We are in unchartered territory in global residential property markets. Over the approaching years we are likely to experience an unusual combination of factors; relatively low capital growth in property values, prolonged record low-interest rates, severe political and economic global uncertainty alongside shortages of housing – particularly for genuinely affordable housing.
Historically, a mixture of housing shortages alongside record low-interest rates (as well as a weak currency within the UK) would have precipitated a housing boom and investors would have flocked to those markets for a bit of the pie. within the past, developers could have relied on likely future growth to entice investors into the market. However, an equivalent set of circumstances might not necessarily cause an equivalent conclusion.
There is little question that there’s likely to be some growth in capital values over the approaching five years; however, within the absence of drastic changes to both levels of taxation, and enhancements within the outlook for the worldwide economy, growth is unlikely to be anywhere near levels experienced between 2009 and 2015. during a low growth environment, rental levels will likely be one of the main contributors to future growth. Rents, or indeed the power to pay rent, are directly linked to income levels and, in the UK, inflation-adjusted average weekly wages are yet to return to the amount they were pre the 2008 downturn. it’s also notable that, for investors, much of this increased rent will simply offset costs both in terms of greater transactional costs (in the shape of additional SDLT) also as additional tax costs.
As Help to shop for continues to percolate and drive UK sales (albeit perhaps nearing capacity in terms of the transactions it’s capable of delivering) what is going to be the stimuli required to drive much-required growth in housing supply, particularly in inner London which has been particularly hit by the present environment? This new reality may have a profound effect on the market and therefore the way during which participants and developers operate. a bit like the GFC forced developers to vary their delivery model, perhaps we are entering a replacement introduce the residential development delivery cycle? I even have hung out recently discussing the market with various industry players and that I think we are likely to ascertain a variety of serious changes over the approaching years.
Firstly, it’s highly probable we’ll see the further ascent of the build to rent (BTR) market. this is often likely to be driven through a mixture of accelerating rents and indeed the dimensions of the rental market, alongside future governmental changes promoting BTR as its own use class. additionally, developers are going to be trying to find greater sales certainty as economic confidence remains muted. within the BTR space, we could see operators becoming more willing to simply accept both planning and construction risks so as to drive returns, also as new strategic relationships being formed between operators and house-builders who will undoubtedly find a symbiotic relationship. and maybe even an outsized operator will acquire a serious house-builder or a part of their business.
Similarly, to the financial services industry, technology is probably going to play a big role within the new market reality and indeed a number of the most important future market participants probably don’t currently exist. As we’ve witnessed in other industries, technology is going to be a double-edged sword; PropTech companies, blockchain, and maybe even cryptocurrency will all make transactions more seamless and convey simplicity. we’ve often heard of the paranormal tokenization of property assets – perhaps this is often now closer to becoming a reality. However, new technology also will be highly disruptive, and existing players will get to change the way they are doing business as ‘live transaction’ information will become much more accessible. For an industry that has traded in an opaque market and been guarded with information, new technology will pose a challenge for several.
Whilst BTR will definitely be a serious new contributor to housing supply, it’ll not be a solution to heralding the answer to the housing crisis. Simply not all developments will suit this market product; nor perhaps is that the market deep enough to bridge the gap between demand and provide. We are likely to experience some movement within the development market where participants adapt their model to satisfy this new dynamic. From discussions, I think we are likely to ascertain two changes during this space.
Firstly, for those developers who require pre-sales from investors so as to satisfy construction targets, they’ll well be got to create new strategies to draw in investors. One area during which we may even see the market development is that the creation of two clear sorts of tenure space within an equivalent building delineated specifically through specification. during this scenario, the developer may indeed look to re-price the danger related to pre-sales to investors and/or provide a tangible discount to retail pricing at launch so as to draw in investors.
Additionally, we could see the increase of a replacement sort of developer who seeks to supply access to development profit so as to retain investors; or perhaps play a development management role to get scale. As these businesses mature, counting on their end game, they might transition to a more traditional role; but as this is able to suggest a successful starting strategy, they might then likely get replaced by other start-ups occupying an identical space. Either way, the residential landscape will look rather different from today – and therefore the speed at which this might occur may surprise us all.