UK residential market positive for 2011

KUALA LUMPUR: The UK residential market is strengthening, reported Knight Frank head of residential research Liam Bailey in January 2011's Residential Market Update.

"As we enter the new year there is much to be relieved about regarding the UK housing market," said Bailey. "Prices rose slightly in 2010, and the volume of sales while not spectacular was at least consistently higher than the level seen during the crash. The concerns for this year relate to weak growth in real incomes and declining consumer confidence, but the real issue is the ongoing difficulty large numbers of prospective buyers have in accessing the mortgage market. This issue of access to debt is likely to be the critical factor determining market performance in 2011."

The outlook for 2011 will feature three main issues such as falling household incomes, mortgage market restrictions and the risk of rising interest rates, Bailey observed.

The prime market performance was encouraging with price falls reversed since November 2010 and continued through December with a rise of 1.3% recorded over the month.

"The most recent price rise means that prices ended the year higher by 10.3% compared to December 2009," said Bailey. Prices at the end of December were 26% higher than the market low in March 2009, but 4.4% below the peak level in March 2008.

"The central London residential market continues to outpace the weakening UK market," Bailey said. "The drivers for this strength in performance are strong demand set against week supply."

The strong demand is due to the weak sterling pound, and the eurozone crisis has driven European buyers to buy into the central London property market, due to the perceived "safe-haven" investment of the area. European purchasers' registrations rose 25% in the final three months of 2010 on a year-on-year basis.

As for London's rental performance, it rose 2.2% in the 4Q2010. "This means that rents have risen by 16% over 2010 as a while and by 19% since their low point reached in mid-2009 when the market was suffering from significant over supply," Bailey observed.

The volume of available rental properties across the year was 20% lower than in 2009. The reasons for the rental market are two-fold: employment conditions in central London are much healthier than in 2009 and the many deals are still locked out of owner-occupation structures and have to consider renting.

"With landlord investments delivering 3.5% yields, together with capital growth of 10.3% in 2010, we should expect more investors to be drawn into the market – indeed, there has been a steady growth of demand for property from investors over the past 18 months," said Bailey.

Overall, Bailey doesn't see strong capital growth in any residential sector in 2011. "The key reasons are related to improving yields, rents have been rising steadily over the past two years, especially in southern England and London and also supply and demand dynamics," he said.

2011 will be the third consecutive year when new-build development volumes will struggle to reach even 50% of their 2007 peak level. Demand for accommodation in most parts of the UK outpaces supply and this situation is set to become more extreme over the short-term. This is the key reason why affluent investors are continuing to add properties to their portfolio.

"For those who have access to equity this year, there will be considerable opportunities in the market in 2011," said Bailey. "For the investor these opportunities will be centred on strong yielding properties and refurbishment projects, whilst for developers it will be development small to medium-sized sites with a product targeting owner-occupiers and longer-term investors."
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