Richard Hamilton – Head of Property at Davis Blank Furniss – talks about what property investors can expect in the new financial year:
Richard, how are things looking in the marketplace right now?
Well, the new financial year has just begun so time will tell if doom and gloom or concern will return to the property sector thanks to Brexit and the much talked about interest rate rises or if the market remains positive with returns to be made. I feel pretty confident though!
What’s your view on prices?
Despite the uncertainty surrounding Brexit and the economic effect it will have, property prices have remained resilient. 2017 was a year of growth in property values. Looking at various mortgage lender’s statistics, in 2017 a typical home grew by an average of just over £7,000, based on an average price of £220,000. The common belief for 2018 is that growth nationally will slow to around 0.3% by the end of the year. This would still produce an increase in value of £6,000 to £7,000 on the average priced house.
What about regional variations?
Some housing market specialists say that property prices will rise by 1.3% nationally but fall by 0.3% in London. Manchester, Liverpool and the North West have continued to grow and prices have become more affordable relative to earnings. RICS believes that prices will flat line across the UK generally. Growth in places such as the North West, Glasgow and Birmingham will offset the weaker position in London.
The government has tried to stimulate the market by, for example, introducing the SDLT exemption for first time buyers but this alone does not seem to have stimulated the market greatly. Clearly, more has to be done in terms of increasing housing stock and more affordable housing at the lower to entry level. The advice remains to choose your investment well and positive returns can be made. The outlook for the North West is particularly reasonable.
What about for landlords?
The 2017 financial year was a tough one in many respects for landlords; increased SDLT due to 2016 changes with the 3% uplift, lower rents in many areas, more difficult to source finance due to tougher buy-to-let lending criteria and checks are some of the reasons for this. For 2018 the government has a desire to ban all fees charged by agents other than deposits. The fees for finding tenants, dealing with checks and moving clients in and out will likely fall on the landlord. The government wishes to reduce rental deposits (four weeks is suggested) which could expose landlords to more risk. There is also the prospect of more new build high quality rental properties being made available to market with institutional investors investing heavily in the sector which can explain the return of some of the city centre cranes.
How is the commercial sector looking?
Over the first few months of the current calendar year, commercial property and real estate forecasts have improved. Despite a relatively strong 2017 many experts and analysts thought that the commercial property market would not remain strong post-2018. Since then, average rental and capital growth calculations have increased.
Do you think there will be much growth?
Growth is likely to be relatively modest, but it is growth nevertheless. Rental value growth has been upgraded to an average forecast to 0.8% from 0.4%. Better than expected capital growth is forecast, which flows from greater confidence in the rental value.
What other factors should also be considered in order to analyse whether or not the commercial property sector will be under increased strain this year?
The CGT exemption for overseas investors in the UK commercial property market is to be removed from April 2019. It is not believed that this will deter many investors as it merely brings the UK in line with most other developed countries. Asian countries are increasingly looking to invest in UK property. Japanese, Chinese and Korean capital is becoming much more active.
Investors can look at their offerings to increase returns. Flex-space and better use of technology will attract occupiers and in turn increase rental yield and capital growth.
The cranes are back but that does not necessarily lead to new available space now, therefore, if new supply is not available in your area, you may be able to maximise returns now with existing landlords negotiating favourable terms for leases or sales.
What’s the picture for the Retail sector?
The retail market remains harsh. Some well-known businesses and national retailers are still struggling which is well publicised in the media, but this has always been the case in the retail sector and new operators or occupiers often fill the void, particularly in major retail centres or town.
Are any particular sectors strong at the moment?
Hotels are trading well with an increase in tourists coming to the UK for holidays due to the weaker pound, and many of us are staying in the UK for holidays for the same reason. This has led to much improved occupancy levels and injections of cash in relation to new hotels and hotel acquisitions.
Any final thoughts?
Construction and development costs will rise and finance costs will potentially become more expensive with the expected rate rises. Investors should also be aware of the Minimum Energy Efficiency Standards which will make it unlawful to let commercial properties below an EPC rating of ‘E’ from April 2018. This could see increased compliance costs for landlords and may also lead to tenants driving a harder bargain when negotiating terms for new leases. Overall the property market remains relatively buoyant with a potential for positive returns to be made despite Brexit and the regulatory changes of the recent past and the near future.