JULY
PROPERTY MARKET UPDATE
July 31, 2023
UK Residential Investment Market Report, July 2023
UK economists were pleasantly surprised this month when the rate of inflation eased, confounding expectations. June’s Consumer Price Index (CPI) figures saw inflation fall to its lowest level in a year to 7.9% from its static of 8.7% in April and May. Mortgage lenders were quick to comment, forecasting interest rates to fall and be passed onto consumers from early 2024. Zoopla were more optimistic, predicting that mortgage rates would return to between 4-5% this autumn.
In this market update we’ll be summarising the major market commentary and outlining the best investment strategy for the prevailing market conditions. Important to note, is the market for new build investment properties is entirely different to that of the mainstream market the UK headlines often refer to. Within the margins of the residential development market there are nuances to be noted and savvy investments to be made.
What is the prevailing consensus on the UK property market now?
Succinctly, it’s one of optimism. Falling interest rates, a “ripping rate” of earnings growth at 7.3% and lenders exhibiting more tolerance towards those expressing concern about the rising cost of their existing mortgages has unleashed a wave of optimism in the market. RICS monthly residential survey reports numbers of new sales instructions gradually increasing. Interestingly, Zoopla highlights how year on year demand has decreased by 40% but sales are only 17% lower, meaning there are more committed buyers and sellers in the market, making for a sounder foundation.
In their mid-year outlook, CBRE commented, “Inflation has remained stubbornly high but has fallen from its October 2022 peak, with GDP growth being slightly better than anticipated and the labour market remaining tight.” The real estate investment firm forecast a recovery in transactional activity over the second half of the year as “investors will come under pressure to either release or deploy capital as the year progresses.” This trend seems to support the latest data from Zoopla about an increased level of committed buyers and sellers in the market. CBRE further reported that “investors are exhibiting more appetite at present for residential, logistics and operational assets,” thus showing the opportunity the residential new build market presents our clients at the moment.
Where are the best places to buy in the UK market right now?
As we’re always remarking, the UK is not one monolithic market. Zoopla’s July UK House Price Index showed “affordable markets in economically active areas still registering annualhouse price inflation of over 3.5%.” What does this mean? Well, increased interest rates have disproportionally affected demand in the South East where house prices are highest, meaning buyers feel the squeeze more. More affordable markets are not registering price falls, amongst which are Birmingham, Manchester, Nottingham, Liverpool and the East of England (Essex and Suffolk). That said, the South East showed a quarterly price change of +4.7% according to Zoopla.
The highest gains belong to Nottingham, Birmingham and Manchester – again, all relatively affordable markets, where increased mortgage rates of even 5.5% have not been enough to dampen demand. East of England showed a 3.5% rise against London’s 1.4%. And it’s worth putting this all into context, acknowledging that average house prices are still 15% higher than they were at the start of the pandemic.
What’s happening in the rental market?
Data released by the ONS showed that the affordability for renting is at its ‘worst’ for a decade. Commenting on the figures, the BBC reported, “Official figures show rent rising at its fastest annual rent since comparable records began in 2016.” Meanwhile, a release from Rightmove supported the frenzied rental market view; the number of requests per property of potential tenants wanting to view rental homes has more than trebled since 2019 when the UK average was 6 requests per property. This quarter, requests numbered 30 per property in Manchester, 25 in Birmingham and 15 in London.
London rents jumped 5.1% during the month of June alone according to Hamptons who explained the unprecedented demand as the combined result of students and workers returning to the city post-Covid and the short-term effect of landlords having sold up meaning a reduced number of rental properties available. For sure, it doesn’t take a genius to reason that reduced supply plus increased demand will result in a highly competitive rental market.
Rightmove
“Tenant demand continued to exceed even last year’s frenetic levels. Demand is 3% more than the same period in 2022 and 42% higher than June 2019.”
What’s happening in the new build market?
In what is probably bad news for renters but good news for landlords and investors (and highly telling of a further squeeze in supply) the number of EPCs awarded to new homes showed a 13.5% fall in Q2 of this year, compared with the same quarter in 2022; the biggest non-pandemic fall in the last decade. High-end buying agents RFR reported that the level of new build stock in London was down an astonishing 83% since 2016. Average London rent now stands at £2,567 a month, and with the London market relatively insulated by the volume of cash buyers, many investors who bought with cash are no doubt reaping the profits.
CBRE
“The rental market will continue to see demand significantly outstrip supply. Increased mortgage costs for potential first-time buyers who are currently renting, a strong labour market and high inflation will fuel rental demand.”
Where and what should you buy in the UK at the moment?
If you’re asking yourselves this question, then we would say:
1) New build with EPC ratings of A and ideally no lower than B,
2) Modest properties
3) Regional city centres or outliers such as East of England.
New build because of the energy efficiency, modestly sized properties because of the cost-of-living concerns amongst tenants (but make sure there is working from home provision) and regional city centres/East of England because of the increased demand and supply shortages in the pipelines. If you’re buying with cash, lucky you, you’ll get the pick of the crop. For clients looking at leveraging, then we’d echo Richard Bishop, mortgage advisor at PFEP Wealth Management who wisely advises, ‘Tracker rates may be the right move in the short-term before buying a fixed two-year deal in the second quarter of next year.’
Whether you are departing for foreign climes or staying at home, we wish all our clients a happy summer break. As ever, if you’d like to discuss a prospective purchase please contact a member of our team, or enjoy some window shopping and peruse our current developments here.
Featured Property Development
SUDBURY FIELDS
SUDBURY, SUFFOLK
A rural community of 46 homes in the Suffolk village of Great Cornard, close to the picturesque market town Sudbury.
RICHARD BRADSTOCK
RPA Group Managing Director
about the AUTHOR
RPA’s founder, Richard has worked in residential development investment for 20 years and oversees the general running of the business ensuring the RPA Group retains true to its founding principles. Over his career Richard has built an incredible network of international property investors and like-minded industry professionals. The RPA Group was born out of a duty of care to provide property investors with an industry-leading and integral service, one that connects investors with quality and desirable investment opportunities, whilst providing reliable and trustworthy market commentary and analysis alongside, enabling investors to make the best, most-educated decisions for them.