Market Updates for Developments & Investments
Autumn 2011
The cloud of financial uncertainty in Europe has made things tough, but Adam Stackhouse believes that bright skies lie ahead in the residential investments market...
Despite a buoyant residential sales market in Central London, and with sentiment high amongst housebuilding developers, the fundamental issue of funding continues to frustrate new builds in Zones 1 and 2. As of July 2011 there were 115 sites that had started construction, generating a total of 7,237 units, of which 1,200 approx are currently unsold - therefore c. 5,000 units have sold so far this year. (Source:Molior). Sales of small developments (5-20 units) have dominated our activity due to the these developers being able to access the requisite funds required to buy and develop in the current market place.
There has also been a rise in the number of transactions in the larger, volume end of the spectrum due to the significant war chests of the national house builders, who have had to adapt to survive in the changing market. Against a backdrop of uncertainty with European sovereign wealth, volatile stock markets and repressed interbank lending, there has been a stall in the volume of lending from normal bank sources across the summer months. This has been described as ‘walking through treacle’ by many well funded, prolific property developers who have been involved in high-end zone 1 schemes. The alternative lending sources, venture capitalists and high net worth individuals have all focused on top city addresses and at increasingly larger rates of interest, making some schemes unviable to the normal list of developers. Nevertheless, both public and private developers remain adaptable and having adjusted to the ‘new world order’, with some casualties along the way, we are clearly left with a leaner, fitter group of agile companies able to deliver schemes of very high quality which are, importantly, on time.
Whilst we experience a gradual, yet steady recovery in the development sector, I believe we are on the cusp of some very dramatic improvements in the residential investment market both from institutional buyers, overseas wealth (both sovereign and individual) and the more localised domestic ‘buy to let’ individuals who are primed with cash in the bank, ready to capitalise on the renewed supply of incredibly competitive mortgage products. So why is demand for investment properties about to increase? Here are some of the fundamentals that underpin this market:- Supply & Demand: The basic fundamentals of any market-place are particularly pronounced in the ‘Buy-to-Let’ sector. As mortgage availability declined so dramatically during 2008 the majority of buyers with relatively low deposit levels were forced into the private rented sector. Many of these parties have invested their wealth in other asset classes and are firmly appreciative of the ‘flexibility’ that renting provides, resulting in a dramatic increase in demand and a significant increase in rental income for landlords.The logical step of apparent ‘inflation’ in the rental market is that landlords are receiving greater net income from their stock - a factor particularly pronounced against the backdrop of much lower interest rates.
Naturally, this results in stronger net yields for landlords, leaving them with spare cash to re-invest in the market. Of course, good news does travel and with the success of the rental market as both an investment class, pension fund and wealth-generator, more and more domestic buyers are poised to re-enter the market, where London will provide a ‘safe-haven’ for their money. As the market gets stronger for rental demand, more investors enter the market and much of this is down to the extreme volatility that has been endured through other asset classes, such as stock markets and commodity prices. Broadly spread issues relating to sovereign wealth and geo-political instability leave many savvy investors with few ‘safe-havens’ for their wealth, leading inevitably to a reversion back into ‘tried and trusted’ asset classes of old.
My final point relates to the recent ‘multiple dwelling’ relief in this years Finance Bill which was passed in July. It provides a new level of SDLT (Stamp Duty Land Tax) relief when a number of residential units are purchased together. It can be summarised as follows:- Mr A is buying five flats by way of the grant of five leases. The flats are priced 3 at £450,000 each and 2 at £300,000 each. The total consideration is £1,950,000 and the average price per flat is £390,000. The average price fixes the SDLT rate at 3% and this is applied to the total consideration of £1,950,000 giving SDLT payable of £58,500. However under previous rules five flats are treated as residential so the 5% rate would apply giving a SDLT charge of £97,500.
All in all, in a period of relatively low inflation, with some staggeringly low lending rates now available, there is much to support the residential investment market in London for the future without even daring to mention capital growth!
By Adam Stackhouse, Head of Developments & Investments
