our track record · prime country house prices rose by 0.7% between july and september, continuing...

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



Yield c. 4.25% NIY

03Royal Wharf Ground Rents

Size Ground Rent portfolio

Type Ground Rents

Purchaser Institutional fund manager

Deal Forward Purchase


“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



Yield c. 3.6% NIY

07

07Quintain

Size 5,500 units

Type Acquisition consultancy

Purchaser Lone Star

Deal Corporate purchase


06Forbes Place, Aberdeen

Size 292 units

Type Build-to-Rent

Purchaser LaSalle IM



05Confidential Prime Central London Investment

Size 48 units

Type Build-to-Rent

Purchaser Individual investor


Price c.£100 million

10

04

05 06

09Exchange Square

Size 603 units

Type Build-to-Rent

Purchaser LaSalle IM



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


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


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


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


Prime Country House Index Q3 2015

Residential Market Update Oct 2015

Housing market and economic overview


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


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.


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%


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


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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THECOMBINATIONOF

OURPEOPLE, RESEARCH AND TECHNOLOGYHAS HELPED USGROWOUR ENVIABLE

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YOUR GLOBAL PROPERTY PARTNERThe four ingredients which set Knight Frank apart are our independence, our global network, and our commercial and residential platforms.

Through our US alliance with Newmark Grubb Knight Frank we have grown to a group of over 13,000 property professionals, in more than

417 offices in 58 countries. Being a partnership allows us to put our clients first, we focus on giving them the best advice and putting long term relationships before short term wins. Trust and integrity are everything.

Working with private individuals, developers, investors, banks, corporate occupiers and public sector bodies we provide a range of

agency, investment and professional consultancy services which are supported by our dedicated market research teams.

The combination of our people, research and technology has helped us grow our enviable track record and that’s why clients come back to us for their personal and professional property requirements.

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our track record · prime country house prices rose by 0.7% between july and september, continuing...

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