Nobody is in any doubt the UK residential property market faces challenging times, given the economic climate and fallout from Kawi Kwarteng’s miscalculated growth plan announced last autumn. But opportunities are available for both developers and investors, as Ben Portner examines.
Kwasi Kwarteng’s mini-budget last September was swiftly followed by the withdrawal of dozens of mortgage offers from the market. Since then, there has been a slight about-turn, with some products coming back at more favourable rates. But there is still concern about reduced house price growth. This will have a knock-on effect for the large national housebuilders this year.
Despite this, there is growing optimism within the industry. Estate agent Savills said that while it predicts an average 10% fall in house prices across the UK in 2023, it expects the position to stabilise by the middle of 2024 and for losses to be made up by 2026. As the UK still has a shortage of available stock with a strong demand for new housing, it said, “there will remain plenty of space for investment and innovation across the housing sector over the next five years”.
This is reflected in the development sites housebuilders are buying now. Sales are unlikely to commence for some time, which allows for recovery growth in the meantime. Large strategic development sites are popping up around major cities, such as the Silvertown scheme in London’s docklands and Birmingham’s Smithfield area. These are typical of the extensive mixed-use developments around residential property that are likely to impact urban regeneration significantly.
Densification of town centres
There has also been a pattern of increased densification of city centre housing with taller buildings around vibrant transport hubs. Since the pandemic and increased hybrid and home working, local authorities and central government are moving towards repurposing town centres and high streets. This is allowing developers to acquire sites for building new homes in mixed-use urban projects.
This is also giving rise to joint ventures between the public and private sectors to provide a stream of supply by releasing public sector land for development. The housing associations who partner with private housebuilders will benefit too, as it will allow them to meet their targets for providing affordable homes. Such ventures will also be able to take advantage of funding from some non-governmental organisations (NGOs) as well as central government or other bodies.
The cost-of-living crisis and higher mortgage costs are currently putting off some would be buyers and first-time buyers. However, the recent rise in rent levels is creating opportunities for investors in the build-to-rent market. These rent increases are helping soften the blow of high land prices and rising construction costs. This remains a concern for developers. Despite this, the expectation is that stable cashflow from rents will see the build-to-rent market expand and, in turn, trickle down into the buy-to-let market. Developers need to be mindful of increasing rents too much though, as there is growing political pressure for rent caps and people are already struggling with higher living costs.
Retirement living and student housing
There are opportunities for investors in the retirement and later living accommodation market and the student housing market. Many institutional funds and private equity establishments are seeking out care home provider assets. Later living accommodation is also forming part of new mixed private development schemes, with shared ownership models available.
The student accommodation market will attract property investors as demand for commercial lettings and office use continues to decline. So long as the location is right, letting to students provides stable cashflow and the ability to rebase rents annually. The number of students is expected to rise until 2030, matched with increased demand for basic, affordable student accommodation.
The refurbishment and repurposing of properties for student digs offer opportunities for owners of houses in multiple occupation (HMOs). HMOs are now being professionalised and aggregated by institutional investors. Investors are taking advantage of the challenges private landlords are experiencing from adverse tax changes and greater regulation. These challenges and higher mortgage costs are making it easier for investors to build portfolios of these types of properties.
Shortage of stock
In all this, a government that can deliver stable, long-term policies with regulations that encourage investment and enable quicker development is of primary importance to stimulate the UK residential property market. Housing policy will always remain high on the political agenda, but a shortage of stock continues to be a major factor. Developers will continue to seek a reform of the planning system so that long-term housing targets can be met.
If you would like to discuss any issue relating to residential property, please contact Ben Portner at [email protected].
Disclaimer: The above is merely general guidance and should not be relied on as formal advice. We suggest you take professional advice before taking any action in relation to the issues discussed above.