9% in 2019. It also forecasts a fall in RPI inflation, although its 2.9% projection is already above the actual rate and is likely to be lowered next month.
The Bank of England’s Monetary Policy Committee did not meet in January and Bank Rate therefore remains at 0.75%. Concerns about the extent of Brexit disruption and a slowdown in the global economy mean that Bank Rate may well remain unchanged for the next few months at least.
UK 3 month Libor rates have nudged upwards this month and as at 25th January stood at 0.93%. 5 year swap rates have remained broadly stable and stood at 1.24% at the same date.
Figure 2: Inflation & Bank Rate forecasts Source: HM Treasury Forecast Panel & ONS
3.50% 3.3% 3.3% 3.1% 2.9% 3.00% 2.7%
2.50% 2.1% 2.1% 1.9% 2.0% 2.0% 2.00% 1.92% 1.50% 1.69% 1.00% 1.37% 1.10% 0.50% 0.75%
0.00% 2018 2019 2020 2021 2022
Bank Rate (q4) CPI RPI
Employment and earnings growth
Employment remains buoyant while unemployment has stabilised, although if the pace of retail job losses continues these statistics are likely to worsen as the year progresses. The latest figures from the ONS show the employment rate at 75.8%, higher than for a year earlier (75.3%) and the highest since comparable estimates began in 1971. The unemployment rate was estimated at 4.0% and has not been lower since the period December 1974 to February 1975.
Latest estimates show that average weekly earnings for employees in Great Britain in nominal terms increased by 3.3% excluding bonuses, and by 3.4% including bonuses, compared with a year earlier. In real terms earnings rose by 1.1% excluding bonuses, and by 1.2% including bonuses, compared with a year earlier.
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RESIDENTIAL PROPERTY
National sales market
Latest HMRC data reveal that residential transactions fell sharply in December – by 11.5% in the UK and by 10.0% in England, although the compared to December 2017 the decline was far less steep at 2.9% and 1.9% respectively. Nonetheless, sales over the year as a whole held up remarkably well, passing the one million mark in both the UK and England and were only around 2% down on the 2017 totals.
Figure 3: Monthly residential property transactions (non-seasonally adjusted) Source: HMRC
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UK England
Latest Land Registry data shows that national average house price growth in the 12 months to November 2018 reached 2.8% in the UK and 2.6% in England, representing a slight acceleration compared to October. The average house price in the UK now stands at £230,630 compared to £247,430 in England.
Rightmove reports that the price of property coming to market in January rose by 0.4%, the lowest monthly rise at this time of year since January 2012. The average asking price was also 0.4% down on the January 2018 figure, with the northern part of the country faring better in terms of both pricing power and willingness to move than the rest of the country.
The largest annual increase was recorded by second steppers (1.6%), triggered by potential home- mover visits to the Rightmove website which reached record highs for the first two weeks of a new year, and were up by 5% on the same period a year ago. In contrast, the prime market suffered a 0.4% decline over a 12 month period, although a 0.6% monthly increase was recorded in January.
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Figure 4: Average annual house price growth: UK & England Source: Land Registry/ONS
5%
4%
3%
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UK England
At regional level, annual house price growth is strongest in the Midlands: West Midlands at 4.6% and East Midlands at 4.4%. Only London remains in negative growth territory and this is moderate at - 0.7%.
Figure 5: Average regional house price & annual price growth (Nov 2018) Source: Land Registry
4.6% £500,000 4.4% 4.3% 5.0% £450,000 4.0% 4.0% £400,000 3.1% £350,000 2.6% 3.0% £300,000 2.0% £250,000 2.0% 1.1% £200,000 £150,000 1.0% £100,000 -0.7% 0.0% £50,000 £0 -1.0%
Ave price 12 month growth
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Figure 6: Mortgage approvals Source: UK Finance
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First time buyers Home movers
Mortgage approvals for house purchase rose in November 2018 as buyers took advantage of continued low interest rate deals. First time buyer loans rose by 8.4% month-on-month and were 5.8% higher than in November 2017. Loans to home movers rose by 6.8% over the month and by 1.1% year- on-year. Re-mortgaging was slightly up year-on-year (+1.3%) but was a hefty 23% down on the previous month – although activity in October was the highest recorded in a decade as a large number of fixed-rate deals came to an end.
Figure 7: Key mortgage lending indicators Source: UK Finance
First Time Buyer Nov-17 Nov-18 Loan-to-Value 84.7% 85.0% Loan Size £138,000 £142,500 Loan to Income Multiple 3.64 3.65 Repayment as % of Household Income 17.3% 17.4% Home Mover Nov-17 Nov-18 Loan-to-Value 72.5% 72.9% Loan Size £175,500 £180,000 Loan to Income Multiple 3.40 3.41 Repayment as % of Household Income 17.5% 17.7%
London sales market
Preliminary Land Registry data for the first 11 months of 2018 indicate a 17.9% reduction in sales compared to same period in 2017, although for resale transactions the drop was 15.7%. Affordability, stock shortages (Rightmove also reported that there was a 19% fall in properties coming to market in December compared to December 2017) and Brexit remain the principal drag factors on demand.
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Figure 8: Residential sales in London: Jan-Nov each year Source: Land Registry
120000 109086 103184 100000 94901 85387
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Figure 9: Annual price growth by London borough (November 2018) Source: Land Registry
Redbridge Southwark Bexley Hounslow Barking and Dagenham Haringey Islington Barnet Hillingdon Lewisham Ealing Havering Croydon Enfield Richmond upon Thames Greenwich Hackney Waltham Forest Sutton Lambeth Newham Bromley Merton Kingston upon Thames Wandsworth Hammersmith and Fulham City of Westminster Harrow Tower Hamlets Kensington And Chelsea Camden Brent City of London -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
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Prices are now falling in 23 boroughs on an annual measure and in the year to November Land Registry data show that sold prices in Greater London fell by 0.7%, compared to a 12 month fall of 1.7% in October, taking the average price to £472,901. The City recorded the steepest fall (-5.7%), while of the 10 boroughs which saw growth over the period, Redbridge (3.7%) was the top performer. According to Rightmove new seller asking prices fell by 1.8% in December 2018, the smallest drop recorded in December since 2013.
The prime central London market enjoyed a better second half of the year in 2018 with Lonres reporting that the number of properties going under offer was 6% up on the corresponding period in 2017. The £2m-plus segment of the market was especially active with a 12% increase in under offers recorded. Nonetheless, Lonres reported a 7.1% price drop for flats during 2018 and a 10% fall for houses.
The more active second half of last year can be attributed several principal factors: more vendors realised that if they wanted to attract offers they needed to lower their price expectations – in the final quarter Lonres noted that 53% of properties sold had their initial asking price reduced, with an average discount of 13.1%. In addition, many buyers who had been looking for some time decided that they would act rather than wait and possibly miss out on a property they really wanted and where the price had already come down to an acceptable level.
There are signs that more buyers in central London are ready to commit to deals. In the latter months of 2018, we witnessed a notable increase in buyers coming to the table as asking prices dropped to a level which reflected good value. This trend is likely to continue in 2019 while there is strong competition for the relatively limited number of available properties. Other than for those directly affected, Brexit appears to be less of a concern for buyers at this end of the market than pricing and quality of product.
Unless there is a substantial rise in forced sales, we should see prices stabilise this year. Values in some of the central locations are already nearly a fifth below their peak levels, which when added to sterling weakness, has made prime London property look even more attractive for overseas buyers.
New homes market
The London new homes’ market continues to suffer. Private sales of new homes in London in 2018 were 9.5% down on the previous year according to Molior as pricing issues and political uncertainty affected buyer confidence. Nearly a third of sales were to build-to-rent investors, which rose by 19% compared to 2017.
At the end of 2018, 48% of new homes (30,752 units) under construction were unsold, slightly up on the end-2017 figure of 45%. A further 2,740 completed units were also unsold, over two thirds higher than at the end of 2017. In response to the rising supply, developers continue to scale back new development. Although completions were 4.2% higher than in 2017, construction starts were 15.4% lower.
Despite the drop in sales, asking prices dropped only marginally last year although on some developments they rose. However, achieved prices may have taken more of a hit after buyer
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incentives are taken into account. Molior reports that average asking prices stood at £896/sq ft at the end of 2018 with Inner London at £1,377/sq ft and Outer London at £656/sq ft.
Figure 10: London new homes' sales analysis Source: Molior
30000 70.0%
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Sales % U/c and unsold (year-end) % Completed and unsold (year-end)
Note: data is only for schemes of 20 or more units
National lettings market
Rents in the UK rose by 1.5% in December 2018 compared to the same month a year ago, according to the Homelet Index. The average monthly rent now stands at £921. When London is excluded, the average UK rental value was £763 in December 2018, up 0.7% on last year. Rents roses in seven out of the 12 regions covered in the index, down from nine in the previous month, with the East Midlands (2.9%) recording the strongest growth excluding London.
The latest monthly survey from ARLA reveals that the number of tenants experiencing rent increases fell for the third month running in November 2018 to reach the lowest level seen since last February. 21% of agents reported that landlords increased rents, compared to 24% in October and 31% in September. However, year on year the number of tenants experiencing rent rises was up from 16% in November 2017.
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Figure 11: Average monthly asking rents & annual growth by region (Dec 2018) Source: Homelet
£1,800 6.0% 4.7% £1,600 4.0% 2.9% £1,400 2.7% 2.1% 1.7% £1,200 2.0% 0.9% £1,000 0.0% 0.0% £800 -1.4%
£600 -2.0%
£400 -4.6% -4.0% £200
£0 -6.0% Greater East South West North South Yorks & East Of North London Midlands West Midlands West East Humber England East
The ARLA survey also noted that the supply of properties available to rent fell by 7.6% in November compared to the previous month to reach its lowest level since April, and was down 4% year on year. Tenant demand also decreased in November, with the number of newly registered applicants per branch dropping to 55 on average, compared to 71 in October. Affordability may partially explain the drop in tenant, with a two percentage point increase in the national rent-to-income ratio recorded by Homelet
Figure 12: Household rent to income ratio by region Source: Homelet
Dec-17 Dec-18 North East 22.3% 24.4% Yorks & Humber 24.9% 26.7% North West 26.1% 28.7% East Midlands 27.4% 28.8% West Midlands 27.2% 29.6% UK (ex. London) 27.7% 29.7% East of England 28.6% 30.7% UK 28.4% 31.1% South East 29.4% 31.8% South West 29.8% 32.5% London 31.4% 35.9%
A Private Members Bill that will enable tenants to sue rogue landlords if their homes are not fit for human habitation has received Royal Assent and will become law in spring 2019. Once in force, the legislation will give tenants the right to take legal action in the courts for breach of contract if a property is not fit for human habitation. The Homes (Fitness for Human Habitation) Act amends the relevant sections of the Landlord and Tenant Act 1985, updating the ‘fit for human habitation’ test, although it only applies to England.
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London lettings market
Rents in Greater London increased by 4.7% in December last year compared to December 2017, taking the average monthly rent to £1,596 per month, according to the Homelet Index.
Figure 13: London borough monthly asking rents for 2-bed flats (as at 28 January 2019) Source: Zoopla
Westminster £4,817 City of London £4,704 Kensington & Chelsea £4,180 Camden £3,312 Hammersmith & Fulham £3,124 Southwark £2,662 Islington £2,501 Tower Hamlets £2,419 Wandsworth £2,273 Hackney £2,229 Lambeth £2,203 Merton £1,829 Richmond upon Thames £1,820 Ealing £1,800 Newham £1,731 Hounslow £1,704 Brent £1,703 Haringey £1,692 Barnet £1,669 Greenwich £1,660 Lewisham £1,524 Kingston upon Thames £1,520 Harrow £1,410 Waltham Forest £1,404 Hillingdon £1,355 Enfield £1,350 Redbridge £1,323 Bromley £1,292 Croydon £1,288 Barking & Dagenham £1,276 Sutton £1,214 Havering £1,210 Bexley £1,155 £0 £1,000 £2,000 £3,000 £4,000 £5,000 £6,000
There was a notable improvement in tenant demand in central London in 2018. The number of registered applicants and viewings both rose by over one fifth compared to the previous year, while overall lettings rose by 7% over the year. As in the wider London market, there was a reduction in the number of properties available to rent, reflecting landlords either reducing portfolios or not taking on new stock in reaction to increased operating costs and more onerous legal requirements. Combined with the increase in tenant demand, this resulted in a 3.6% reduction in overall availability in central London over the year according to Lonres.
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COMMERCIAL PROPERTY
London office market
In spite of Brexit distractions, office take-up in central London in 2018 was nearly one fifth higher than in the previous year and offices due to open in London in 2019 are already nearly 50% let. Space under offer coming into 2019 is also running at a high level and among major expected deals is Sony’s music arm taking 124,000 sq ft across six floors at 4 Handyside Street in King’s Cross and a 420,000 sq ft letting at 5 Bank Street in Canary Wharf.
A Deloitte survey revealed that office space under construction in central London at the end of 2018 was 13% lower than six months earlier. Despite the strong take-up and reduced construction activity, availability nudged upwards to 6.3% over the final quarter of 2018, ranging from 8.6% in Docklands to 4.7% in the West End.
Prime rents in the West End currently average £110/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 £68/sq ft with an average rent-free period of 24 months.
A potentially ground breaking case is being tried in the High Court, the outcome of which could have significant implications for the commercial property occupier market. The case revolves around whether Brexit triggers the rarely used legal doctrine of "frustration" in the case of the European Medicines Agency (EMA) and its £13m-a-year lease of premises at Canary Wharf, which runs until 2039 with no break clause and which the EMA is trying to walk away from.
The EMA is using an obscure English legal doctrine of "frustration" – which is when an unexpected event occurs which fundamentally changes the performance of a contract. The doctrine has never been successfully argued in court in Britain and the case is being watched closely in legal and commercial property circles amid fears it could open the door to similar claims from a variety of companies whose business is impacted by Brexit.
Retail market
Despite the woes of the retail sector, retail sales volume (seasonally adjusted) in 2018 accelerated to 2.7% compared to 2.0% in 2017. However, on a quarterly and monthly basis, December 2018 retail sales declined by both volume and value. Online sales accounted for 20% of total retail spend in December, with an overall growth of 13.9% when compared with the same month a year earlier.
Nonetheless, the sector faces a difficult road ahead, especially the bricks-and-mortar operators. Retailers experienced their worst Christmas in a decade, according to the British Retail Consortium (BRC) and even price cutting appeared not to have been enough to encourage shoppers.
The latest BRC-Springboard Footfall & Vacancies Monitor Footfall showed numbers declined for the 13th month in a row in December - overall footfall fell by 2.6% compared to a year previous, albeit a smaller decline compared to the previous year when it fell by 3.5%. High street footfall declined by 2.1%, marking five consecutive months of weakening, while retail parks saw footfall drop by 2.1%.
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Shopping centre were worst hit, with footfall declining by 3.9%. Shopping centres have now recorded 21 consecutive months of footfall decline.
Figure 14: Annual retail sales growth by volume (seasonally adjusted) Source: ONS
5.00% 4.70%
3.90% 4.00% 3.50%
3.00% 2.70% 2.00% 2.00% 1.10% 1.00% 0.60%
0.00% -0.10% -1.00% -0.80%
-2.00% 2010 2011 2012 2013 2014 2015 2016 2017 2018
According to Deloitte, there was a 53% increase in Company Voluntary Agreements in 2018, while the Centre for Retail Research (CRR) reports that nearly 150,000 jobs were lost and 20,000 outlets were closed. CRR predicts that job losses in the sector could rise by as much as 20% this year. The next round of business rates bills in April is expected to affect nearly 50,000 retail premises where the rateable value is above £51,000.
The Government is attempting to prop up the high street with the launch of the £675m Future High Streets Fund on Boxing Day. Local councils will bid for their share of funds to be used to transform high streets into community hubs, aiming to reduce the reliance on retail. However, the sector is calling for a reform of the rates system and a levelling of the playing field with regard to the taxation of online retailers.
A large part of Oxford Street is to be redeveloped into a landmark £300m office and retail scheme. Daejan Investments has received planning approval for a major regeneration that will revamp the east side of the central London shopping district. Westminster City Council has approved the demolition and redevelopment of six buildings on Oxford Street, Berwick Street and Wardour Street. The new scheme will comprise a seven-storey block with around 45,000 sq ft of offices, 30,000 sq ft of retail and a 9,000 sq ft nightclub.
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INVESTMENT MARKET
Residential
In the buy-to-let market house purchase activity remains subdued as landlords take stock of the increased operating costs as a result of tax and regulatory changes, while re-mortgaging continues to grow as landlords lock into attractive rates. The number of new mortgages for house purchase in November fell by 9% compared to the same month a year ago while re-mortgage numbers rose by 9.5% over the same period. Meanwhile landlords are bracing themselves for their tax relief on finance related costs to be cut to just 25% from April.
Figure 15: BTL Mortgage Lending (number of loans approved) Source: UK Finance
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
House purchase Remortgage
The build-to-rent sector continues to expand, both in London and increasingly in the main regional centres around the country which typically offer lower entry costs and better returns. Landsec, British Land and the Canary Wharf Group – which have traditionally focused on offices and retail – are among recent major players moving into the sector. Aberdeen Standard Investments’ latest pan-European housing fund has recently made its first investment in the UK, investing £60m to forward fund a build- to-rent project in Birmingham.
Capital & Regional, which has planning consent in east London for 500 units at The Mall Walthamstow and 214 units at The Exchange in Ilford, and is exploring the possibilities for adding BTR to some of its other developments.
The sector is not only expanding but is also beginning to evolve new strategies. More attention is beginning to be paid to enhancing the tenant experience and services provision rather than simply offering the more traditional amenities. As the sector matures, owners and managers of BTR schemes should find it easier to strike a balance between the level of amenities and services offered and the rents tenants are willing to pay for them, a change which will likely be driven by the growing competition in the sector.
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Commercial
Investor appetite for London real estate proved resilient in 2018 in spite of the uncertainty surrounding Brexit. Nearly £20bn was invested in direct property in the City and West End markets alone. In contrast, the number of investors wanting to take their money out of property funds is growing. According to Bloomberg, almost £500m was withdrawn from open-ended funds in the final quarter of 2018, as nervousness grew about the impact that a hard Brexit could have on commercial property. This is the highest amount since the quarter preceding the 2016 referendum and compares to just £58m in the preceding quarter.
Major recent deal announcements include:
Hong Kong investor Lai Wing-To has exchanged contracts to buy the 23,265 sq ft office and retail building at 2-5 Old Bond Street, W1 for £150m at a yield of 2.75%. Starwood Capital acquired the mixed-use Southbank Central in SE1 for £255m at a yield of 5.52%. South Korean asset manager Hanna Alternative purchased the mixed-use No.1 Poultry in EC2 for £182m at a yield of 4.7%. Hanna Alternative also bought Sanctuary Bridge (offices) for £285m at a yield of 4.18%.
Prime City office yield remain stable at 4.0%-4.25% as do West End prime yields at 3.25%-3.50%.
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. January 2019.