UK Commercial & Residential Property Markets Review: December 2018 | 1

UK Commercial & Residential Property Markets Review: December 2018 | 2

CONTENTS

Economic overview page 3

Residential property

- National sales page 5 - London sales page 6 - London new homes page 7 - National lettings page 8 - London lettings page 9

Commercial property

- London office market page 11 - Retail market page 11

Investment market

- Residential page 12 - Commercial page 13

Contact page 14

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ECONOMIC OVERVIEW

GDP Growth

After a solid start to Q4, GDP growth faltered somewhat in October and the business surveys suggest that output barely increased at all in November. Moreover, household spending weakened considerably over the last month and there is growing evidence that the impact of Brexit uncertainty on the economy is starting to intensify.

The boost to exports from the pound’s post-referendum fall has all but run its course and other survey measures for Q4, such as the export orders balance of the manufacturing PMI, point to weak growth in goods exports.

Nonetheless, the Treasury’s panel of independent forecasters held its December forecast GDP growth rate for 2018 at 1.3% and pointed to GDP growth accelerating to 1.5% in 2019.

At the time of writing, Brexit remains up in the air with various outcomes possible. It seems highly unlikely that Parliament will approve the Prime Minister’s deal agreed with the EU and equally unlikely that the EU will grant any further concessions. A “no deal” scenario is also unlikely to get through Parliament, which leaves us with the prospect of a No Confidence vote in the Commons with another General Election to follow if a new government with the support of a majority of MPs cannot be formed within a period of 14 calendar days.

A change of government, another referendum and/or a unilateral revoking of Article 50 courtesy of a European Court of Justice 11th hour ruling (thereby keeping the UK in the EU) are all possible outcomes – none of which is likely to prove any less divisive than the current position.

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%

1.0%

0.5%

0.0% 2017 2018 2019 2020 2021 2022

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Inflation & interest rates NEXT ONS RELEASE: 19 DEC

CPI inflation dropped at 2.2% in November and RPI inflation fell to 3.2%. The Treasury’s forecast panel projects CPI inflation will stabilise at 2.0% in 2019, while RPI inflation will settle at 3.0%.

The Bank of England’s Monetary Policy Committee did not meet in December and Bank Rate therefore remains at 0.75%. UK 3 month Libor rates have again moved out this month and as at 19th December stood at 0.91%, while 5 year swap rates have dropped again to stand at 1.24%.

Figure 2: Inflation & Bank Rate forecasts Source: HM Treasury Forecast Panel & ONS

4.00% 3.6% 3.50% 3.3% 3.3% 3.0% 3.0% 3.0% 3.1% 3.00%

2.50% 2.0% 2.0% 2.0% 2.0% 2.1% 2.00%

1.50% 1.92% 1.69% 1.00% 1.37% 1.13% 0.50% 0.75% 0.50% 0.00% 2017 2018 2019 2020 2021 2022

Bank Rate (q4) CPI RPI

Employment and earnings growth

Despite concern about the strength of the economy, the labour market remains strong. Latest data show that the employment rate has risen to 75.7%, higher than for a year earlier (75.1%) and the joint- highest estimate since comparable estimates began in 1971. The unemployment rate, at 4.1%, is lower than the corresponding figure for last year (4.3%).

Earnings growth continues to outpace inflation. Average weekly earnings in nominal terms increased by 3.3%, both excluding and including bonuses, compared with a year earlier. In real terms, they rose by 1.0% excluding bonuses, and by 1.1% including bonuses.

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RESIDENTIAL PROPERTY

National sales market

Latest Land Registry data shows that national average house price growth slowed in the 12 months to October – to 2.7% in the UK and to 2.4% in England. The average house price in the UK now stands at £231,095 compared to £274,914 in England.

Figure 3: Average annual house price growth: UK & England Source: Land Registry/ONS

6%

5%

4%

3%

2%

UK England

Figure 4: Average regional house price & annual price growth (September 2018) Source: Land Registry/ONS

£500,000 4.90% 6.00% £450,000 4.40% 4.30% 5.00% 3.80% £400,000 4.00% £350,000 2.10% 2.10% 3.00% £300,000 1.50% 2.00% £250,000 1.00% £200,000 -0.10% £150,000 0.00% £100,000 -1.70% -1.00% £50,000 -2.00% £0 -3.00%

Ave price 12 month growth

At regional level, annual house price growth is now strongest in the North West at 4.9%. Two regions - London (-1.7%) and the North East (-0.1%) – saw prices fall over the 12 months to October.

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Figure 5: Mortgage approvals Source: UK Finance

40000

35000

30000

25000

20000

15000

10000

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First time buyers Home movers

Recent credit conditions’ surveys indicate that given weak house price expectations, lenders are becoming more cautious about extending new mortgage credit. Nonetheless, mortgage approvals for house purchase rose in October for the first time in four months according to UK Finance. The number of first time buyer mortgages rose by 8.2% year-on-year in October, and were 10.8% higher than in September. Home mover mortgages increased by 4% y-o-y and were 13.2% up on the previous month.

A competitive market in 2018 means that re-mortgaging has reached its highest rate for a decade as home owners have had access to a wide range of deals. Data from UK Finance shows that there were 50,500 re-mortgages completed in October, a rise of 23.2% compared with the same month in 2017. By value, re-mortgaging was 22.7% higher year on year.

London sales market

Preliminary Land Registry data for the first 10 months of the year indicate a 10% reduction in sales compared to same period in 2017. In addition to stock shortages, affordability issues and a hint of seasonal slowdown, Brexit appears to be having more of a negative impact the closer we move towards B-day, in particular for EU nationals.

Prices are now falling in 22 boroughs on an annual measure and in the year to October, the Land Registry reports that sold prices in Greater London fell by 1.7%, taking the average price to £473,609. The Index reveals that asking prices in December were 1.1% lower than in December 2017. Interestingly, Inner London asking prices were 1.4% higher over the period whereas in Outer London they fell by 3.5%.

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Figure 6: Annual price growth by London borough (October 2018) Source: Land Registry

Greenwich Barking & Dagenham Bromley Havering Haringey Waltham Forest Bexley Redbridge Sutton Hammersmith & Fulham Ealing Wandsworth Lewisham Hounslow Enfield Merton Westminster Richmond upon Thames Newham Camden Islington Brent Kingston upon Thames Barnet Croydon Kensington & Chelsea Harrow Lambeth Hillingdon Southwark Hackney Tower Hamlets City of London -16.00% -14.00% -12.00% -10.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00%

Source: Land Registry

Conditions remain challenging in the prime central London market. Between September and November, achieved prices fell by 8% compared to the same period in 2017 and sales volume was 16.5% lower according to Lonres data. It remains a buyers’ market with the average discount on initial asking price between September and November standing at 11.2%.

As at 17th December, 51% of available properties had experienced a price reduction and availability was 2.9% higher than at the same point in 2017. Nonetheless, there remain signs that conditions are beginning to turn as evidenced by the number of sealed bids on properties.

New homes market

2018 has been a tough year for the London new homes market. Annualised data for the first nine months suggest that sales will be 8% lower than in 2017, around a third of which will have been sold to the built-to-rent sector. At the end of September, 66,000 units were under construction – 46% of which were unsold.

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The better news is that developers are reining back on new construction. Pro-rata in the first nine months of 2018, there were 31% fewer planning applications than in 2017 and 15% fewer starts, although completions were only down by 2%.

Getting an accurate handle on pricing is difficult as asking prices are liable to be quite different from achieved prices. Anecdotal evidence points to some contracts being flipped before completion at anything up to a 25% discount as speculators look to make a quick exit. Further evidence suggests that even where asking price, or near to it, is achieved developers have given away various incentives which would effectively reduce the headline price.

Housebuilders have suffered on the stock market at various times this year. Most recently, shares in Berkeley Group, Persimmon, and fell between 3.5% and 5.1% following the delayed Brexit vote in parliament.

The weaker London market is prompting some developers to diversify. has been shifting its focus away from London and the South East. The Berkeley Group has also moved into the regions, selling its first project in Birmingham and acquiring two further sites for development. has closed its London division after warning that the market for new homes in the capital is more difficult than previously anticipated. Meanwhile, is moving away from sales to focus on rentals.

Figure 7: London new homes' sales analysis Source: Molior

30000 70.0%

25000 60.0%

50.0% 20000 40.0% 15000 30.0% 10000 20.0%

5000 10.0%

0 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Q1-Q3)

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

The latest Homelet Index shows that average rents across the UK rose by 1.5% in the year to November 2018, taking the average monthly rent to £918. When London is excluded, the average UK monthly rent was £760, up 0.9% on last year.

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Rents rose in 9 out of the 12 regions covered in the Index. The strongest annual growth was recorded in London (4.4%) followed by the South West (2.1%). In England, rents fell in the North East (-3.0%) and Yorkshire & Humberside (-0.2%).

Figure 8: Average monthly asking rents & annual growth by region (Nov 2018) Source: Homelet

£1,800 5.0% 4.4% £1,600 4.0% £1,400 3.0%

£1,200 2.1% 1.9% 2.0% 1.6% 1.3% 1.3% £1,000 1.0% 0.4% £800 -0.2% 0.0% £600 -1.0% £400 -2.0%

£200 -3.0% -3.0% £0 -4.0% Greater South West East South North East Of Yorks & North London West Midlands Midlands East West England Humber East

Ave rent 12 month growth (%)

ARLA reports that demand from prospective tenants increased in October, with the number of applicants registered per branch rising to 71 on average, compared to 63 in September. Supply also rose with the number of managed properties per branch increasing from 194 in September to 198 in October. This is the highest figure seen since December 2017, when supply stood at 200 and is up 9% year on year.

The number of tenants successfully negotiating rent reductions jumped from 2% in September to 3.7% in October. This is the highest figure seen since records began in January 2015. In line with this, the number of tenants experiencing rent increases fell for the second month running in October, with 24% of agents reporting that landlords increased rents, compared to 31% in September and 40% in August.

The average ratio of rent to household income continues to rise. In November the UK ratio stood at 30.8% (29.4% excluding London) compared to 28.2% (27.4% excluding London) in November 2017, according to Homelet.

Airbnb is considering developing its own buildings. Co-founder and Chief Product Officer Joe Gebbia has announced the 2019 launch of Backyard, a new venture which is "an endeavour to design and prototype new ways of building and sharing homes," indicating that both single-family and multifamily construction are being considered. Whatever Backyard builds, it will be listed on Airbnb as a shared unit, although Gebbia cautioned that Backyard is still in its embryonic stage and could go in any number of directions.

London lettings market

Rents in London increased by 4.4% in the year to November 2018, according to Homelet. The average rent in the capital now stands at £1,597 a month – a staggering 110% higher than the UK

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average excluding London. Affordability has worsened from 31.1% (average household income versus rent) in November 2017 to 35.8% in November this year. Supply in London is the lowest among the regions, averaging just 118 managed properties per branch according to ARLA.

Figure 9: London borough monthly asking rents for 2-bed flats (as at 17 December 2018) Source: Zoopla

City of London £6,586 Westminster £4,860 Kensington & Chelsea £4,253 Camden £3,302 Hammersmith & Fulham £3,179 Southwark £2,615 Tower Hamlets £2,594 Islington £2,480 Hackney £2,287 Wandsworth £2,250 Lambeth £2,112 Merton £1,830 Richmond upon Thames £1,826 Ealing £1,802 Brent £1,723 Haringey £1,702 Hounslow £1,686 Barnet £1,678 Greenwich £1,671 Newham £1,661 Lewisham £1,526 Kingston upon Thames £1,505 Waltham Forest £1,436 Harrow £1,391 Enfield £1,372 Hillingdon £1,355 Redbridge £1,316 Bromley £1,290 Croydon £1,267 Barking & Dagenham £1,267 Sutton £1,191 Havering £1,186 Bexley £1,101

£0 £1,000 £2,000 £3,000 £4,000 £5,000 £6,000 £7,000

Lettings activity in prime central London has slowed in the last three months (Sep-Nov) with the number of transactions 1.5% lower than in the previous three month period according to Lonres. This is in part due to a seasonal slowdown but also the result of a reduction in supply – Lonres reports that available stock in the second week in December was 7% lower than at the corresponding point in 2017.

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Achieved rents were 9.1% higher in Sep-Nov than in the preceding three month period, despite an average discount of 2.8% on asking rent. Nonetheless Landlords still need to be flexible in order to attract tenants as Lonres reports that 34% of properties available to rent as at the second week of December had been reduced in price.

COMMERCIAL PROPERTY

London office market

As recently as the beginning of 2017 some pundits were speculating that London could lose up to 200,000 financial services jobs to the EU due to the loss of, inter alia, passporting. However, a recent Reuters survey of more than 100 companies in the sector came to the conclusion that only 630 had actually moved or been created in the EU to date. The same survey suggested that in the event of a "hard" Brexit the total job losses would be around 5,800.

On the other hand, according to data from City recruiter Morgan McKinley, the number of new jobs advertised in the Square Mile at the beginning of December dropped by almost 40% year-on-year, with the number of those looking for a new role falling by 28%.

While it could be argued that survey results are equally at risk of positive and negative hype, the metrics on the ground in the London office market point to a more positive story than anyone expected back in 2016. Although November take-up was down on the previous month, the occupational market has enjoyed a strong year, with take-up in the first 11 months of 2018 only around 5% down on the same period in 2017 - which was the strongest ever year in central London. Around one fifth of take-up was accounted for by flexible space operators.

Central London availability stood at 6.5% in November, two thirds of which was in second-hand space. Submarket availability ranged from just under 10% in Docklands down to 4.8% in the West End, while City availability stood at 8.5%.

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 an average rent-free period of 24 months.

Retail market

Consumer confidence in the UK sank to its lowest level for the year as the economic outlook for the next 12 months reached its weakest point since the Brexit referendum. According to the GfK Consumer Confidence Index, consumer sentiment fell to -13 in November from -10 in October, the lowest reading since December 2017.

The fall in confidence is reflected in recent retail statistics. According to the latest Footfall & Vacancies Monitor from the British Retail Consortium and Springboard, overall footfall in November fell by 3.2%, the largest drop of any November since Springboard started publishing footfall data in 2009. It also marked the 12th consecutive month of footfall decline. The East, South East and East Midlands experienced the deepest declines of 5.6%, 4.8% and 4.7%, respectively.

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The high street suffered a footfall decline of 3.8%. This marked four months of consecutive weakening for the high street and the largest decline since April when it fell by 4%. Retail park footfall declined by 1.4% while shopping centre footfall declined by 3.8%.

In-store retail sales in November were the worst for the month in three years despite Black Friday efforts, according to BDO’s monthly High Street Sales Tracker, falling by 2.6% compared to November 2017. This follows a 2% year-on-year drop in October and marks the 10th month in a row of negative in-store growth.

Black Friday week provided little relief for the high street, with bricks-and-mortar retail sales remaining flat at 0.4%, and some analysts suggesting that shoppers have become jaded by the discounting campaigns carried out by various retailers. In contrast online retail enjoyed a bumper month, with 18.2% year-on-year growth in November.

Weak trading, with consumers hanging on for as long as they can in anticipation of pre-Christmas discounts, together with concern over Brexit has forced retailers to offer record levels of discounting. Deloitte has revealed analysis of 800,000 products that showed stores were attempting to jump-start consumer spending with discounts averaging almost 44%. The research predicts savings will increase to a new record of 48% by Christmas Eve. According to Deloitte, a number of key concerns including an over-supply of stock from a mild start to winter, and the resulting markdowns, had caused widespread discounting across the industry.

INVESTMENT MARKET

Residential

Figure 10: 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

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Purchase activity from BTL landlords picked up in October, which may be due to an increase in the number of discounted properties available for sale as other landlords look to reduce or churn portfolios. There were 6,100 new buy-to-let (BTL) purchase mortgages completed in October, up by 17.3% on the September figure although 9% lower than in October 2017. Re-mortgaging rocketed by 27.6% month-on-month and was 5.4% up on the October 2017 figure.

The Mayor of London has hinted that he is considering introducing rent controls across the capital in a radical overhaul of private rental laws, according to a recent newspaper article. However, the Labour Party in Wales has previously rejected rent controls arguing that they reduce incentives to invest in new property and lead to a reduction in the quality of housing.

Other proposed changes, which will be laid out the Mayor’s “London Model” due to be published in spring 2019, include ending section 21 “no fault” evictions. Assured shorthold tenancies would be replaced with open-ended tenancies, providing greater security of tenure to renters, according to the draft document.

In an interesting move, Legal & General Capital (L&GC) has acquired a Homebase store in Bath from that it plans to convert into a retirement living scheme. It is an example of the value of a site as a residential scheme far outweighing that of its retail value and there are likely to be more examples of this in the future. L&GC’s Inspired Villages Group aims to develop 3,500 new retirement units and is in the process of acquiring sites across the country.

Commercial

London has retained its crown as the world's most popular destination for cross-border investment into real-estate, in no small measure thanks to Asian buyers. In the City investment market alone, the volume of transactions over the first ten months of 2018 reached its highest ever level for that period (£9.5bn), 7.6% up on the same period in 2017.

Major recent deals include:

 Dukelease is under offer to buy the 191,144 sq ft Ibex House office building in the City for £120m, reflecting a yield of 5.02%.  Delancey and APG’s plans for Elephant & Castle £1bn shopping centre have been approved by City Hall. Under the plans, the shopping centre will be demolished to make way for 979 homes, a university campus and retail, office and leisure space. The development will include nearly 1,000 new homes for rent, of which 35% will be “affordable”.  Hana Alternative Asset Management has completed the £185m acquisition of One Poultry in the City.  Battersea Power Station has sealed a £1.6 billion deal to bring new owners on board amid worries that there will be construction delays. Permodalan Nasional Berhad, a fund manager with £50 billion of assets under management will complete the deal in the first quarter of next year. However, the investment only involves the Grade II-listed building itself and the six acres of land it sits on, but not the rest of the 42-acre riverside site being developed.

Prime City office yields were stable at 4.0%-4.25% in November. West End prime office yields were also unchanged at 3.25%-3.50%. Prime West End retail yields were at 2.25%-2.50%.

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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. December 2018.