Residential Capital Markets
OUR TRACK RECORD
Build-to-Rent and Funding
Over the last few years there has been a surge of interest in the UK residential investment market. The sector is seen as key to accelerating the rate at which we deliver new homes across the UK, it has created a lot of headlines in the industry press and is receiving significant political support.
Large scale investors from the UK and overseas have been attracted to the sector by a combination of outstanding capital growth (particularly in London) and sound rental fundamentals (increasing demand and relatively low supply). In particular there is an increasing understanding that the income offered by the rental market is both secure and shows long term appreciation, a rare and valuable commodity in an increasingly turbulent world.
As well as providing a secure long-term investment, Build-to-Rent can also afford developers a number of benefits, ranging from accelerating their development programme through to providing a complete funding solution.
With income now a key value driver, it is imperative that developers design their blocks with a view to maximising gross rent and minimising operational costs. This type of product is currently rare in the UK and in order to satisfy the demand we must build it from scratch, creating brand new institutional-grade assets specifically designed for the rental market.
Knight Frank have a market leading residential investment team and were recently crowned Residential Investment Team of the Year, for the second year running, at the 2016 RESI Awards. We are at the forefront of the Build-to-Rent discussion and our experienced team offer a broad range of services across the residential investment sector, placing particular emphasis on:
x Forward funding transactions x Joint venture transactions x Specialist design advice for
Build-to-Rent product x Turn-key PRS investment x Financial appraisal and cash
flow analysis for Build-to-Rent investments
x Residential ResearchTim Treadwell Partner
BUILD-TO-RENT
ROYAL WHARF, LONDON E16
KNIGHT FRANK 5RESIDENTIAL CAPITAL MARKETS
02Plot 22 Royal Wharf
Size 195 unitsPurchaser UK institution
Type Build-to-Rent
Price c. £75 million
Deal Forward funding
Yield c. 4% NIY
01Plots 1 and 3 Royal Wharf
Size 250 unitsPurchaser Individual investor
Type Investment sale
Price c. £93 million
Deal Forward funding
Yield c. 4.25% NIY
03Royal Wharf Ground Rents
Size Ground Rent portfolio
Type Ground Rents
Purchaser Institutional fund manager
Deal Forward Purchase
Price c. £40 million
“The Knight Frank Capital Markets team have supported us through a number of important transactions over the past few years.
The team are hardworking, attentive and their market intelligence is excellent. They get things done!”.
Jenny Steen, Sales Director, Ballymore
01
02 03
04South Bank Place, Waterloo, SE1
Size 203 units
Type Funding
Purchaser Overseas investor
Deal Forward funding
Price c. £176 million
Yield c. 3.6% NIY
07
07Quintain
Size 5,500 units
Type Acquisition consultancy
Purchaser Lone Star
Deal Corporate purchase
Price c. £700 million
06Forbes Place, Aberdeen
Size 292 units
Type Build-to-Rent
Purchaser LaSalle IM
Deal Forward funding
Price c. £60 million
05Confidential Prime Central London Investment
Size 48 units
Type Build-to-Rent
Purchaser Individual investor
Deal Forward funding
Price c.£100 million
10
04
05 06
09Exchange Square
Size 603 units
Type Build-to-Rent
Purchaser LaSalle IM
Deal Forward funding
Price c. £100 million
11
11Stephenson Street, London E16
Size c. 1,000 units
Type Build-to-Rent consultancy
Client Berkeley Homes
10Ealing Broadway Shopping Centre, London W5
Size c.190 units
Type Build-to-Rent consultancy
Client British Land
082 Salcombe Road, London N16
Size 21 units
Type Build-to-Rent
Purchaser Individual investor
Deal Forward funding
Price c. £8.13 million
Yield c. 4.7% NIY
10
08
9
KNIGHT FRANK 11RESIDENTIAL CAPITAL MARKETS
Knight Frank Research Reports are available at KnightFrank.com/Research
RECENT MARKET-LEADING RESEARCH PUBLICATIONS
It has been 11 months since the Chancellor raised stamp duty for properties worth more than £1.1 million.
Despite the fact nearly a year has passed, the consequences have only come into sharper focus in recent weeks.
The spring selling season was overshadowed by the general election and, after a seasonal lull in the summer, the autumn market has been the first reliable test of sentiment since the stamp duty increase.
Autumn is typically a more active time of year but the final months of 2015 have been marked by a stand-off between buyers and sellers.
There is a degree of nervousness around global economic events such as the China slowdown and the fact some markets have experienced strong price growth in recent years, but the stand-off primarily comes down to the arithmetic of higher stamp duty rates.
Buyers calculate it will take them longer to recover the extra stamp duty expense in house price inflation and expect a lower asking
price, something vendors are not always willing to concede.
The number of exchanges in the three months to September 2015 was 17% lower than the same period last year. Meanwhile, the number of new prospective buyers was -30% down on the same period in 2014, as figure 2 shows.
As a result of this markedly higher price-sensitivity, Knight Frank has revised down its 2016 forecast for prime central London price growth to 2% from 4.5%.
Prices fell in October by -0.3%, which was the largest decline since the summer of 2010, a period when the euro zone crisis began to escalate following the original bailout of Greece. Annual growth dipped to 1%, which was the lowest level since October 2009.
However, despite the stand-off, there are signs some vendors have realised demand has cooled since the stamp duty increase and where asking prices have come down the market is operating in a normal manner and tapping into underlying demand that remains resilient.
October 2015Prices fell -0.3% in October, the steepest monthly decline since summer 2010
Annual growth slowed to 1%, the lowest rate since October 2009
Greater price sensitivity caused Knight Frank to revise 2016 forecast down to 2% from 4.5%
The number of exchanges in the three months to September was 17% lower than 2014
Macro View: London’s status as a global financial centre
TOM BILL Head of London Residential Research
“The final months of 2015 have been marked by a stand-off between buyers and sellers” Follow Tom at @TomBill_KF
For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief
A STAND-OFF EMERGES BETWEEN BUYERS AND SELLERS IN PRIME CENTRAL LONDONPrices fell in October by the largest amount since the euro zone crisis intensified in the summer of 2010, says Tom Bill
RESIDENTIAL RESEARCH
PRIME CENTRALLONDON SALES INDEX
FIGURE 1 Price growth in prime central London
Source: Knight Frank Residential Research
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Oct
-14
Nov-
14De
c-14
Jan-
15Fe
b-15
Mar
-15
Apr-1
5M
ay-1
5Ju
n-15
Jul-1
5Au
g-15
Sep-
15O
ct-1
5
Source: Knight Frank Residential Research
FIGURE 2 Demand falls in prime central London Three months to September 2015 vs 2014
12 month % change 6 month % change three monthly % change monthly % change
New prospective buyers
Exchanges Viewings
-1%-30%-17%
Prime Central London Sales Index - Oct 2015
House Price Sentiment Index Oct 2015
Fig 1: Change in current and future value of property (HPSI)
Knight Frank/Markit House Price Sentiment Index (HPSI) – October 2015
Expectations for future house price growth ease
Key headlines for October 2015 Households in all UK regions perceive that the
value of their home rose in October Those in London and the South East perceived
the strongest price growth over the course of the month
Households in all UK regions expect house prices to rise over the next 12 months, but the future house price index slipped to its lowest level since February this year
Some 4.6% of households expect to buy a property over the next 12 months, down from 5.9% in September
Change in current house prices Households across the UK perceived that the value of their home rose in October, according to the House Price Sentiment Index (HPSI) from Knight Frank and Markit Economics. Some 20.9% of the 1,500 households surveyed across the UK said that the value of their home
had risen over the last month, while 4.8% said that prices had fallen. This resulted in a HPSI reading of 58.1 (see figure 1). This is the thirty-first consecutive month that the reading has been above 50. Any figure over 50 indicates that prices are rising, and the higher the figure, the stronger the increase. Any figure below 50 indicates that prices are falling. October’s reading was a decrease from the 59.3 recorded in September and it remains firmly below the peak of 63.2 achieved in May last year. Households in all eleven regions reported that prices rose in October, with those in London (69.0) reporting the biggest rise, followed by those in the South East (64.3). However, the perceived rate of house price growth eased in all areas except London and the South East, compared to September (see tables on page 3).
Prime country house prices rose by 0.7% between July and September, continuing the modest upward trend of growth that started in early 2013. Prices have shifted upwards now for eleven consecutive quarters.
Annual growth also rose slightly to 2.7% on average, up from 2.3% in Q2 but down from a recent high of 5.2% in 2014.
The market continues to feel the impact of the increased cost of stamp duty, following the Autumn Statement in December 2014. This continues to weigh on both price growth and activity at the top end of the market.
In fact, the latest figures from the Land Registry show that between January and July there have been 35% fewer sales with a value above £1.5m outside of London compared to the same period last year.
The prime market below £1.5m has been less affected by these tax changes.
Illustrating this fact, prices for homes in the prime market valued under £1.5m have risen by nearly 4% annually over the year to September. In comparison, over the same time properties priced above £1.5m, the point at which the 12% rate of SDLT kicks in, have risen by 2%.
Under £1.5m, price growth has generally been underpinned by demand for homes in urban centres. Price growth in town and city markets including Bristol, Bath and Oxford for example, where buyers continue to be attracted by good schooling, amenities and transport links, has outperformed the wider prime market.
There remains a significant price differential between property prices in the prime country market and in London, while anecdotal evidence from agents suggests that there is pent up demand from buyers in the Home Counties and the South West. This could help underpin prices and an increase in activity levels across the market as the year progresses.
The average prime country house price is still 14% below its 2007 peak. In contrast, prime prices in London are, on average, 34% higher than their previous peak values. The rise in London prices in the last few years means that buyers looking to swap the city for the country are able to get a lot more property for their money, with such buyers able to take advantage of the relative “discount” which currently exists.
BUYERS CONTINUE TO ABSORB STAMP DUTY CHANGEPrime country house prices continue to grow, but tax policy is starting to have an effect at the top end of the market.
Key headlines from Q3 2015Prime country house prices increased by 0.7% in the third quarter of 2015
Annual growth stands at 2.7%
December’s stamp duty change continues to have an effect on the market above £1.5m
The price differential between the prime London and the prime country markets remains significant
FIGURE 1
Prime country price growth Annual and quarterly change in prime country property values
FIGURE 2
Prime London v Prime Country price differential Nominal price change since Q1 2007
Source: Knight Frank Research Source: Knight Frank Research
201520142014201220112010
-6%
-4%
-2%
0%
2%
4%
6%
8% ANNUAL % CHANGEQUARTERLY % CHANGE PRIME COUNTRY HOUSE
PRIME CENTRAL LONDON
70
90
110
130
150
170
‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15
RESIDENTIAL RESEARCH
PRIME COUNTRY HOUSE INDEX
OLIVER KNIGHT Residential Research
“ The country house market continues to feel the impact of the increased cost of stamp duty. This continues to weigh on both price growth and activity at the top end of the market.”
Follow Oliver at @oliverknightkf
For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief
Prime Country House Index Q3 2015
Residential Market Update Oct 2015
Housing market and economic overview
RESIDENTIAL RESEARCH
UK RESIDENTIAL MARKET UPDATE
“ On a regional bases the annual average change in house prices ranges from 10.6% in London to -1.3% in Scotland.”Follow Gráinne at @ggilmorekf
For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief
GRÁINNE GILMORE Head of UK Residential Research
RATE RISE ON ICE?UK deflation returned in September and wage growth eased, leading some to speculate that the first rise in the base rate in more than six years may not happen before the summer of next year. Meanwhile price growth eased across the board as the rate of policy change in the housebuilding sector speeded up.
Key facts October 2015Average UK house prices rose by 0.5% in September, taking annual growth to 3.8%
Prime central London values fell by 0.1% in September. Annual growth is at 1.3%
Prime Country house prices rose by 0.7% in Q3, and are up 2.7% on the year
Average values for prime Scottish homes fell by 0.7% in Q3, taking annual growth to 0.6%
The pace of average price growth across the UK is easing on an annual and a quarterly basis. However, market dynamics differ across the country. Even on a regional basis, price change in the 12 months to the end of September ranges from 10.6% in London to -1.3% in Scotland.
Ultra-low mortgage rates for those who have access to equity or a sizeable deposit, and who can navigate the tougher application criteria under the new mortgage rules, are helping underpin the market.
The undersupply of housing is also a key factor in the current market. It is estimated that around 200,000 to 250,000 homes a year need to be built in the UK. As shown in the chart above, total delivery is some way below these targets.
In order to try and address the shortfall, the Government this week unveiled its Housing Bill, designed to try and boost the supply of housing. Key among the changes is the introduction of “Starter Homes” – homes will be sold at 80% of market value (and will remain priced at this level for five years) and will be available to first-time buyers aged under 40. The Prime Minister has pledged that 200,000 such homes will be built by 2020, an ambitious target. Details of how this type of housing will dovetail with the current
Although the expectation is that interest rates will rise before June next year, the Bank of England was thrown a curveball this week as the country dipped back into deflation. The negative inflation reading means that the cost of goods and services is falling year on year, and leaves the Bank further from its sole target – hitting 2% inflation in the medium term. Despite strong employment figures, wage growth also eased, meaning that the Bank of England may hold off for longer on raising rates, good news for homeowners with variable rate mortgages.
Falling mortgage rates Average mortgage rates for 2-year fixed-rate deals
Source: Knight Frank / Macrobond
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
2008 2009 2010 2011 2012 2013 2014 2015
25% deposit10% deposit
0%
1%
2%
3%
4%
5%
6%
7%
8%
UK quarterly house price growth Quarter-on-quarter change
Source: Knight Frank / Nationwide
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2013
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
2007 2008 2009 2010 2011 2012 2013 2014 2015-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
Housing completions in the UK
Source: Knight Frank Research*Minimum housing requirement
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Local Authority
â
Housing AssociationPrivate Enterprise
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Important Notice © Knight Frank LLP 2015 – This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.
RESIDENTIAL RESEARCH
For the latest news, views and analysison the world of prime property, visit
KnightFrankblog.com/global-briefing
GLOBAL BRIEFING
Oliver KnightSenior Analyst+44 20 7861 5134 [email protected]
Tom BillHead of London Residential Research +44 20 7861 [email protected]
Gráinne Gilmore Head of UK Residential Research +44 20 7861 5102 [email protected]
Liam Bailey Global Head of Research +44 20 7861 5133 [email protected]
Knight Frank Residential Market Forecast November 2015
2015 2016 2017 2018 2019 2020 2016-2020
Mainstream residential sales markets
UK 4.2% 4.1% 4.1% 3.5% 3.1% 4.0% 20.3%
London 8.5% 5.0% 4.5% 3.0% 3.0% 2.5% 19.3%
North East 2.0% 2.5% 2.5% 2.5% 2.0% 3.0% 13.1%
North West 1.5% 3.0% 2.0% 2.5% 2.5% 3.0% 13.7%
Yorks & Humber 2.0% 3.5% 3.0% 3.0% 2.5% 3.0% 15.9%
East Midlands 3.0% 4.0% 3.5% 3.0% 2.5% 4.0% 18.2%
West Midlands 3.0% 4.0% 3.5% 3.0% 2.5% 4.0% 18.2%
East 3.0% 4.5% 4.0% 4.0% 3.5% 4.5% 22.2%
South East 6.0% 4.0% 4.0% 4.0% 3.0% 4.5% 21.2%
South West 5.5% 4.0% 4.0% 3.5% 3.0% 4.0% 19.9%
Wales 3.0% 3.5% 3.0% 2.5% 2.5% 3.0% 15.4%
Scotland 0.5% 3.0% 2.5% 2.5% 2.5% 3.0% 14.2%
Prime residential sales markets
Prime Central London 1.0% 2.0% 3.0% 4.0% 5.0% 5.0% 20.5%
Prime Outer London 4.0% 3.5% 4.0% 4.0% 5.0% 5.0% 23.4%
Residential rental markets
UK 1.7% 1.9% 2.1% 2.3% 2.5% 2.6% 11.9%
Prime Central London 1.0% 2.0% 3.0% 3.5% 3.0% 3.0% 15.4%
Prime Outer London 0.5% 2.0% 2.5% 3.0% 3.5% 3.5% 15.4%
Source: Knight Frank Residential Research
NB: These forecasts apply to average prices in the second hand market. New build values may not move at the same rate
RESEARCH Knight Frank Global Research produces market-leading property reports and indices, as well as undertaking bespoke consultancy projects. Our global network of offices, operating in over 50 countries, means we can carry out research virtually anywhere in the world.
12Greenwich, London SE10
Size 73 units
Purchaser Specialist PRS operator
Deal Forward funding
Price c. 35 million
Yield c. 4% NIY
12
“The Knight Frank Residential Investment Team were very knowledgeable and experienced, and guided us through a complicated sales process as sell-side advisor successfully. I would highly recommend the team and consider them the best in the industry”.
Shamik Narotam, Executive Director, Morgan Stanley
The Knight Frank Build-to-Rent and Funding team provides specialist advice on the Residential Investment Market. Our award winning team draws from a wide range of experience, enabling us to provide our clients with a market-leading service. Strong working relationships with the wider Knight Frank network allows us to consider all of our clients’ needs and give genuinely holistic advice.We are proud to lead the way in this fast paced, evolving market.
OUR PEOPLE
Amelia Merrick Surveyor, Residential Capital MarketsE: [email protected]: +44 20 7861 5343
Chris DugganAssociate, Residential Capital MarketsE: [email protected] T: +44 20 3826 0641
Tim TreadwellPartner, Residential Capital MarketsE: [email protected] T: +44 20 7861 5416
Tony HaranAssociate, Regional InvestmentsE: [email protected] T: +44 121 234 0339M: +44 7918 560 935
BUILD-TO-RENT AND FUNDING
HEAD OF BUILD-TO-RENT AND FUNDING
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