Property Market

Economic Outlook

For most countries, the past year marked the end of a global recession.  The UK, Europe, and US experienced sharp drops in output in 2008 and 2009, but have returned to positive growth in 2010 while the emerging markets in Asia have continuously expanded at a rapid pace.  Domestic concerns over continental Europe’s sovereign debt difficulties and high government spending may risk consumer demand.  However, the global outlook is positive, and international demand for London properties remains high. 

In the UK, growth has been quick and steady in 2010 and 2011 at a rate of 1.5% and 1.7% annually.  The first quarter of 2011 was 1.8% higher than Q1 of the previous year.  However, government policy is focused on reducing the government deficit, with policies such as the higher VAT that was implemented in January this year, and has lead to downgrades in forecasted 2011 GDP growth from 2.1% to 1.7%.  In the short to medium term, spending cut policies may reduce demand, but they reduce future costs of borrowing and relieve market pressures.  In addition, inflation projections have increased due to worldwide rising commodities prices in food and oil. 

Economy at a Glance:  

- Retail sales have remained low because of the combination of weakened consumer confidence, high inflation, and low household income growth.  

- Unemployment in the UK has grown to 2.53 million, which is the highest level in a decade, and is projected to grow due to public sector job cuts. 

- The Consumer Prices Index (CPI) inflation has risen to 4.4%, and is expected to remain at 4-5% throughout 2011.  

- The Monetary Policy Committee (MPC) is keeping the interest rate at a low 0.5% with an additional quantitative easing of £200 billion. 

London Market Overview 

The UK property market has been stabilizing over the past year following the financial crisis of 2008.  The IPD index below shows that total returns on UK properties became positive mid-way through 2009 and into 2010, across all property sectors. The returns are still lower than historical averages, which suggest that the current market is still undervalued but experiencing uplift.  

While investment levels in 2010 and 2011 have increased significantly, they are still well below the 2007 activity levels.  The main contributor to this outcome is that much less debt financing is available.  Developers in particular face various challenges that limit the supply of new homes.  In addition to financial constraints, changes in the planning system have made the development process more complex and therefore uncertain. 

Decreasing Supply and Increasing Demand:

The number of new homes completed in England in 2010 was 13% lower than that achieved in 2009 and was just 102,570 units—the lowest level since 1923.  While some larger builders have experienced positive growth recently, small-medium sized developers have been hit particularly hard by financing difficulties and are cautious about the near future.  The dearth of construction financing is driven by contractions on both the extensive and intensive margins: fewer banks are making residential development loans, and the remaining ones are doing so at much lower rates.  Some researchers estimate that one of the most active banks is generating loans at only one-third of the 2006/2007 levels.  Loans are costlier (around 5-7%), and banks are demanding higher profit margins, so that much fewer developments are deemed “investment-worthy”. 

Fundamentally, the growing number of households has raised the demand for housing.  However, prices have remained relatively stable in the early part of 2011, which suggests that consumers are still uncertain about purchasing.  The proportion of survey respondents who said it was not a good time to buy a home increased from to 30% in March 2011 from 26% in December 2010.  This figure is mostly due to lack of job security and difficulties obtaining financing, and depicts a national average that does not reflect regional and city variations.  

Central London Market 

Central London diverges from the national picture due to worldwide demand that is largely separated from local UK conditions.  Home values grew 0.8% in Q4 of 2010 and further increased to 2.5% during Q1 of 2011, while the UK average shrank 0.3% during the same period.  International buyers are fueling these developments, as they continue to view London as a safe investment as well as a global cultural and economic hub.  The demand for Central London properties is also unrestrained by the financial difficulties facing the general UK public.  Overall, supply in the Central London market shrank by 55% in Q1 of 2011 compared to Q1 of 2010 while demand grew by 50% in the same period. 

Overseas buyers tend to buy in cash, so they are relatively unaffected by ongoing credit constraints.  In addition, the pound sterling’s relative weakness compared to other currencies has led to persistent demand.  The market for properties in the £500,000 to £1 million range is the fastest-growing, which is straining an undersupplied market.  This situation is further exacerbated by current owners’ unwillingness to transition between homes in an undersupplied market, choosing to upgrade or renovate instead.  The market turnover is further depressed by rising rents and landlords preferring to draw rental revenue rather than drawing their properties’ asset value. 

The long-term outlook for prices is based on these supply and demand movements.  Little reprieve in either supply or demand is expected so that the market imbalance will continue to drive up prices at a rate of 6% in 2011.  In addition, other internationally-driven submarkets around London will likely conform or even outperform the expectations for Central London.  Cluttons LLP projects a growth rate of 7-8% in the years 2012-2016 due to anticipated economic stabilization in the UK and globally.