Opportunities in the London property market
By Marios Theophanous, Credit Manager.
The UK Macro-Economic Outlook
The Bank of England’s Monetary Policy Committee (MPC) sets policy to meet the inflation target in order to help sustain growth and employment. At its most recent meeting in May, they voted to maintain Bank Rate at 0.5% but indicated small base rate increases at a gradual pace and to a limited extent could be on the way in the medium term as the economy grows above its potential.
Although inflation fell to 2.5% in March, its lowest for eight months, this is still above the Bank’s target of 2%, mainly due to the fall in the value of the Pound after the Brexit vote. But the Bank expect this to gradually fall back towards the target level.
However, with the Office of National Statistics (ONS) reporting strong employment figures and rises in personal and household disposable income, the prospect for the economy are good as GDP also showed a rise in Q4 2017.
London Property Overview
In recent years the London property market has had a lot to contend with. Increasing Stamp Duty for high end properties, buy to let legislation and tax changes and of course, much debate over the longer term impact of Brexit. However, despite this demand remains strong in the residential and commercial property sectors for the capital, and it’s now a good buyers market.
Property consultants Knight Frank, reported recently a 1.1% reduction in central London property prices in the first two months of 2018 and a fall in rental values of 1.5% in March, but this is seen as a stabilising effect rather than a concern, as the London market absorbs the tax changes and the higher cost of transactions. However, Knight Frank also report that trading volumes have increased and demand for rental property continues to grow, signalling that rents could be forced up again as the number of people searching for rental property climbs and more viewings are taking place for these dwellings.
Potential Brexit Impacts
Although there is still some uncertainty over the Brexit negotiations and how the final deal will impact the property markets, there are real reasons to be optimistic about the long term strength of London as a property capital. Opportunities for investors will remain in terms of rental acquisitions, renovation projects and new builds.
There will be continuing demand for HMOs, student accommodation as well as retail and commercial property in London. Indeed inward investment from overseas is still strong as cash-rich companies and developers seek to purchase major office buildings to strengthen their portfolios, for example with the purchase of iconic building such as the Walkie-Talkie and Cheesegrater by foreign investors.
London itself will continue to be resilient as it will always have an underlying demand for residential and commercial rental property. It is likely that the ‘softer’ the Brexit the better this will be for the London market as a transition period will smooth out the process and minimise sudden shock in values and returns, and with UK interest rates remaining relatively low, London property is still seen as an attractive prime market location.
UK House Prices and Buy to let
The buy to let market continues to perform strongly, with a report by Ludlow Thompson showing that the number of buy to let investors in the UK hit an all-time high of 2.5m last financial year. The number of buy to let investors has increased 27 per cent over the last five years. This despite all that has been done by legislation to dampen that market in favour or house purchase by individuals.
This is backed up by recent Bank of England data pointing to a degree of persistence in the sector, with 12.7 per cent of mortgages in the final quarter of 2017 going to buy to let investors, although this was down from 14.4 per cent a year earlier, as some landlords are more focused on transferring their portfolios to limited companies rather than managing them as personal assets.
The overall strength of UK housing stock as a reliable asset is further supported by the Halifax House Price Index, with house prices hitting a new record high in March 2018 with the biggest monthly rise since August last year. However, the average price of a UK property fell by 3.1% in April compared to March and currently stands at £220,962, but have shown an annual rise of 2.2%.
However, according to the Land Registry, UK house prices rose 4.2% over the twelve months to March 2018, but fallen 0.2% since February, demonstrating some volatility in the short term measure.
Bridging Finance Optimism
For residential and small to medium sized commercial properties, bridging finance remains a popular funding vehicle to facilitate the quick purchase of buy to let investments, property in need of renovation with an eye on the rental market and development land for construction.
The Association of Short Term Lenders (ASTL) in their recent sentiment survey report that confidence is high with their lender members who expect continued volume growth in the bridging sector. In 2017 over £3.5bn was lent by their members demonstrating a solid demand for bridging funding. A major expectation is that more money will be lent to SME housebuilders and property developers to further ease the housing crisis.
2018 has started well, with bridging lending reaching £1bn in the first quarter of 2018, up 1.5% on Q1 2017.
The popularity of this form of finance is based on not only the speed at which it can be delivered but the relative low rates, and the breathing space it provides for longer term finance to be put in place once a property is acquired and renovated for either rent or sale. Loans are typically three to eighteen months and then paid off in full so it’s important to have the exit strategy agreed in advance.
The London Hub
With London property prices now stabilising, this makes it a good buying market when balanced with a continuing high demand for well-located rental space, both for the commercial and residential sectors. We’re seeing continued interest from foreign investors for major purchases and this despite the Brexit debate, signalling that these investors are looking at stability and growth being provided in the longer term.
With the UK economy performing well and even with the possibility that interest rates may creep up in the coming months, the market remains strong and a good market for buyers.
The current data suggests that London is still a premium property location with a rental population that still needs to be provided with quality, well managed housing and office space.