Real Estate Capital – 2019 market outlook - Urban Exposure



Real Estate Capital – 2019 market outlook

The UK economy is entering a period of severe uncertainty, with final decisions on investments dropping off as we enter the endgame of Brexit manoeuvring. The macro outlook is therefore the big call for 2019 – consensus forecasts point to low single-digit percentage GDP growth, c 1.5%[1].

However, with UK unemployment and interest rates remaining at near historic lows, the macro backdrop remains supportive for the residential housing market.

The UK government’s support for housebuilding continues unbound with its ambitious target of seeing 300k new homes built each year (current delivery c 217k[2]) by the mid-2020s reaffirmed. This was highlighted earlier this year by the announcement of the extension of the Help-to-Buy scheme until 2023, as well as the extension of Stamp Duty relief to first-time buyers for shared equity ownership purchases.

Several other public-sector initiatives should also continue to be helpful. For example, the Letwin Review found no evidence of land-banking by housebuilders and made further progress on the longstanding issue of planning by making it easier for larger strategic sites. Moreover, we saw an extra £500 million committed to the Housing Infrastructure Fund and the new five-year strategic business plan for Homes England published in October 2018. That review also recommended that the Housing Revenue Account cap that controls local authority borrowing for housebuilding is abolished, which would enable councils to increase housebuilding.

Other than the negotiation of the UK’s departure from the EU, housing looks set to remain the number one item on the Government’s agenda.

There are other positive signs too.

While the total origination of property-related loans for 2019 is likely to be in the £45 to £55 billion range, this is consistent with what we’ve seen in the last five years[3]; and although development loans may still be below their peak of 21% of total property-related loans in 2007, they have increased steadily from a 2014 low of 9% to c 13% in 2018[4].

Some of the brightest spots in the market looking ahead come from the Build-to-Rent sector, where the pipeline is forecast to double by 2021, potentially filling the gap left by the decline in the Buy-to-Let market of late[5].

Likewise, whereas the expansion of the major housebuilders (who have driven the growth in housebuilding over the past five years) has slowed, this is expected to be matched by the acceleration of smaller housebuilders, housing associations and local authorities over the next five years.

Where the South East and London are now struggling after delivering market-leading growth for so many years, it is now Scotland and the North of England that are expected to enjoy above average growth going forward.

So, if there is one thing that is certain right now, it’s that the detailed picture of the UK housing market is by no means simple.

But longer term, the continued supply/demand imbalance means the market fundamentals will remain strong. Indeed, the marked deterioration in rental affordability in recent years (both in absolute terms and relative to home ownership) should also boost housing transactions. Notably, while average UK mortgage payments have fallen to c £550 a month, average rents have increased to c £900 a month, meaning there is now a differential of over 60%[6]. For first-time buyers in particular – so crucial to the future health of the market – there has rarely been more compelling evidence of why the economics of buying a home makes sense.

[1] Source: PWC, UK Economic Outlook, November 2018

[2] Source: Knight Frank, Housebuilding Report 2018

[3] Source: Cass CRE Lending Survey Mid-year 2018, October 2018

[4] Source: Cass CRE Lending Survey Mid-year 2018, October 2018

[5] Source: Savills, Residential Property Forecast, Autumn 2018

[6] Source: Lazarus Economics & Strategy, UK Housing Market Briefing, July 2018

Article originally published by Real Estate Capital.