UK Property - London Residential Review, Summer 2008

The much-publicised crisis in the sales market is setting the scene for a boom in the lettings market and professional property investment, according to Knight Frank’s latest London Residential Review.

The credit crunch has not curtailed demand for accommodation. However, buying an appropriate home is either impossible, as a result of tightened mortgage conditions, or regarded as unwise, given the short-term outlook for house prices.

As a result, many potential buyers are deciding to rent, with demand in the letting market increasing by as much as 30% on a year-on-year basis. Rents grew by as much as 16% in central London during 2007.

There has also been a noticeable change in sentiment. Renting is no longer seen as a short-term or second-rate option, with the rent itself viewed as ‘dead money’; instead, tenants see their accommodation as offering flexibility and value.

Tenants increasingly see themselves as staying in rented accommodation in the medium-term – meaning that demand for good quality, family homes is particularly strong.

However, with many frustrated vendors now choosing to rent out their homes given the uncertain outlook in the sales market, supply is also increasing. This is also markedly improving the quality of stock on offer, as most previously owner-occupied homes are furnished to a very high standard.

Consequently, rents look set to rise by only around 4% during 2008. This situation is only temporary, however, and this new supply should peter out towards the end of the year. Demand for rentals will continue to increase, given that there is no sign of relief in the sales market, and strong growth in rents will resume in late 2008 and early 2009.

Combined with falling capital values, this will make holding property for the rental income alone a far more viable option.

Liam Bailey, Knight Frank’s Head of Residential Research, comments:

“There are already signs that, given the current market, developers are opting to retain stock and let it out in the medium-term rather than sell it at discount prices, particularly in more fringe areas that are still being regenerated.”

“This benefits them in two ways – they do not have to take a hit on profits by selling, and they also gain from the improvements to the area produced by the new scheme, which will only be realised when the market begins to improve.”

“Also, with rents rising and property values falling, it will soon begin to make more sense to own property purely for the rental income. This will, in due course, attract more professional investors into the UK rental market. There are already signs that the Sovereign Wealth funds, among others, are taking notice of the changes. It will also provide dividends for buy-to-let investors who can stay the course.”

The latest edition of the residential review notes one other bright spot in an otherwise gloomy market: the so-called ‘super-prime’ sector of homes worth over £10m. There were 70% more such homes sold over the three months from April to June compared to the same period last year.

Although prices are no longer booming, except for the very best properties, it is highly unlikely that there will be significant falls – a testament to the ongoing attraction of London to an international super-rich that remains unaffected by the credit crunch.

In the wider sales market, the report notes a continuing difficulty in matching vendor and buyer expectations. Many owners, after years of rapid growth, have been unable to adjust to the new climate and are refusing to lower prices. This is producing a blockage in the market.

Meanwhile, there is no sign as yet of the averse conditions in the mortgage market easing. The Bank of England is more focussed on tackling inflation than easing the pain in the housing market, and the availability of finance continues to tighten.

Liam Bailey adds:

“The outlook remains very uncertain, but it is unlikely that the market will ease in the near future. Our view is that the most likely scenario is a peak-to-trough fall of around 20% - but this drop could be far more significant if the overall economic situation deteriorates, employment increases drastically and inflation spirals out of control.”

“It is important to bear in mind that falling prices have not made houses more affordable, as lenders’ loan-to-value ratios and multiples have become more strict. This will become more of an issue as the election in 2010 approaches.”

“The high rate of stamp duty was defensible in a rising market. In the years to come, though, many buyers will have lost money on their own home sale, and will be outraged by the idea of paying a five-figure sum to the taxman. This issue is sure to rise up the political agenda over the next two years, particularly if the market downturn is protracted.”

“Meanwhile, it is important to bear in mind that there is still a dramatic undersupply of housing in the UK. This will be severely exacerbated over the next few years as house builders almost entirely pull out of development. When the market does come back, the problems of affordability and scarcity will return – and they will be even more significant than in recent years.”

Courtesy: Knight Frank Residential Research

For further information, please contact:

Liam Bailey, Head of Residential Research, Knight Frank
Tel: +44 (0) 20 7861 5133
Mob: +44 (0) 7919 303148
Email: [email protected]

Davina Macdonald Lockhart, Knight Frank, residential pr
Tel: +44 (0) 20 7861 1033
Mob: +44 (0) 7796 996154
Email: [email protected]