3. carterjonas.co.uk 3
Rory O’Neill
Partner, Head of Residential
rory.oneill@carterjonas.co.uk
01672 519705
WELCOME TO OUR LATEST
EDITION OF RESIDENTIAL VIEW:
YOUR INDISPENSABLE GUIDE TO
THE UK’S RESIDENTIAL PROPERTY
MARKET FOR SUMMER 2015
It has been a fascinating first half of the year
as the country adjusts to the unexpected
result of the General Election and the
appointment of a new government. Now, with
a Conservative majority, the approach is likely
to be a continuation of what we have seen
over the last five years. The country should
now be entering a period of market stability
and expect some assertive action from the
government in terms of addressing the
current undersupply of new homes.
In this issue of Residential View we consider
the London markets: Super Prime, Prime
Central London and Outer Prime; three areas
where we are reporting differing capital values
and rates of rental growth.
Outside of London, comment on the
farmhouse and country house markets is
provided to demonstrate key trends which are
evident within the market.
We take a closer look in our ‘areas of interest’
section at the UK Government’s Help-to-Buy
scheme, questioning whether or not the Equity
Loan element has in fact boosted new home
supply.
The other features at the end of this report
explore the reasoning behind buyer preference
for apartments rather than houses in Prime
Central London and discuss the introduction
of the Cities Devolution Bill and the
implications for the residential property
market over the next six months.
We do hope you enjoy reading our latest
research and features. Should you require any
further information or advice on your property
asset, please get in touch with the residential
team or one of our research specialists, whose
details can be found at the back of this report.
We would be delighted to help you.
WE SHOULD NOW BE ENTERING A PERIOD
OF MARKET STABILITY AND EXPECT SOME
ASSERTIVE ACTION FROM THE GOVERNMENT
IN TERMS OF ADDRESSING THE CURRENT
UNDERSUPPLY OF NEW HOMES
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POLICY
The recent Conservative majority has provided
the continuity which is important to a stable
housing market and should result in a more
assertive approach to housing. We now
expect the government’s focus to switch
from the populist policies aimed at wooing
home buyers, to the more long-sighted and
contentious issue of how and where we are
to deliver the 200,000–250,000 new homes
required every year. Whilst policies such as
the recent Help-to-Buy ISA and Equity Loan
are generally welcomed, they must operate
in tandem with an aggressive approach to
delivering more homes, or risk becoming part
of the problem they are aiming to address.
CHANGES TO STAMP DUTY
Perhaps the most important event of 2014
was the unexpected change to the method
stamp duty is calculated on the purchase
of residential property. Announced during
the Chancellor of the Exchequer’s Autumn
Statement, the method in which the tax is
charged has moved from a slab system, to
a more fluid marginal system (similar to the
way in which income tax is calculated). The
welcomed new marginal method will, generally
speaking, result in purchasers over £1m being
charged a higher figure than previously with
most purchasers under £1m experiencing
significant savings. During his statement,
the Chancellor stated that the new system
will equate to a £1bn give-away, although we
forecast that rising house prices, increased
transaction volumes (aided in part by the
changes) and a continued trend in increasing
receipt contributions from sales above £1m
(this accounted for just under 30% of total
receipts during 2013–14) will ensure that this
fall in revenue should be overstated. However
the compounding effect of further falls in
PCL transaction levels, coupled with the
new calculation method relying heavily on
£1m+ sales, may result in a significant dent in
projected receipts. This possible outcome will
not have gone unnoticed at 11 Downing Street.
THE DEREGULATION BILL
The Deregulation Bill gained Royal Assent
on 26 March to become the Deregulation
Act 2015. With the act containing a number
of legislative changes relating to residential
lettings, we have highlighted below some key
areas where tenants and landlords should pay
special attention.
Keys points include:
1. Landlords no longer have to re-protect a
deposit when a tenancy agreement reverts
to a periodic tenancy at the end of the
initial fixed term
2. Energy Performance Certificates need
to be issued to prospective tenants at
the point of enquiry to ensure that the
contents of the certificates form part of
the tenant’s decision-making process
3. Retaliatory evictions. Landlords are now
unable to issue section 21 notices to quit
for six months following the receipt of an
improvement notice against a property.
This does not affect the rights of landlords
serving section 8 notices due to the tenant
breaking the terms of the contract
4. London short-letting. The act removes the
need to obtain change of use planning
permission should a property be let for
a period of less than 90 days. Owners of
property within the 32 London boroughs
will now be able to let their properties out
for short periods providing they do not
exceed 90 nights in one calendar year
Index Published 2014 house price inflation
ONS 9.8% (UK)
Nationwide 8.3% (UK)
Halifax 7.8% (UK)
Land Registry 7.0% (England and Wales)
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OVERVIEW
Although Land Registry figures at the end of
Q1 2015 showed average annual house prices
in England and Wales close to eclipsing their
2007 peak, this data is heavily skewed by the
rapid house price inflation recorded in London.
Outside of London, only two other regions
(the South East and East) have surpassed
their previous peak, with average values in the
Northern regions still 16–24% below the highs
witnessed in late 2007/early 2008. Although
less exaggerated, this geographical split can
also be applied to transaction levels, where
sales in Northern regions remain 29–33%
below the peak market annual average, whilst
this figure is just 15–17% below in Southern and
Eastern areas.
TOWN/CITY MARKET
Once again, house price inflation in prime
regional city/town markets outstripped their
surrounding country markets due to the
trend of semi-urban/urban living gathering
pace. The previous 12 months have also
witnessed this trend starting to draw larger
scale investment away from London and
the major regional conurbations to smaller,
more affluent towns and cities. This shift has
been highlighted recently with the property
investment arm of M&G agreeing a deal with
Crest Nicholson to build 97 homes at Bath
Riverside, specifically for the private rented
market. Whilst it is too early to state if larger
scale institutional investment in smaller,
regional Private Rented Sector (PRS) markets
will become commonplace, this investment in
Bath, although relatively small in scale, may
possibly be an indication of a future trend.
Moving forward, this outperformance pattern
is forecast to continue over the short and
medium term as supply fails to meet demand.
This will be compounded by an increase in
households exiting London to take advantage
of record differentials in home values between
London and the rest of the country.
FARMHOUSE AND COUNTRY
HOUSE MARKET
Whilst early year activity from both purchasers
and vendors was muted at the top end of
the market, a post-election calm has resulted
in a return to more natural levels of new
instructions, viewings and most importantly,
transactional levels. Due to the absence of
the mansion tax threat, this pre-election trend
was certainly not felt in the mid-lower end
of the market, where strong demand was
witnessed both before and after the General
Election. Moving into the latter part of 2015,
we expect an increase in the number of
families exiting the London market to boost
demand. Differentials between the capital and
the country markets look to have reached the
peak point of this cycle, which should result
in a release of pent-up demand from outward
moving London households. Values of £1m+
country houses are expected to hold firm for
the coming months, beginning to rise circa 5%
during 2016.
THE
MARKETS
Average house prices
Q1 2015 compared with the 2007/2008 peak market
35
30
25
20
15
10
5
0
–5
–10
–15
–20
–25
London
SouthEast
East
SouthWest
EastMidlands
WestMidlands
Wales
Yorks&Humber
NorthWest
NorthEast
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Residential transactions
2013–2014
16
14
12
10
8
6
4
2
0
–2
–4
–6
ENGLAND & WALES
LONDON
PCL
13.9%
4.4%
–3.7%
SALES
The final quarter of 2014 witnessed a well-
documented slowdown in Prime Central London
(PCL) property price inflation as buyer demand
stabilised. This trend has continued into the early
part of 2015, with a number of areas recording
slight falls or flattening values during Q1. The
strongest capital value increases during 2014
were once again witnessed in outer prime areas,
with Barnes and East Sheen leading the way
and recording a 17.5% year-on-year growth.
PCL also differed from the national market in
terms of transaction volumes, with total sales in
2014 down –3.7% from the previous year. This
is against the national trend, where increases
of 13.9% have been recorded during the same
period. Early signals are that PCL transactions
have remained low in the early part of 2015.
Whilst the uncertainty that surrounded the
General Election will have no doubt played a
part in this cooling, the trend post Q3 2014 is
part of a wider period of market stability with
speculative investors looking elsewhere for high-
risk/return investments, overseas investment
levels plateauing, and families in outer prime
markets returning to more natural buying/selling
patterns that have previously been skewed by
huge variances to the markets they would be
moving between. This return to normality will
take a good deal of heat out of what has been
five years of super-charged market activity and
should result in a period of relatively modest,
sustainable capital value growth and stable
transaction levels.
THE
MARKET
THE STRONGEST CAPITAL VALUE INCREASES DURING 2014
WERE ONCE AGAIN WITNESSED IN OUTER PRIME AREAS,
WITH BARNES AND EAST SHEEN LEADING THE WAY
AND RECORDING 17.5% YEAR-ON-YEAR GROWTH
Source: Land Registry
%
SUPER PRIME MARKET (£10M+)
Following a turbulent 12 months after the market
peak in Q1 2013, the Super Prime London market
recorded further falls during 2014, although the
market does appear to have stabilised during Q1
2015. At the end of Q1 2015, average achieved
square footage values in this market were
8.7% down on the Q1 2013 peak. This differing
performance from even the mainstream PCL
market highlights a comprehensive difference in
the origins of demand at this small end of
the market.
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In response to anecdotal reports of a growing
buyer preference for flats over houses, we
investigated this potential trend to establish if
demand had translated into values and what
the possible drivers are for this development in
the market.
In an attempt to make as close a like-for-like
comparison as possible, we set the below
parameters:
• Property size between 1,000 and
5,000 sq ft
• Properties sold between January 2013 and
December 2014
• Properties located within Mayfair,
St James’s, Knightsbridge and Belgravia
• All flats with sub-80 year leases excluded
The results of our analysis found that, based
on average achieved square footage values,
flats within the above parameters achieved a
premium of just under 20% over comparable
houses, or in monetary terms, an average of
over £390 per square foot more.
2. WHY HAVE WE FALLEN OUT OF
LOVE WITH HOUSES IN PRIME
CENTRAL LONDON?
£0
APARTMENTS
HOUSES
Source: Carter Jonas Research
On the face of it, the lower running costs (no
service charge or ground rent), the comfort
offered by ultimate ownership, the increased
privacy and greater individualism of houses
should ensure a premium is achieved over flats;
but it is apparent from the above graph that
this is not the case. We hypothesise about the
key drivers leading to the continuing buyer
preference towards flats in the box opposite.
POSSIBLE REASONS FOR
THE TREND
1. Overseas owners’ attitude
Contrary to popular belief, large scale
overseas investment in PCL residential
property is not a new thing, but the
preference for leasehold property (usually
flats) is. Due to the perceived lack of
actual ownership of leasehold property,
overseas investors historically preferred
to buy freehold property (usually houses).
This trend, along with the dominant
nationalities of modern overseas investors,
has changed significantly over the previous
decade. Foreign owners have a limited
appetite for direct involvement with
their investments and now opt for flats
in professionally managed developments
with a low administrative burden.
2. Recent lifestyle trends
Current trends are also playing a part in
the growing popularity of the flat. Lateral
living is proving particularly popular at
the moment, with a number of newer
developments and conversions now
starting to reflect this style. Alongside this,
occupants of PCL property are becoming
increasingly cash rich/time poor. People
are becoming increasingly unwilling to
take ownership of the issues related to the
upkeep and maintenance of houses, such
as gardening and structural repairs.
3. Security awareness
Whilst it may not statistically be the
case that we are more at risk of suffering
from crime or anti-social behaviour, our
collective perception of how secure we are
has certainly become heightened in recent
years. Flats, specifically in portered blocks,
offer far greater security than houses,
providing occupiers with the sanctuary
they desire.
4. Investor trend
The preference for flat living is not only
confined to the owner-occupier market.
With a majority of PCL tenants calling
‘home’ somewhere other than the UK,
periods of non-occupation during the
holiday seasons are widespread, ensuring
that secure, managed developments of
flats are highly sought-after. This demand
has filtered through into investor returns,
with flats generally benefitting from higher
rental yields than comparable houses.
Average £ per sq ft achieved
2013 – 2014
£2,500£2,000£1,500£1,000£500
