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Implications of the UK Economic Outlook – Is UK Property Still a Good Play for Investors?

New regulations and Tightening Bank Lending Criteria Weigh on UK Property; Sale Prices Drop

Since our last update, the introduction of MMR (Mortgage Market Review) regulations and an additional contraction in bank mortgage lending has led to a reduction in transaction volumes, and above average seasonal reductions in national sale prices throughout July and August.

In detail, sale prices fell for the first time in 12 months during July, while August saw the largest monthly drop on record relative to the summer months of previous years. Prices in the London market also cooled during the same period, prompting some real estate firms to suggest that the ceiling of affordability may have been reached.

While unease had been building for some time over the rapid acceleration in prices seen during late 2013, the regulatory changes of 2014, combined with an evolving interest rate outlook, have seen investors begin to reduce exposure to the sector.

Consequently, shares in many of the UK’s major house-builders have fallen throughout much of H1 2014.

Graphic Provided by Rightmove

RIGHTMOVE

 

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Barratt Developments Group Plc and Bovis Homes Group Plc // Share prices

HOUSEBUILDERS

 

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Economy Continues to Gather Momentum

While a jump-start to the housing market proved key to stoking the economy back to life in 2013, the slowdown exhibited during the year to date has had relatively little effect on overall output.

Contrary to the outcome that many would have expected, economic growth has actually accelerated this year and held at a pace consistent with pre-crisis levels of expansion.

Behind this stronger performance from the economy has been a sudden increase in business investment, combined with continued high levels of consumer spending and steady demand from the public sector.

As a result, it now appears increasingly likely that the MPC will move to raise interest rates during H1 2015, probably a short time before the general election.

Although this is positive news for savers, the likely movement in interest rates holds negative connotations for transaction volumes and sale prices in the residential property market.

With both real and nominal incomes in decline, mortgage lending criteria tightening and higher rates set to constrain affordability further, we believe that transaction volumes will fall further during the quarters ahead and that this will drive additional declines in sale prices at a later date.

Despite the apparent doom and despair of those investors hoping for another year of outlandish capital gains, opportunities still exist for investors.

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One Man’s Loss is Another Man’s Gain  

Although rising interest rates are almost certain to weigh further on affordability and eligibility for UK homeowner hopefuls, they are likely to achieve very little in terms of addressing the stark supply and demand disparity in the market for UK residential property.

As a result, we expect there to be a positive feedback from these dynamics into the residential lettings market. With lesser numbers of prospective homebuyers able to satisfy tougher affordability criteria going forward, we see larger numbers of individuals remaining within the lettings market.

This would be most likely to prove positive for demand and could also, over the medium term, exert upward pressure upon rental rates. So, while the events of the last nine months have been less than helpful for those hoping to see further price rises, they are likely to prove a blessing in disguise for buy-to-let investors and their agents.

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Options and Action Steps for Leveraging an Ongoing Supply and Demand Disparity in UK Housing

Although property investment has traditionally been the forte of high net worth individuals, modern day capital markets and innovation in the intermediary space has led to rapid growth in the range of available property investment vehicles.

While smaller investors are able to gain exposure to the property market through buying shares in any one of a number of the UK’s listed companies, a 2013’s surge in IPO activity saw the residential lettings market also become open to such investors when both Foxtons Group Plc and Countrywide Plc floated on the London Stock Exchange.

When combined, both companies hold a substantial share of the UK residential property market and can offer investors both a liquid, as well as cost effective, means of exposure to growth in this area.  

For those with the requisite capital, innovation in the intermediary space has led to an acceleration in the number of alternatives to traditional buy-to-let schemes. One of the most notable of these is the advent of  “build to let” property, most of which is concentrated in the student accommodation, holiday home and affordable housing arenas.

There are many vendors that operate in these areas, each offering different projects with a variable potential to generate portfolio returns.

It is important, of course, that investors remember that property investments are, despite the presence of a healthy market, less liquid than other assets, which may pose a problem for those who lack the requisite time horizon.

Some of the intermediaries operating in the areas referenced above offer schemes that enable investors to enjoy the traditional benefits of buy-to-let investing, such as optional third party management and administration, as well more unique benefits such as contractually guaranteed occupation rates and rental yields.

In some cases, such extras can compensate for the lower level of liquidity that comes with property investments, whilst ensuring that investors are able to secure the level of income necessary for them to achieve their financial objectives.  

We have selected one of the largest vendors of UK investment property to illustrate to our readers some of the opportunities available within this space. Their complementary e-brochure will have been emailed to you shortly after opening this report, along with our latest macroeconomic title: The UK Economy in a Rising Rate Environment.

For further insights and information relating to the UK property market, please see our earlier reports via the below links

UK Property, Part 1- 23 May 2014

UK Property Part 2 – 28 May 2014

UK Economic Update – The UK Economy in a Rising Rate Environment

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IMPORTANT:
The contents of this report and the Stockatonia website (https://www.stockatonia.co.uk/) have been prepared to provide general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Please always remember that the value of investments may fall as well as rise. Investing in securities, and any other products associated with them, carries a high degree of risk and may not be suitable for all investors. For advice or guidance related to investing in securities markets, please consult with your own financial adviser.