Three trends identified to reshape UK’s real estate sector

KUALA LUMPUR: Three structural catalysts has been identified by a research firm in United Kingdom that could reshape both the residential development and investment markets over the longer term in the country’s real estate sector said Savills Research director Yolande Barnes.

In a report on development and investment for the month of September, Barnes said that how the sector responded to these three trends would have far-reaching implications. The three trends are a shift in tenure, financial viability and a broader investment climate.

The first trend of shift in tenure refers to the owner-occupation in the UK, which Barnes described as “over”. She said that the shrinking number of owner-occupiers is due to the difficulty in market entry – even for those with high income – and that renting would be the tenure of the future.

“We believe a move towards more private renting offers distinct possibilities for both developers and investors to diversify and mature,” she said in her report.

The second trend of financial viability is “already beginning to be seen in land markets”. Barnes said that a permanent gap seems to be opening up between the value of small, serviced sites and large strategic and regeneration sites, which require major ‘pump priming’ capital investment.

“The lack of credit availability and the cost of this has triggered a rift, which means virtually none of the more difficult sites are currently trading. In future, land value uplift at grant of planning permission will not be automatic, it will be entirely dependent on the viability and profitability of the planned scheme with future market uncertainty heavily factored into valuations,” she said.

A broader investment climate - the third trend that is taking place in UK’s real estate sector – is set to change the face of housing investment and development is the broader investment climate. Barnes said that the challenges of servicing the pension provision of an ageing population will require a shift to cashflow investment.

“We believe purpose-built residential property will play a large part in delivering this outcome. Some quasi-residential sectors, such as build-to-let student housing have already pointed the way to how investment models might look,” she said.

Barnes added that these three trends present themselves as opportunities and threats, and that a new method of delivery is needed if homes that people want and need are to be provided.

She also said that in the UK, 2008 has been a difficult year for house builders and investors as house prices fell dramatically, real estate transactions dried up, lending was difficult to gain, and development land values plummeted.

She said that the price fall decreased the net value of residential investment portfolios and the withdrawal of buy-to-let mortgage finance left few able to cash in on the bottom of the market.

By the late 2009 and 2010, the residential industry has shown signs of recovery as house builders worked through their standing stock, repaired their balance sheets and, on the back of a mini recovery in the housing market, re-entered, to a limited extent, the land market.

“New models of residential investment were also being touted, with large-scale investors actively looking to step into the shoes of the now-disappeared buy-to-let landlord,” Barnes wrote in her report.

However, despite the recovery of 2009, Barnes believes that the housing market is at a second tipping point and faces the prospect of short-term price falls or, a period of low/zero growth.

She said that as low interest rates act as a safety net for house prices, the second slip in values of real estate is expected to be relatively short lived, “but only if the economy continues its slow-but-sure recovery, as consensus economics currently predicts”.