Market Prospects – Year End 2013
POSITIVE TRENDS TO CONTINUE
It is our view that sale prices will rise by a further 7% in 2014, across City, Midtown and Docklands and that most of the growth will occur in the first half of the year before settling into a calmer second half. We expect strong demand to continue throughout the year from equity-rich buyers in the UK and overseas but growth will wane as the market takes stock of a prolonged period of rapid price rises.
The prospect and build up to a General Election in May 2015 is likely to suppress demand in the early months of 2015 but we expect a further rise of 5% in the second half of 2015 once the usual uncertainty that precedes a General Election is replaced by the certainty of a new Government being elected. We expect the same outcome no matter which party gains power.
Price pressure has been, and remains, highest for one-bedroom apartments and we do not expect the same levels of growth to be achieved for two and three bedroom apartments. For these, we would reduce our predictions to growth of 5% in 2014. The reason for this is that one bedroom apartments are more affordable and, in Central London, the rental market is stronger for a one bedroom apartment.
Another area of the market in which we anticipate strong demand in 2014, is for mixed-use freeholds with residential accommodation above retail units. There are relatively few such properties coming to the market and, for that reason, demand will continue to outstrip supply.
With supply constrained by a pre-sold development pipeline, we expect values to increase by 7% in 2014.
Already 26% of London’s households live in the private rental sector and we expect this proportion to grow over the next five years.
It seems inevitable that some owners will take the opportunity to realise capital gains in 2014, following a period of such steep increases in capital values. This new stock will bring some modest relief to supply constraint, though not enough to restrain further price increases and there will be only a limited contribution from new development because so much of it has been pre sold during, or prior to, construction.
Rental stock, on the other hand, will expand in 2014, as new developments are completed and investor-owners offer them for letting. Again, one bedroom apartments are in shorter supply than larger units and thus demand is stronger in this segment of the market.
Nevertheless, we expect another flat year for rents, and the only areas we expect to experience rental growth are Midtown and the West End where supply remains low. In these two areas, we expect an uplift in rents in 2014, of 10% for a one bedroom apartment and 5% for a two bed apartment.
If our outlook for 2014 is proved right, then investment yields from prime residential property in Midtown, City and Docklands will dip towards 4% by the end of the year and close to 3.5% for new homes but even with returns of 4% we expect the demand for investment properties in the heart of London, to remain robust.