Market Overview – Year End 2013
AN EXCEPTIONAL YEAR FOR CAPITAL VALUES
2013 was an exceptional year in London’s residential property market. It began with the spectacular launch of Battersea Power Station in January, which completed 600 sales in four days – 480 secured in the Far East and 120 in the UK. By the end of the year, prices for one-bedroom apartments across Midtown, City and Docklands had risen by 20%.
This was the strongest annual growth in the London residential market since 2006, when we reported prices rises of 26%.
But these price rises were not matched by growth in rental values. Nor indeed is there any reason to expect that they should be. In fact, rental value growth slowed in 2013 to nil or a nominal increase and actually declined in the City. And, since prices have risen strongly and rents have not, yields from residential investments have fallen this year.
In City Midtown and Docklands, 80% of new home purchases (and 33% of all sales) were intended as buy-to-let investments and will find their way into the private rental stock. It is this flow of new supply that is maintaining stability in rental values and we see this trend continuing in 2014.
Looking ahead, any threat to the future of the sales market will come from taxation reform aimed at overseas investors, or steep rises in interest rates, which could destabilise domestic demand. No matter how subtle, the prospect of either of these has the potential to dent confidence. The market has yet to fully absorb the impact of higher rate SDLT introduced in Mrch 2012 at 7% for properties above £2,000,000.
That said, we are not expecting a substantial slowdown in demand or transaction numbers or a major price correction. Owners in our markets are well-funded and we know from experience that when demand falls owners turn in greater numbers to the rental market rather than become forced sellers. This was demonstrated between September 2007 and February 2009 when despite a steep decline in transactions following the banking crisis, central London had very few distressed sales and even fewer repossessions.
Pressure for residential property is unlikely to ease as long as London’s population continues to expand. Between 2011 and 2012 the number of people living in London grew by 1.3% to 8.3 million and it is forecast to grow by another million before 2021.
London has a housing shortage. The mayor of London’s office has responded by setting ambitious targets of building 400,000 homes in London over the next 10 years. Even if this figure were to be achieved, London would still have a housing shortage. Already, 26% of London’s households live in the private rental sector and we expect this proportion to grow over the next 5 years.
There are two critical dates looming. The first is the unknown date of an inevitable rise in interest rates. It seems unlikely that the Bank of England will wait for the 7% unemployment trigger before making a change and we do not rule out a small rise towards the end of 2014 provided the wider economy continues to improve.
The second date is the widely expected General Election in May 2015. We expect the coalition government to resist introducing any controversial new policies over the next 18 months. The prospect of a General Election and consequent political positioning creates uncertainty which can cause the market to stall in the six-month lead-in, starting at the end of 2014.
Our market craves certainty and, from experience, we anticipate a bounce in confidence following the General Election, whichever party is elected and more buyers in the market from June 2015, which may well fuel further price rises.
PRICES PER SQ FT RESALE MARKET 2013