The Year Ahead - 2016
As we wade into 2016, news of global stock market slumps and the rapidly depreciating cost of oil would have us believe that the year ahead holds a significant amount of uncertainty. Perhaps the most dramatic headline grabber has been RBS who, on 12th January, appeared to advise that other than high quality bonds, everyone should sell everything! However, just two days later, a further announcement revealed that they had earmarked ￡1 billion to invest in the private residential rental sector in the UK.
Invariably at this time of year we are asked the same question by our clients and purchasers; “what does the year ahead hold for the property market?” This is a tricky question to answer without a crystal ball, but we can be more certain on some things than others, so here goes…
If we are to understand that RBS is seemingly taking a bullish position on the London residential sector (given ￡1 billion investment!) then we are firmly in the same camp for no other reason than economic fundamentals. Whilst the government has implemented a number of measures designed to cool the residential market and deter buy-to-let investors from buying residential property (especially affecting London and the South East), it fails to effectively address the supply side of the property equation. Undoubtedly the demand side policies will have some kind of short-term impact as buyers evaluate the consequences - but over the long-term, they are unlikely to deter investment from domestic and international buy-to-let investors. Here’s why:
- There remains a huge undersupply of housing across the UK. The National Housing Federation recently released research highlighting the massive shortfall in the number of new homes built in England between 2011 and 2014. According to their research, just 457,490 homes were delivered compared to the 974,000 which were required – representing a shortfall of more than 500,000 homes. This problem is most acute in London. The reality is that when such a significant supply demand mismatch exists, something has to give; long-term price growth – which is going to attract investors.
- Whilst the government has quite a direct route on influencing demand, it does not have the same direct route on the supply side of the equation. In reality, regardless of the measures implemented by the central government to attempt to streamline the planning process, it remains notoriously difficult for developers to obtain planning consents locally for new build housing schemes. Furthermore, even if these planning obstacles did not exist, the stark reality is that there is not the capacity within the economy, whether it be raw materials or labour, to deliver the 250,000 homes a year which are required.
For as long as the market equation looks like this, the situation is not going to change – buyers (whether it be owner occupiers and/or buy-to-let investors) all understand the reality and it points to capital value growth. So the same buyers are going to chase the very limited stock which exists.
Obviously, from a buy-to-let perspective there are a number of other factors, all of which are likely to continue to tip the balance towards buying.
- Lack of alternatives – the reality is that the stock market no longer exists in the real world; it is a world for the exclusive few, full of institutional investors and secret trading systems. Company performance is not the only factor influencing stock performance. “Mum & Dad” investors know this and like the tangibility of property which is easy to understand and leverage.
- Trust – it almost sounds crazy to say this, but apparently most people trust their property agent more than their banker! In a recent survey undertaken by the Office for National Statistics respondents were asked what investment would provide them the best return on their money – property was streets ahead as the preference at 44%. Just 25% said their pension, and a distant third were stocks with just 10% seeing this as sound investment.
- Rents are going up – alongside the supply side shortage, and irrespective of the current turmoil in global markets, the UK economy is recovering; things are better today than they were two years ago. As the economy continues to recover, wages will grow - and with this so will rents.
- Interest rates – currently at their lowest levels for many years, smart investors are taking advantage of low rates now to harness the long-term capital growth offered by the UK market.
- Currency (for international investors) – on the 31st of December 2015, ￡1 cost HKD 11.49 versus HKD 11.01 on 26th January 2016 – representing a currency depreciation of 4.17%. This would more than offset the potential increase of the proposed 3% Stamp Duty Land Tax surcharge for buy-to-let investors. This is before we take into account any incentive provided by a developer to react to the new regulations, and before increased rent returns which will undoubtedly be demanded by landlords as the cost base for their investments increase.
The increased rate of Stamp duty Land Tax for second home buyers and buy-to-let investors may have a short-term impact on values and vendors will need to be realistic about asking prices. However, while the market equation remains the status quo and the low interest rate environment persist, the fundamentals remain healthy. Prospects are great for investors and homeowners and we are optimistic about the year ahead in the UK residential market.