residential property focus q2 2012

7/31/2019 Residential Property Focus q2 2012

1/14

Svs Rsrch

UK Reidential

ReSidentialPRoPeRtyFocUsQ2 2012

G ppruI it time t mmit treidential invetment?

Rental sector. Booming demand

Taxation: Budget measures 2012

Investment & development: Q&Asvs.c.uk/rsrch

ivsmSpc

Examining theyield ptential

ar UKhuing


2/14

v.c.uk/c 03

Q2 2012

With the new property world dominated bycash and not mortgage borrowing, the timeor residential investment has fnally arrived

ForewordThe rise and fall

of The UK morTgage

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When we rst started to look at

residential property as an investable

asset class 25 years ago, it was deeply

unashionable. There was only a tiny,

vestigial market rented sector let in the

UK, ollowing regulation-induced asset

disposal by investing institutions. At

that time the fow o occupier behaviourwas away rom tenancies and into

ownership. This trend began to reverse

at the millennium so that in uture it

might come to be viewed only as a late

twentieth century phenomenon.

mt tConventional wisdom has had it that

housing values are determined by two

main variables: household incomes and

mortgage interest rates. Low income

growth and high rates meant weak or

alling house prices; high income growth

and low interest rates meant risinghouse prices. Any recent analysis o

the UK housing market since 2007 has

shown that there is a third component in

this model the supply o debt nance.

Post credit-crunch a new orm o

mortgage rationing, orgotten since the

1970s, has re-emerged. The imposition

o very low loan-to-value ratios and

stringent qualication o applicants

has created a major barrier to housing

accessibility. The cost o deposits has

overtaken the cost o debt repayments

as the issue determining aordability.

The subsequent growth in the numbero market-rented properties over the last

ve years has reminded us that the new

property world is dominated by cash

and not borrowing.

But what is the value o the income to

the owner? Tying up cash in an asset like

housing is only worthwhile i it produces

a return greater than that available

elsewhere at equal or lower risk.

f vuFor most owner-occupiers and private

investors, there are very ew alternative

investments that are genuinely as sae

as houses. Those that exist are very

low yielding. Consequently, any asset

with a net yield north o 3% and with the

prospect o longer-term capital growth,

looks compelling.

Not so or many corporate and

institutional investors who still try tovalue residential property on the same

basis as commercial properties. But

commercial property returns are more

volatile, show low rental growth and

depreciate at a much aster rate than

residential. IPD analysis shows that risk-

adjusted total returns have been higher

or residential property and we think this

will remain the case in uture.

Investment yields will be reset in the

next ew years as a consequence, and

residential property will be increasingly

avoured by corporate investors. This

means we expect to see increasingcapital values or investment properties,

especially as rental growth urther

boosts income streams. As a result

there are big opportunities or new

investors who understand which stock

will perorm in this environment and

what is currently mispriced and how

to nd hidden value. Ater 25 years,

it looks as i the time or residential

investment has nally come. n

Y B

Head o ResidentialResearch

020 7409 8899

[email protected]

Executive summary

The key fndings in this issue

nThe private rental sector has historically been

the province o the young, but more people

are remaining or longer in privately rented

accommodation because its cheaper or them to

rent, or in some cases because they really cant

aord to buy.

See pages 4/5

nTenant demand or private rental accommodation is

not only expanding but becoming more long-term, as

a result o the challenges o getting onto the property

ladder. But what are the implications or the supply

side o the private rental equation, and where are the

investor opportunities?

See pages 6/7

nStamp duty rates or higher value properties have

been on the rise since 1997. Receipts rom housing

rose by 670% in the 10 years to 2007/08, while house

prices increased by just 180%. See pages 8/9

nContinued stock constraints mean prices across

prime London are above peak, driving strong growth in

1million+ sales in locations outside core prime central

London which are increasingly attracting international

buyers. See page 10/11

nDevelopment opportunities exist in markets that

have recovered most strongly to date, with least

reliance on high loan to value mortgage debt, whichremains in short supply.

See pages 12/13

Contents

04 Rental Sector

06 Investment

08 Stamp duty

10 Market orecasts

12 Development

14 Buying vs Renting


3/14

04

Rs Prpry Fcus

Rental Sector

taking advantage

oF the Rental boom

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Rental Britain, our report on the

private rental sector based on joint

research with Rightmove, highlights

the key challenges acing tenants

in the private rental sector, and the

outlook or the coming years.

The increase in tenant demand in

the UK has been dramatic: over the

ve years to the end o 2011, the

total value o housing in the private

rental sector was up 42%, while

the number o households renting

privately had leapt almost 50%, rom

3.4 to 4.8 million. And the trend is set

to continue: by 2016 we estimate that

gure will have risen to 5.9 million.

trpp sThis shit in the way people access

accommodation is underpinned

by the retail lenders continuing

reluctance to provide mortgages or

prospective rst time buyers at the

high loan to value ratios (LTVs) they

seek. Gross mortgage lending at

LTVs o 90% plus has allen by 95%

since summer 2007, and the average

deposit paid by rst time buyers has

more than doubled over that time. In

London more than seven out o ten

rst time buyers now turn to their

parents or help in raising the capital.

Further, where lenders do makeavailable mortgages at suitably

high loans to property value, they

charge an infated price. At the end

o 2011, the interest rate on 90% LTV

discounted rate mortgages averaged

5.1% two thirds more expensive

than the equivalent on 75% LTV, at

an average 3.0%.

The consequence is that although

the private rental sector has

historically been the province o the

young, more people are remaining

or longer in privately rented

accommodation because its cheaperor them to rent, or in some cases

because they really could not aord

to buy. More than hal o private

rented sector tenants are believed to

be trapped in this way a quarter o

them aged over 40.

Moreover, not only are more

people renting, and or longer, but the

social prole o tenants is changing

and broadening. Private renting is

increasingly becoming a way o lie

or a wide spectrum o people in their

30s and 40s.

R rsHowever, there is huge variation

in average rents paid across the

UK, though in general rents are

Not only are more people renting, andor longer, but the social profle o tenants

is changing and broadeningLucian Cook, Savills Research

Private renting is becoming a wayo lie or a much wider spectrumo people in the UK and the numbero tenants trapped in the sector

shows no sign o decreasing

Wrs y luc C

GRAPH 1.1

investors fllng the gap let by the buy to let mortgage drought

Graph source: Savills Research using CLG and CML data

n icrs us uy rs icrs Uks pr r sc

thousands

ofhouseho

lds

400

350

300

250

200

150

100

50

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


4/14

ss.c.u/rsrc 05

Q2 2012

higher in centres nearer London. A

comparison o the 30 largest rental

markets outside London shows that

the highest average monthly rent or

two-bedroom properties (1,320 pcm

in Elmbridge) is three times that o the

lowest (470 pcm in Bradord). The

dierentials are even more marked

in London, with two-bed properties

almost ve times more expensive in

Kensington & Chelsea (4,020 pcm)

than they are in Bexley (830 pcm).

In part these rental dierences

refect regional dierences in income.

The mean average single persons

rent o a two-bedroom property as a

percentage o mean average income,

stands at an average 31% across the

UK as a whole, but that nationwide

average masks large disparities

when regional or local averages are

considered. In the North East and

East Midlands, this broad indicator o

rental aordability averages just 25%

o the average incomes or these

regions, while in the South East it

rises to 35% and in London, where

private tenants more regularly share

accommodation and renting is more

common in more afuent income

groups, it rockets up to 53%.

Qus ryRegional rental dierentials,

however, cannot be ully explained

by variations in income. Another key

actor is the existing supply o private

rented accommodation, as well as

the extent o social housing provision.

Thus a high aordability ratio occurs

in areas where rental demand

markedly outstrips supply, pushing up

rents regardless o average income

levels.

The London market is particularly

skewed. For a start, the public sector

provides aordable housing or alarge tranche o households on lower

incomes, thereby taking them out

o the equation. In other words, the

average tenant in Londons private

sector is likely to be on a higher than

average income. At the same time,

owner occupation in the London

market is lower than elsewhere,

relative to the rental market, refecting

the high number o young people

starting their careers there, and

infated property prices that make it

even harder or them to get on the

ladder.

Cr spsYet there are clear hotspots outside

London too, where supply o private

MAP 1.1

Rental aordablty vares across the Uk

Map source: Savills Research, Rightmove

rental accommodation lags well

behind demand or it. Oxord is

an extreme example, with the average

rent on a two-bedroom property

amounting to 57% o average

income; another is Brighton & Hove,where average rents are slightly less

crippling at 47% o income.

In contrast, the private rental

market is well catered or in Milton

Keynes, and rental aordability there,

at 32%, is in line with the national

average. Clearly, each local market

has its own dynamics and needs to

be understood on its own terms, but

investors could start by identiyingthose with a high aordability ratio

as areas likely to be suering rom a

shortage o good quality private rental

accommodation. n

Average 2 bed fat rentas % o single personsgross pay

nor 50%

n 35% 50%

n 30% 35%

n27.5% 30%

n25% 27.5%

n22.5% 25%

nUp 22.5%


5/14

06

R Prpr Fu

Investment

higheR yields

attRact investoRs

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W stimat that 200 billion o

invstmnt is rquird in th nxt

v yars, i th dmand or privat

rnting is to b mt. But banks

rmain much mor constraind in

thir buy to lt mortgag lnding, and

its xpctd that only 50 billion o

th rquird invstmnt will tak th

orm o buy to lt loans. Attntion is

thror incrasingly ocusd on th

attractions o th privat rntal markt

or institutions and invstmnt unds,

and to a lssr xtnt, thos privat

invstors with quity.

Th ky actor in this rspct, o

cours, is th rntal incom yilds

availabl, and how thy compar

with altrnativ incom-producing

asst classs. Historically, rsidntial

proprty invstmnt has attractd

invstors primarily on th basis o

strong hous pric growth, and has

struggld to attract incom-sking

institutional invstors bcaus o th

low nt yilds availabl.

But th past yars hav sn a

shit in markt undamntals. First,

tnant dmand is ulling sharp riss

in rnt. Across th UK as a whol in

2011, rnts ros by 5.2%, though

London saw a 7.2% incras ovr

th yar. Rntal dmand is xpctd

to continu to outstrip supply in th

coming v yars, kping rnts

undr upward prssur. At th sam

tim, th housing markt rcovry

rmains sluggish and thrs littl

sign o any dramatic upturn in capital

valus looking ahad.

imprm This combination is lading to som

improvmnt in yild lvls nationally.

Our joint rsarch with Rightmov

shows avrag gross incom yild now

stands at 5.8% nationally, but thr ar

signicant variations within th markt

as a whol, or various rasons.

On actor is siz: yilds ar

much highr on smallr proprtis,

whr ownr-occupir dmand has

bn hardst hit by th squz on

mortgag lnding and rntal dmand is

naturally concntratd. Thus, incom

yilds on on-bdroom proprtisavrag 6.7%.

Rgional dirncs ar rlativly

slight, although yilds tnd to b highr

in th North than in th South. But

within rgions thr ar also signicant

variations in yild, according to th

valu o th local markt.

An analysis o yild on two-

bdroom proprtis according to

postcod rvals an avrag yild

o 7.8% in th 10% o postcods

with th highst yilds (whr two-

bdroom proprty prics avrag

lss than 100,000). This contrastsdramatically with th avrag 4.4%

achivd in th lowst-yilding 10%

o postcods (whr two-bdroom

proprtis avrag 326,000).

Investors need to delve below the headlinefgures and have a clear grasp o theunderlying complexities o particular marketsJacqui Daly, Savills Research

As the residential rental marketcontinues to gain signifcance asan asset class, property investorswill increasingly look to income

generation as their measure o value

Wr b Jqu d

GRAPH 2.1

gross income yeds for 2 bedroom properes b reon (2011)

Graph sourc: Savills Rsarch / Rightmov

nAveragen Upper Quartilen Lower Quartile

su W irl

ourl

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su e eM

W yrkr t humbr

WM

nr e nrW

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

7.0%

3.9%

5.4%

4.8%

5.7%

4.8%

5.7%

4.7%

5.6%

4.6%

5.5%

6.2%

4.4%

5.3%

4.9%

5.9%

4.9%

6.0%

5.0%

6.1%

5.1%

6.2%

5.1%

6.3%6.5%

6.7% 6.7%6.6%6.8%

7.3% 7.3% 7.3%

7.7%


6/14

..uk/rr 07

Q2 2012

Thr ar thror opportunitis or

invstors to improv on hadlin gross

yilds, whthr by buying smallr units

or in lowr-valu local markts. Larg-

scal invstors buying units in bulk ar

also abl to boost yilds by buying at a

discount to th vacant possssion rat

(th pric paid by an ownr occupir).

Th hadlin avrag gross yild o

5.8% riss as high as 7.7% or thos

invstors in a position to ngotiat

discounts through bulk purchass.

a rb m rmO cours, invstors do not pockt thir

gross yilds in ntirty. Atr accounting

or costs and void priods, th avrag

nt yild or typical privat landlords

coms in at around 4.1%.

Nonthlss, rlativ to cash

rturns avraging lss than 2%,

and givn th outlook or a continuing

mismatch btwn rntal dmand

and supply ovr th coming v

yars, its prhaps unsurprising that

invstors ar incrasingly ocusing

attntion on th potntial o th

privat rntal sctor to gnrat a

rliabl incom stram.

A survy conductd by Rightmov

in Octobr 2011 discovrd that

ovr 40% o invstors in rsidntial

proprty pointd to attractiv yildsas thir primary rason or holding th

asst class.

Total rturns ar o cours also

infuncd by capital growth in th

housing markt, which avragd 6.7%

a yar ovr th past 30 yars. Basd

on Savills hous pric orcasts, total

rturns (nt o rntal xpnss) ar

likly to avrag around 6.9% a yar

ovr th coming 10 yars.

But invstors nd to dlv blow

th hadlin gurs and hav a clar

grasp o th undrlying complxitis

and trad-os o particular markts.Dirnt locations will or dirnt

combinations o rntal yild against

capital growth prospcts or capital

stability, as wll as opportunitis

to nhanc that yild urthr, or

xampl by ocusing on spcic

markt sgmnts.

Ultimatly, as th rsidntial rntal

markt gains in signicanc as an

incom-gnrating asst class,

its likly that invstors will mov

away rom thir historical ocus

on a proprtys capital valu to

ownr occupirs, and concntratincrasingly on th incom stram as

a masur o valu, in lin with othr

incom-producing assts such as

bonds and commrcial proprty. n

the investMent MatRix

The prospective total 10-year investment returns

TABLe 2.2

Where o nves ousde of london

TABLe 2.1

invesn n london

Tabl sourc: Savills Rsarch / Rightmov

Tabl sourc: Savills Rsarch / Rightmov

Forecas toa Reurns 2011-2021

l

6.0%6.0% 6.5% 6.5% 7.0% 7.0% 7.5% 7.5% 8.0%

or

8.0%

l

50%

Brighton &Hov

elmbridg

50%

55% SouthndBournmouth

Bristol,Colchstr

OxordSouthampton

RadingWoking

55%

60% Northampton Portsmouth

MdwayMilton

Kyns

60%

65%

edinburghStockportWarrington

CardiLicstr

Nottingham

65%

70%Bradord

Nwcastl,Lds

ManchstrShld

CovntryBirmingham

or70%

Kirkls GlasgowLivrpool

Forecas toa Reurns 2011-2021

7.0% 7.5% 7.5% 8.0% 8.0% 8.5% 8.5% 9.0% or 9.0%

l

40%

Knsington& Chlsa,

Wstminstr

40%

45%Hounslow

Barnt, Kingston,Harrow, Camdn,Hammrsmith &

Fulham

WandsworthRichmond

Islington, Cityo London,SouthwarkHackny

45%

50%

Croydon, Bxly,Havring, Sutton,

Brnt, enld,Rdbridg, Haringy,Hillingdon, Bromly

Lwishamealing

LambthMrton

50%

55%Waltham Forst

Grnwich TowrHamlts

55%

60%

Barking andDagnham

Nwham

ProporionoftoalReurncomingfromR

en

ProporionoftoalReurncomingfromR

en


7/14

08

Reidential Prpert F

graph 3.1

Diviin f IHT Receipts from Residential Property (2009/10)

g souce: Svills resec usin hMrC dt

0% 20% 40% 60% 80% 100%

Etate Vale > 2m

(Av Rei Vale 1.13m)

Etate Vale > 1m-2m

(Av Rei Vale 465k)

Etate 500K-1m

(Av Rei Vale 349k)

Etate 300k-500k

(Av Rei Vale 228k)

Etate < 300k

(Av Rei Vale 126k)

36%

1%

29%

2%

31%

7%

4%

16%

88%

n By IHT Contribution n By Number of Estates

Prprtin f etate/reeipt

Never ha the prime

reidential prpert

market been mre in

the ptlight in the

rn p t and ake f

a Bdget than in Marh 2012.

Te ocus ws st tuned on

ime ousin by te Libel

Democt oosls o mnsion

tx, cmioned by Vince Cble.

Te oosls wee justied on te

emise tt txin welt in te

om o immoveble oety ws

moe ecient tn txin moveble

income, tt it would ect only

te vey welty nd tt, in lit ocouncil tx eceits, suc oety

mde n unily modest contibution

to tx eceits.

Ou wok wit te Cente o

policy Studies sowed tt not only

would suc tx be comlicted

nd costly to dministe iven te

nunces o vlution, but would lso

unily enlise sset ic, income

oo ownes wo d seen dmtic

owt in te vlue o tei omes

ove tei eiod o ownesi.

Vlues would ve d eedin

enzy, wilst once but no lone

fuent ensiones could ve been

elly squeezed.

pes moe etinent to te

wide debte is te extent to

wic i vlue oety ledy

contibutes to te tx tke. Ounlysis o hMrC dt suests

tt even beoe te 5% stm duty

te ws intoduced in ail 2011 o

oeties ove 1million, suc sles

wee ledy delivein 26% o te

stm duty tke, but ccountin o

just 1.6% o ecoded sles. also,

ove one tid o ll ineitnce

tx (IhT) eceits om esidentil

oety cme om less tn 1%

o te ousin stock eld t det.

The red bx hkO tese two txes stm duty s

been successive ovenments

weon o coice o te diect

txtion o oety, nd no suise

tt stm duty ws eviewed in te

Budet te tn intoducin new

moe contovesil tx.

Stm duty tes o ie vlue

oeties ve been eetedly

incesed since 1997. as esult, tx

eceits om ousin ose by 670%

in te 10 yes to 2007/08, wile

ouse ices incesed by just 180%.

Since ten stm duty eceits

ve llen s constined ccess to

mote nnce nd wek buye

sentiment ve led to etly educed

ousin tnsctions, but moe

obust sles volumes in te ime

mkets, ticully in London,

nd ie tes o duty o tese

oeties, ve mitited tese lls.

So, wile tinkein wit stm

duty o st time buyes s dlittle imct on Tesuy eceits, n

dditionl 1% stm duty on sles

ove 1million since ail 2011 s

dded n estimted 290million to

te 1.2billion o eceits om to

end sles.

Anti-avidaneTe fy in te ointment o te

Tesuy ws tt te ie te tx

te ete te incentive to seek to

void tx.

as mnsion tx oosls lost

vou so ttention tuned to stmduty voidnce, nd in ticul te

use o osoe coote ownesi.

Ou e Budet nlysis suested

te extent o stm duty voidnce,

oweve undesible, d been

ovestted. We exected ssocited

loooles to be closed in te Budet,

but we didnt exect te cncello

to tckle te issue wit suc usto.

risin stm duty o oeties

wot ove 2million om 5% to 7%

ws es edictble, s ws te

closue o some secic loooles.

Eqully, iven ucse o sesin oety oldin comny would

be dicult to tx, 15% ce

on tnsein tt oety into

comny in te st lce is loicl.

Stamp duty

THE TREAsuRys

wEAPoN oF cHoIcE

The 2012 Budget saw new rates of stamp duty introducedfor properties sold for more than 2million. But what effectwill these measures have on prime residential property?

wrd b

Lian ck


8/14

avill..k/reearh 09

Q2 2012

graph 3.2

Anali f Tranatin and stamp Dt Reeipt 2011

g souce: Svills resec usin hMrC dt

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

Proportion

oftransactions/receipts

up t 100k 100k - 200k 200k - 300k 300k - 500k 500k - 1m 1m+

n By IHT Contribution n By Number of Estates

But it didnt sto tee. a oosed

nnul levy on coote ownesi

o 2million+ oety mit best be

descibed s eto-ctive, tetin

ownes wo d sout to void

stm duty io to te Budet.

The impatToete te mesues e likely to

sinicntly cutil te cquisition

o oety tou secil uose

veicles, tou it emins to be

seen wete oety ledy

owned in tis wy will be switced

into esonl ownesi.

In tei cuent omt te

oosls will lso imct

estblised coote nd

institutionl investos wit i vlue

esidentil oldins.

Undoubtedly, tis ws n

unintended consequence ndcoote nd institutionl investos

cut by te new stm duty

bndin, nd t isk o bein cut

by te nnul levy, will lmost

cetinly seek exemtion om tese

ovisions.

Te eect on te mket emins

to be seen, but tese mesues

could esent sometin o

cllene to smoot ecovey in

te ime centl London mkets.

Ou view, suoted by ely

evidence in te mket, is tt tey

will not undemine mket demndo bin sinicnt mount o new

stock to te mket to te extent tt

sudden ice lls e tieed.

It is common o te ime centl

London mkets to o tou lulls t

tis ste o mket cycle oweve,

nd we believe tt tese mesues

e likely to be ctlyst o eiod

o eltively sttic ices, in line wit

ou existin ublised oecsts.

Beyond centl London, wee

tx voidnce lnnin ws muc

There is little doubt the Budget measurescould present a challenge to the smoothrecovery in prime central London marketsLucian Cook, Savills Research

less common, te eect will be

lessened. Tee is lso distinct

ossibility we will see owin

demnd om Londones wisin

to void te 2million ice oint,

mkin tdin out to le

1million+ ouse n incesinly

ttctive otion. n

The internatinal ntext

Tkin bode view, te

undmentl demnd dives

o London s lobl city wee

sinicntly boosted by ote

mesues in te Budet, suc

s lowe tes o cootion

tx, wic sinicntly imove

Londons lobl cometitiveness.

a 7% stm duty ce

does not cuse London to be

substntilly out o kilte wit

ote lobl cities. Beoe te

Budet, London ws less exensive

tn pis o oety cquisition,

now it is minlly moe exensive.

a 15% SDLT ce would

mke London sinicntly moe

exensive tn its ees tou

it sould be emembeed tt tis

only lies wee oety

is tnseed into te ownesi

o non ntul eson, nmely

coote veicle.

other glbal itieFo tose buyin ses in n existin

Secil puose Veicle stm duty

will not be considetion, te tey

will be ocused on te osective

nnul ce nd te eect o

oosed CgT ce, i nd wen te

oety is sold out o te coote

veicle. Tou oset by onoin

stm duty svins, te nnul

ces would be i eltive to ote

lobl cities o ou tyicl billionie

esidence in tose cicumstnces

wee tey e ced.

Prhae t a % fprpert vale

Rank

singapre 13.1% 1

sdne 10.5% 2

Mmbai 9.0% 3

Lndn 7.0% 4

Pari 6.5% 5

Hng Kng 5.3% 6

Tk 5.3% 7

shanghai 4.5% 8

Ne yrk 3.3% 9

M 0.0% 10

TaBLE 3.1

stamp Dt r Eqivalent fra Tpial Billinaire Reidene


9/14

10

Residential Property Focus

Source: Savills Research

Annual house price growth key:nBelow 0% n0% to 2% n2% to 4% n4% to 6% n6% to 8% n8% and over

PRIME MARKETSFive-year forecast values, 2012-2016

House price values

MARKET

FORECASTS

Change frompeak to 2011

2012 2013 2014 2015 20165 years to

2016

Prime Central London 16.9% 3.0% 0.0% 5.0% 6.5% 6.5% 22.7%

Prime Regional -17.1% -3.0% 2.5% 4.0% 5.5% 5.5% 15.1%

Prime South East -13.0% -2.5% 3.0% 6.5% 6.5% 6.5% 21.3%

Prime South West -21.7% -3.5% 2.0% 4.0% 4.5% 5.5% 12.9%

Prime East -19.8% -2.5% 2.5% 4.0% 4.5% 6.0% 15.1%

Prime Midlands/North -24.1% -6.0% 2.0% 2.0% 4.5% 5.0% 7.3%

Prime Scotland -18.6% -4.0% 1.0% 2.0% 3.0% 5.0% 7.0%

Prime performanceThe prime markets have been much

more active than their mainstream

counterparts. In 2011 sales o homes

worth 1million+ were within 8% o their

2007 peak across England and Wales

according to Land Registry data.

In Londons prime markets which

have seen the strongest price growth

since the downturn, 1million+

transaction levels exceeded 2007 levels

by 5%. Q1 2012 price growth

o 2.8% suggests London continues

to outperorm.

Continued stock constraints meanprime London prices are consistently

above peak, driving strong growth in1million+ transactions outside prime

central London which are increasingly

attracting international buyers.

In 2011 1million+ sales were more

than 25% up on 2007 in Maida Vale,

Notting Hill, Camden/Regents Park and

Fulham. The prime domestic markets

o south west and west London have

also beneted, with 1million+ sales

in Battersea and Chiswick up by 28%

compared to 2007.

Generally, the urther rom London

the more constrained the prime

markets become. In Yorkshire andHumber 1million+ sales last year

were 35% below 2007 levels - a betterperormance than the mainstream

market but much weaker than the South

East where such sales were within 20%

o their previous peak.

In 2011 all regions witnessed a

dearth o imported London wealth,

though there are now signs o a change,

corresponding with a return o price

growth in the South East, particularly in

some key commuter hotspots.

I these early signs o improvement

continue markets such as Sevenoaks,

St Albans and Oxord, will see their tally

o 1million+ sales rise urther beyondthe records set in 2011. n

London105%

East ofEngland

83%South East

81% South West73%

Midlands& Wales

63%

TheNorth

47%

GRAPH 4.1

Strength of Prime Market Recovery Sales of 1m+ property 2011 vs 2007

Graph source: Savills Research, Land Registry


10/14

savills.co.uk/research 11

Q2 2012

Source: Savills Research orecasts based on Nationwide actuals

MAINSTREAM MARKETSFive-year orecast values, 2012-2016

Change frompeak to 2011

2012 2013 2014 2015 20165 years to

2016

UK -10.5% -2.0% 0.5% 1.0% 2.0% 4.5% 6.0%

London -1.8% -0.5% 1.0% 5.0% 6.0% 6.5% 19.1%

South East -6.3% -1.0% 1.0% 4.0% 5.0% 6.0% 15.7%

South West -9.8% -1.5% 0.5% 2.5% 3.5% 5.0% 10.3%

East -8.7% -1.0% 1.0% 3.5% 4.5% 5.5% 14.1%

East Midlands -11.0% -1.5% 0.5% 2.0% 3.0% 5.0% 9.2%

West Midlands -11.5% -2.0% -1.0% 0.0% 0.0% 3.5% 0.4%

North East -14.0% -2.5% -1.5% -1.5% -0.5% 3.0% -3.1%

North West -14.9% -2.0% -1.0% -1.0% 0.0% 3.5% -0.6%

Yorks & Humber -14.0% -2.0% -1.5% -1.0% -1.0% 3.0% -2.6%

Wales -12.7% -2.0% 0.5% 0.5% 1.5% 4.5% 5.0%

Scotland -10.6% -4.0% 0.0% 0.0% 0.5% 2.0% -1.6%

The mainstream viewThough still 46% below the pre crunch

average or the period, housing

transactions in the rst quarter o

2012 were at their highest level since

2008. This corresponds with improveddemand or mortgage nance reported

by the Bank o England in their Q1

Credit Conditions Survey.

However, at a national level the

Nationwide, Haliax and Land Registry

data all suggest UK average house

prices little improved, with supply and

demand both subdued, though broadly

balanced according to the RICS.

Land Registry gures continue to

show a wide divergence across the UK.

In Oxordshire prices rose 2.8% in the

year to February 2012 to leave them just

4.8% below peak. By contrast pricesell by 9.0% in County Durham to leave

them 29% below their peak.

London continues to be the

strongest regional market, but there

is huge divergence in activity levels

across the city. In Islington annual

transaction levels are running at 82% o

their pre crunch norm while in Barking

and Dagenham they are down 57%

With little sign o improvement in

the availability o mortgage nance

and an increase in the standard

variable rate o interest charged by

some lenders, there seems littleprospect o a sustained improvement

in mainstream market activity over the

next two years at least, as refected in

our house price orecasts. n

Graph source: Savills Research/Land Registry

Table source: Land Registry

GRAPH 4.2

UK Housing Transactions

TABLE 4.1

Mainstream House Prices

UKT

ransactions(000s)

nMonthly Transactions Seasonally Adjusted

180

160

140

120

100

80

60

40

20

0

Sep0

5Se

p06

Mar0

6Ma

r07

Sep0

7Ma

r09

Mar1

0Ma

r11

Sep0

8Se

p09

Sep1

0Se

p11

Mar1

2Ma

r08

Q1 2012 Compared to

Average house price 1 year ago 5 years ago

England & Wales 160,889 -1.1% -6.8%

Kensington & Chelsea 973,856 +12.4% +41%

Oxfordshire 240,551 +2.8% +0.9%

Durham 82,932 -9.0% -25.1%


11/14

12

Residential Property Focus

Development

WHERE BEST

TO DEVELOP?

QProspects or

development andinvestment vary across

the country, at a local level.To fnd the best development

opportunities, should the sameselection criteria be used as or

investment?

ATosome extent, yes. We

exect the makets that

ae cuently stongest to

continue to show the highest ates

o gowth in house ices, ents and

land values duing the next ve yeas.

New homes will geneally be sold

most easily into makets that have

ecoveed most stongly to date,

with least eliance on high loan to

value motgage debt, which emains

in shot suly.

QAre all the development

opportunities ound instronger markets?

ANo. The fiside o investing

and develoing in stonge

makets is that thee is moe

cometition to acquie investment

stock and land. The highe investment

yields available in weake makets can

undein eomance, aticulaly

i gowth is diven by the stength o

adjacent makets. Convesely, a well

located develoment site in a weake

maket can delive good sales ates,

but with less cometition to acquie

the land.

QWhere are the

best developmentopportunities in

stronger markets?

ADeveloment volumes

have bounced back most

shaly in the stongemakets, with a 6% shit in housing

delivey towads the stongest

makets, comaed with the eak

delivey yea o 2007/08.

Examles ae Ashod, South

Noolk (including develoment on

the inge o Nowich) and Conwall,

undeinned by a obust ecovey in

maket activity and the availability

o deliveable land.

In contast, delivey in makets

such as Oxod, Solihull and

Wokingham have stayed elatively

low, desite stong maket ecovey.Scacity o deliveable land with

consent is a constaint in these

makets, so develoment osects

ae good o those who can get land

with consent to the oint o delivey.

Othe makets with stong maket

ecovey but below a levels

o delivey include Mid Sussex,

Guildod and Yok. In London,

Islington, Hackney and Wandswoth

have deliveed less than might have

been exected given thei maket

stength.

QDoes NewBuy

mortgage indemnityopen up opportunities

in other markets?

A well located development site in a weakermarket can deliver good sales rates, but withless competition to acquire the landJim Ward, Savills Research

Scarcity of deliverable land withconsent is a constraint in low delivery,strong markets, so prospects aregood for those who can get land

with consent to the point of delivery

Words by Jim Ward

GrApH 5.1

Recovery in House Building and Market Activity

Gah souce: Savills reseach, HM Land registy

30% 35% 40% 45% 50% 55% 60% 65% 70%

Additionsto

housing

stockvs2005/08average

Residential transactions vs peak

lSize o dot = 5 yr average delivery as a percentage o housing stock

120%

110%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Ashord

South Norolk

Oxord

Corby

Milton KeynesPeterborough

Salord

Liverpool

Manchester

Basingstoke & DeaneCornwall

Islington

Hackney

Guildord

YorkWandsworth

Mid Sussex

Highdelivery,weakermarket

Lowdelivery,weaker

market

Lowdelivery,stronger

market

Highdelivery,strongermarket

Wokingham

Solihull


12/14


13/14

Rsdnal Propry Focs

14

To buy or to rent? A simple question,but a complex answer

One o the eatures o the housing market since the

downturn has been that some households have

chosen to rent, either taking a break rom home

ownership or in the case o the lucky frst time buyers sitting

on a sizeable deposit, delaying the decision to make their frst

move onto the housing ladder.

For both groups the relative costs o buying versus the

costs o renting is critical both at a given entry point and in

the uture. Simply comparing mortgage interest costs against

rental costs is a start point. For example, or someone looking

to buy a two bedroom property at 150,000 with a 25%

deposit, interest payments o just under 4,000 per annum

would compare avourably to rent o 9,150, assuming a

rental yield o 6.1%.

This simple analysis suggests that despite high lenders

margins, the so-called dead money o renting is a high price

to pay. But this is beore taking account o the additional

costs o ownership, such as repairs and insurance, or the

cost o unding mortgage repayments at a time when interest-

only mortgages are a rare commodity.

Buyers should also take account o the income theirdeposits would deliver i invested rather than being tied into a

property. On the basis o the same example that would swing

the balance in avour o renting, with home ownership costing

1,300 more than renting over the course o a year.

Wachn h markAt the peak o the market the additional cost o buying was

substantially higher because both mortgage rates and returns

on savings were higher and the relationship between house

prices and rents had become out o kilter.

Scroll back 10 years and the cash comparison was much

more like todays, though lower house prices meant lower

capital repayments, making it cheaper to buy than to rent both

beore and ater accounting or the costs o ownership.What distinguishes then rom now are the house price

growth prospects. In 2001, prices rose by 25%. A decision

to delay moving and staying in rented accommodation could

thereore be very costly indeed. By contrast, with urther small

house price alls orecast in the short term, there is no rush

to beat price growth just one among many reasons why

housing transactions remain depressed.

Prospective buyers should watch the market careully.

As house price growth returns so the balance will shit again.

This will be seen frst in London and the South East where

house price growth is expected to return more quickly and

more strongly. And this is likely to be particularly relevant to

those more mature households who have taken time out o

home ownership. Despite lower rental yields, and thereorelower relative rental costs, recovery is expected to be stronger

in these equity rich sub-markets, potentially bringing such

households back into the market ahead o frst time buyers

lucky enough to be sitting on a deposit.n

Salls rsarch am

Please contact us for further information

Jacq Daly

Director

020 7016 3779

[email protected]

Nal Hdson

Associate Director

020 7409 8865

[email protected]

Kay Warrck

Associate Director

020 7016 3884

[email protected]

Yoland Barns

Head o Research

020 7409 8899

[email protected]

There are big opportunities ornew investors who understandwhich stock will perorm in thisenvironment and what is currentlymispriced and how to fndhidden value.Yolande Barnes

Lcan Cook

Director

020 7016 3837

[email protected]

Never has the prime residential

property market been more in the

spotlight in the run up to and wake

o a Budget than in 2012.Lucian Cook

Jm Ward

Director

020 7049 8841

[email protected]

Development volumes have

bounced back most sharply in thestronger markets, with a 6% shit

in housing delivery towards the

strong markets, compared with the

peak delivery year o 2007/2008.Jim Ward

BuYiNg vSReNtiNg

Market dynamics

Fasal Chodhry

Associate Director

0141 222 5880

[email protected]


14/14

ll k/ h 015

Date

01

Spotlight

South Wales ResidentialDevelopment Sales April 2012

SavillsResearchUKResidential

Housingcompletio ns

SUMMARY

Local housing marketsacrossSouthWalesremainonthe steady roadto recovery

n Spcal Rpor | Rnal Bran

n Mark n Mns | Prm London Rsdnal Marks

n Mark n Mns | Prm Ronal Rsdnal Marks

n Spolh | Whr Bs to Dlop and ins n Rsdnal Propryn Spolh | Soh Wals Rsdnal Dlopmn Sals

n inshs | World Cs Rw

For more inormation, visit savills.co.uk/research

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