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London house prices are tumbling: will it spread across the UK?

London house prices are falling at the fastest rate since the tail-end of the financial crisis.

The latest house price reading from the Office for National Statistics found that prices in the UK’s capital slid by 4.4% year-on-year in May.

That’s the biggest fall since 2009.

The big question is: will this spread across the UK?

Why London has been hit hardest by the housing downturn
The Office for National Statistics house price index is quite new. But it’s also quite comprehensive and it does come out a lot later than the other surveys, so the data is as close to “finished” as you’ll get.

So while a 4.4% slide in London house prices does seem like a big drop, there’s no obvious reason to discount it. And it does make sense, for reasons we’ll go into in a moment.

All I would say is that if you live outside London, and are hoping for a big slide elsewhere in the UK (prices across the country rose by about 1.2% in May), I wouldn’t necessarily expect it to spread.

There are three main reasons to believe that London is an outlier here. For a start, London prices went up by a lot more than those elsewhere in the country. It’s easy to forget this, because a lot of property comment is written by people living in London, for people living in London.

But the reality is that not every part of the UK has seen the ludicrous price boom that London has enjoyed/endured (delete according to whether you own a house or not). As a rule of thumb, in England and Wales, the further from London you go, the less wild the price appreciation.

Scotland is somewhat different in that Edinburgh is the centre of property price gravity, while Aberdeen has its own unique cycle linked to the price of oil. But prices have still lagged the southeast of England considerably.

As for Northern Ireland, prices there have yet to catch up with their 2007 peak, because Northern Ireland was swept up in the Irish property bubble and the epic bust that followed.

So London is now falling hardest because prices there soared the most.

Secondly, London was always the most vulnerable to all the legislative changes that have been made to try to cool the housing market.

London was the buy-to-let capital. But it also offered the lowest yields (because prices were so high). So over-leveraged London landlords were the first to feel the pain when the withdrawal of tax relief on buy-to-let mortgages kicked in.

Right after the changes were announced, one of the big banks calculated that London house prices would probably fall by about 20% overall as a result, and that now looks like it was a pretty good forecast.

And it’s not just buy-to-let. London was also the main destination for all the footloose and fancy-free global capital that wanted to find a secure bolthole. Once foreign investors started being taxed more heavily, and their affairs began to attract ever-so-slightly more scrutiny than before, the market at the top end of London felt the squeeze more than anywhere else.

Finally, there’s Brexit. I think it’s a pretty minor factor – relative to tax changes and increased suspicion of wealthy foreign buyers – but if it’s going to hit anywhere, then it’s London. (That said, the slide in the pound does have the side effect of making London property appealing to those globetrotters who do still want to buy here.)

Here’s what it would take to create a UK-wide property crash
Of course, if you’re outside London, then I wouldn’t despair either. Prices elsewhere in the UK aren’t exactly rocketing.

Overall, house price growth across the board (at around 1.2%) is now significantly lower than wage growth (around 3.6%). It’s also lower than inflation (about 2% or 2.8%, depending on your favoured measure).

In other words, house prices are falling in “real” (after inflation) terms across the board. Which is just what we’ve been hoping for.

Why are we hoping for that? If house prices fall in real terms, then they become more affordable. That defuses a lot of the political tension in the atmosphere (for most people, property ownership defines which side of the “wealth inequality” divide they feel they are on).

Another benefit of prices falling in real terms but staying basically flat in nominal terms, is that it doesn’t look too scary to existing homeowners. People will learn to cope with owning a house that doesn’t appreciate by roughly double their annual wage every year. But no one likes the idea that they might fall into negative equity.

So a fall in real terms keeps household and bank balance sheets looking healthy, while making life easier for potential first-time buyers.

For a harder fall or a full-on crash, you’d realistically need to see a rise in unemployment, a rise in interest rates, or both. Both of those factors create large numbers of people who suddenly can’t pay their mortgages, and therefore become forced sellers (sometimes via repossession).

Neither of those seems likely in the near term. And ideally, by the time we get to an economic environment where either of those things rise sharply, we’ll have a more affordable market in any case.

That might be too much to hope for – particularly as politics can always throw a spanner in the works – but I’ll keep my fingers crossed.

Of course, it means that the huge numbers of people who seem to be relying on property to provide their pension as well as a roof over their heads, might have to think about diversifying their portfolios.

If you’re nearing the stage of your life where you’re wondering how you’ll maintain your income and your standard of living once you stop working, I’ve got a seminar you should attend.

On the evening of 9 October, The Week’s City editor, Jane Lewis, will be talking to MoneyWeek’s David Stevenson and Charlotte Ransom of challenger wealth manager Netwealth about how to plan for the retirement you deserve. We’ve run these events before and they’ve always proved very popular, so grab your ticket now before they sell out.

By: John Stepek

Source: Money Week

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Sterling touches two-year low as investors hedge rise in Brexit risk

Sterling fell below $1.24 on Wednesday, levels not plumbed for more than two years, as investors continued to price the growing risk of Britain’s crashing out of the European Union without a transition agreement in place.

With economic data also showing the UK economy struggling, putting more pressure on the Bank of England to ease monetary policy, investors are taking to currency derivatives and futures markets to bet on more weakness.

After falling to as low as $1.2382, the pound later rebounded slightly on Wednesday to trade at $1.2426 GBP=D3, up 0.2% on the day, but the currency remains under pressure.

“Clearly the issues facing the UK currently have not been faced in the last decade or so, even during the global financial crisis, and the potential for the pound to hit the 2016 lows is there,” said Neil Mellor, a senior currency strategist at BNY Mellon in London.

In October 2016, the British currency dropped briefly below $1.15, its lowest in more than three decades, during a flash crash in the currency markets in early Asian trading hours.

It has since recovered, strengthening to nearly $1.34 earlier this year. But fears the next British Prime Minister will drag Britain out of the EU without a deal have prompted traders to dump the pound in recent days.

Arch-Brexiteer Boris Johnson is the favourite to become Conservative Party leader next week and hence the next prime minister. Johnson and his opponent for the leadership, Jeremy Hunt, have been vying with each other to show party members their willingness to force a “hard” Brexit.

(For a graphic on ‘One direction for sterling’, click tmsnrt.rs/2NZstIC)

The pound has lost 1% against the euro this month and more than 2% against the dollar, putting it on track for its biggest monthly drop since June 2018.

It is this year’s worst-performing G10 currency against the dollar. HSBC strategists said a “no-deal” outcome would push the pound all the way to $1.10.

(For a graphic on ‘Sterling worst performing G10 currency in 2019’, click tmsnrt.rs/32t7xgc)

Against the euro, sterling weakened to as low as 90.51 pence EURGBP=D3 on Wednesday, a new six-month low, before recovering to 90.285 by 1445 GMT.

“UNDERPRICED”
Traders’ fears seem justified, with Britain’s Brexit minister, Stephen Barclay, telling lawmakers on Wednesday no-deal risk was “underpriced”.

The hard Brexit risk was boosted this week when both Johnson and Hunt said they would not accept the so-called Northern Irish backstop in Theresa May’s proposed Brexit agreement.

The backstop is intended to prevent the return of a hard border between EU member Ireland and British province Northern Ireland. If implemented, the UK would follow many EU rules until arrangements are made to avert a hard border.

That has sent investors scurrying to price greater pound volatility, with implied volatility gauges jumping in recent days — the six-month contract, encompassing the Oct. 31 Brexit deadline, has risen above 9 vols for the first time since early-April, up from 8.3 vols two weeks ago GBP6MO=FN.

“These are all risks we’ve known about for months, so it’s not new, but there is the need for sterling vol to actually price these risks, which it simply was not doing much of before this week,” Nomura strategists told clients.

Markets were shrugging off economic data, with “hedging flows more of a focus”, they said.

Net short sterling positions are at $5.69 billion, having grown for four weeks straight, according to the Commodity Futures Trading Commission.

(For a graphic on ‘GBP volatility curve’, click tmsnrt.rs/32sNMW4)

Reporting by Saikat Chatterjee and Sujata Rao; Additional reporting by Tommy Wilkes; Editing by Larry King and Peter Graff

Source: UK Reuters

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No-deal ‘risks year-long recession, tumbling pound and house price crash’

Britain would enter a year-long recession on a par with the early 1990s, the pound would crash by 10%, and house prices would tumble, according to the latest grim look at the economic toll of a no-deal Brexit.

The UK’s fiscal watchdog warned that Britons would face surging price inflation following a plunge in the value of the pound, but said the Bank of England was likely to slash interest rates from 0.75% to just 0.2% by the end of 2020 to help offset the economic woes.

In its Fiscal Risks Report, the Office for Budget Responsibility (OBR) said that, if the UK crashed out of the EU without a deal on October 31, the UK would be tipped into a “full-blown” recession by the end of the year.£30bnAmount added to public borrowing each year under a no-deal BrexitOBR Fiscal Risks Report

But experts said the OBR’s assessment is a far cry from the Bank of England’s doomsday report published late last year and the OBR itself admitted it was “by no means a worst-case scenario”.

The OBR – headed by chairman Robert Chote – said gross domestic product (GDP) could drop by 2.1% over the next year, driven lower as companies cut their investment amid higher trade costs and the wider economic woes.

Consumer spending would also fall as wages are squeezed by the Brexit-hit pound and higher trade tariffs, compounded by under-pressure wage growth, while unemployment would also initially increase – peaking at just over 5% in 2021.

All this would knock the housing market, with prices likely to plummet by nearly 10% between the start of 2019 and mid-2021.

The economy would start to pick up again in mid-2021, according to the OBR.

Its scenario analysis also looks at the impact on the public finances, warning that a cliff-edge Brexit would add around £30 billion a year to borrowing from 2020-21 onwards and around 12% to national debt as a share of GDP by 2023-24.

The OBR added that. while the plummeting pound will give a fillip to exports, this will be largely offset by the immediate hike in trade tariffs.

While the report makes for painful reading, the OBR said its stress tests are not as catastrophic as the Bank’s controversial no-deal Brexit report last November, which predicted an 8% contraction in the economy, a 25% crash in the pound and a 30% dive in house prices.

It has instead based its analysis on the International Monetary Fund’s outcome scenario.

It said: “A more disruptive or disorderly scenario, closer to the stress test we considered two years ago, could hit the public finances much harder.”

It comes as the Treasury Select Committee separately on Thursday said it has asked the Bank and the Treasury to provide updated scenario analysis of a no-deal Brexit ahead of Parliamentary votes before the October deadline.

Dr Ivan Petrella, associate professor of economics at Warwick Business School, said the OBR gives a “much more optimistic assessment of the potential dangers of a no-deal Brexit than the Bank of England, the Treasury and most commentators are currently predicting”.

He added: “I think the short-term impact projected by the OBR is a much more likely outcome than the severe recession predicted by the Bank of England.”

But he warned that a “rushed no-deal exit is likely to have a more prolonged negative impact on the economy”.

Source: Shropshire Star

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The buy-to-let market stabilises

Buy-to-let activity was mostly unchanged in May, leading to suggestions that it has stabilised, the UK Finance Mortgage Trends Update has found.

There were 5,500 new buy-to-let home purchase mortgages completed in May, the same number as this time last year. There were 15,000 remortgages in the buy-to-let sector, 2% more year-on-year.

Mike Scott, chief property analyst at full-service estate agent Yopa, said: “The number of buy-to-let mortgages for house purchase was unchanged from 2018, suggesting that the buy-to-let market has finally reached a new stable level after several unfavourable tax changes.”

Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “Buy-to-let continues its steady trend, showing that investors are sticking with the sector rather than deserting it in their droves.

“That said, we are also not seeing a flood of new landlords – rather, the experienced ones are adding to their portfolios where they see opportunities and remortgaging to keep costs down.”

Tomer Aboody, director of property lender MT Finance, also highlighted that he hasn’t seen a flood of buy-to-let investors selling up as a consequence of the extra taxes that have hit them.

In 2015 the government said it would start to phase in mortgage tax relief. In 2017 to 2018 the deduction from property income was restricted to 75% of finance costs, in 2018 to 2019 the finance costs are down to 50% and during 2019/2020, 25%.

From 2020 to 2021 all financing costs will be subject to a basic rate tax reduction.

Aboody said: “Investors are absorbing the extra costs and refinancing, hoping that in the long-term values will go up.

“This once again proves that higher stamp duty and extra taxes haven’t helped create more movement in the housing market, but have done the complete opposite and created stagnation instead.”

There were 30,720 new first-time buyer mortgages completed in May, 0.5% more year-on-year.

Jeremy Leaf, north London estate agent and a former RICS residential chairman, attributed this increase in first-time buyer numbers to the slowdown of the buy-to-let market.

He added: “First-time buyers are also taking advantage of reduced competition from the buy-to-let market as landlords reduce activity following various recent tax and regulatory changes with several more on the way which will compromise profitability.

“They are also benefiting from almost record low mortgage rates and improving affordability.”

By Michael Lloyd

Source: Mortgage Introducer

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Will the Bank of England raise or cut interest rates after UK inflation data?

UK inflation has grown at an annual rate of two per cent for the second month in a row, official statistics confirmed today.

The consumer price index (CPI) figure is bang on the Bank of England’s target. It thinks two per cent inflation is ideal for ensuring smooth growth in the economy.

But what does this mean for the Bank’s main interest rate, which currently stands at 0.75 per cent?

If inflation drops below two per cent, the BoE should theoretically cut rates to encourage borrowing and spending, and vice versa.

However, Brexit uncertainty has made the Bank reluctant to take any action for fear of destabilising the economy.

“There is little pressure for the [Bank] to adjust interest rates in either direction,” said Andrew Wishart, UK economist at Capital Economics, in response to today’s figures.

“There was still little sign of rising underlying inflationary pressures despite the continued strength of pay growth in May,” he said. Official figures yesterday showed real pay grew by 1.7 per cent in the year to May.

“A fall in energy price inflation and a reduction in Ofgem’s energy price cap in October should take 0.3 percentage points off inflation over the second half of the year,” Wishart said.

Brexit fog
Investec economist Victoria Clarke said: “For the Bank of England the close-to-target inflation readings helps the institution to maintain its wait and see position amidst continuing questions over Brexit’s likely course”.

“We maintain our view that the BoE is happy sitting tight throughout this year and through much of next year too,” she said.

The way Britain leaves the European Union will be at the forefront of the Bank’s mind. It has hinted it could slash rates to ease the economic turbulence of a no-deal exit.

“On-target inflation gives the Bank of England plenty of room to cut interest rates in the event of sharp slowdown,” said Ian Stewart, chief economist at Deloitte. “The likelihood of the UK joining the global move to easier monetary policy is rising.”

But George Buckley, Nomura’s chief UK and euro area economist, said: “The response of inflation to a hard Brexit may be for a sizeable rise” due to higher tariffs, restrictions on incoming goods from Europe, and a lower pound.

Such a rise would ordinarily trigger a rate cut, but the Bank will likely wait and see exactly what happens to the economy immediately after a no-deal exit, should it occur.

Certain elements of today’s inflation figures, such as lower producer input and output prices, are “helpful for the Bank,” said Howard Archer, chief economic adviser to the EY ITEM Club.

The data gives “decent scope” for the BoE “to adopt a flexible approach on interest rates should the economy continue its current struggles amid Brexit uncertainties,” he said.

By Harry Robertson

Source: City AM

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London house prices plunge at fastest annual rate since 2009

London property values fell by 4.4% in the year to May – the biggest decline since August 2009, the ONS and Land Registry said.

House prices in London have tumbled at the fastest annual rate since 2009, official figures show.

London property values fell by 4.4% in the year to May – the biggest downward slide for the capital since August 2009 when there was a 7% fall.

Housing market experts blamed Brexit uncertainty combined with “punitive” stamp duty costs.

Across the UK as a whole, house price growth remains slow, with northern areas and Wales seeing stronger growth, the report, released jointly by the Office for National Statistics (ONS), Land Registry and other bodies said.

Average UK house prices increased by 1.2% in the year to May, slowing from a 1.5% increase in April.

The average UK house price stood at £229,000 in May.

While London house prices fell over the year, the area remains the most expensive place to purchase a property with an average price of £457,000.

The report said London house prices have been falling over the year since March 2018.

ONS head of inflation Mike Hardie, said: “Annual house price growth remained slow but was once again strong in the North West and Wales.

“However, London experienced its biggest annual fall since August 2009.”

Average house prices increased annually by 3% in Wales to reach £159,000; by 2.8% in Scotland to £153,000; by 1% in England to £246,000 and by 3.5% in Northern Ireland to £135,000.

The North West was the English region with the highest annual house price growth in May, with values increasing by 3.4%. This was followed by the West Midlands, where house prices increased by 2.7%.

While prices fell in London by 4.4% over the year to May 2019, affordability is still an issue for those buying in the capital and South East as prices remain relatively high compared to incomes

Jonathan Harris, mortgage broker at Anderson Harris

Jonathan Harris, director of mortgage broker Anderson Harris, said: “House price growth is slowing as sentiment continues to weaken, partly as a result of Brexit uncertainty.

“While prices fell in London by 4.4% over the year to May 2019, affordability is still an issue for those buying in the capital and South East as prices remain relatively high compared to incomes.

“Mortgage rates remain low and continue to support transactions. Re-mortgaging remains strong as many people stay and improve rather than footing the considerable bill for a move to another address.”

Gareth Lewis, commercial director of property lender MT Finance, said: “The South West (where prices increased by 2.6% annually) and North West have shown reasonable growth over the past year and are propping up UK average property prices.”

Annual change in UK house prices
(PA Graphics)

Sam Mitchell, chief executive of online estate agent Housesimple, said: “House price growth remained somewhat subdued in May, but this does not tell the whole story…

“London’s price fall has plagued the UK average partly due to uncertainty but mainly because of the punitive stamp duty regime, while slowdowns in the South and East of England over the past three years have also taken their toll.

“Yet economic factors that underpin the property market are looking strong.

“Plus, the housing market is still showing sturdier than expected signs of resilience amid political uncertainty.

“Low unemployment and historically low interest rates are leading to high demand from buyers supporting house price growth, particularly in the North West and West Midlands.”

Marc von Grundherr, director of lettings and estate agent Benham and Reeves, said: “Although price growth may remain muted, these ‘slower’ markets are still home to the highest property prices in the UK.”

Source: Express and Star

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Home owners ‘improving rather than moving’, figures suggest

Mortgage lending to home movers was down annually in May amid signs that households are improving by borrowing extra cash, rather than moving.

Some 29,430 home mover mortgages were completed in May – 1.2% fewer than in the same month a year earlier, UK Finance said.

Meanwhile, the number of re-mortgages where households borrowed extra cash jumped by a fifth year-on-year.

There were 21,370 new re-mortgages with additional borrowing in May, 19.8% more than in the same month in 2018.

For these re-mortgages, the average additional amount borrowed in May was £52,000.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said UK Finance’s figures confirm “a trend we are seeing – that people are keen to stay put and improve or extend, rather than go to the considerable cost of moving to another property.

“Some borrowers are also releasing extra cash to help children or grandchildren onto the housing ladder or to cover other costs such as school fees, with older borrowers in particular taking advantage of the sizeable equity they have built up in their homes over time.”

Some 19,650 “pound for pound” re-mortgages with no additional borrowing were recorded – 19.7% more than in May 2018 – as home owners came to the end of their existing deals.

UK Finance also said 30,720 new first-time buyer mortgages were completed in May – 0.5% more than in the same month in 2018.

In the buy-to-let sector, there were 5,500 new home purchase mortgages completed in May – the same as a year earlier.

Buy-to-let re-mortgaging increased by 2% annually, with 15,000 re-mortgages in May.

By Vicky Shaw

Source: Yahoo Finance UK

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UK house asking prices slip for first time in 2019 – Rightmove

Asking prices for British homes fell this month for the first time this year as buyers’ confidence took a hit from the escalating uncertainty around Brexit, property website Rightmove said on Monday.

The average asking price for residential property advertised on Rightmove fell by 0.2% in July after a 0.3% rise in June. Compared with a year ago, prices were down 0.2%, Rightmove said.

The fall in July contrasts with signs of improvement in a survey of chartered surveyors published last week, underlining the uncertainty hanging over the housing market.

“The housing market fundamentals remain largely sound in many parts of the country, but the current political climate means that the crucial ingredient of confidence has been impaired, and that is causing some potential buyers and sellers to hesitate,” Rightmove director Miles Shipside said.

Britain’s housing market slowed after voters decided to leave the European Union more than three years ago, but several indicators have suggested a stabilisation in recent months.

Reporting by Andy Bruce, editing by David Milliken

Source: UK Reuters

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Sterling slides back to $1.25 as economy and Brexit worries grow

The British pound fell back towards six-month lows against the dollar and the euro on Monday, with traders still nervous about a loss of momentum in the UK economy, the prospect of an interest rate cut and a new prime minister.

At the end of last week, sterling ended a nine-week losing streak against the euro and inched up from a low of $1.2439 hit at the end of June.

However, analysts are largely bearish on the pound after a run of poor economic data and signals from the Bank of England that its next move may be to cut interest rates rather than raise them, as it had previously flagged.

The pound fell 0.5% to $1.2510, while against the euro it declined 0.5% to around 90 pence.

Sterling had hit a six-month low of 90.10 pence per euro last week.

On Tuesday, employment and wage growth data for the month of May will show how the British labour market is holding up. Many economists expect the UK economy will have contracted in the second quarter.

Investors are also waiting for the outcome of the Conservative party leadership contest to replace Prime Minister Theresa May.

Eurosceptic Boris Johnson is the favourite to win against Jeremy Hunt in a vote by Conservative party members. The winner will be crowned leader – and prime minister – by the end of July.

Nomura FX strategist Jordan Rochester said the bank’s analysts had concluded that sterling was “in the value zone for now, vols are cheap and a lot of bad news is priced in, but that’s just for the next six weeks or so”.

“In September, hard Brexit risks will once again be priced in by markets,” he wrote in a research note.

Britain is scheduled to leave the European Union on Oct. 31.

David Madden, analyst at CMC Markets, noted that on a technical basis, sterling/dollar “has been driving lower since mid-March, and if the bearish move continues it might encounter support at $1.2365 region.”

Reporting by Tommy Wilkes; Editing by Jon Boyle and Kevin Liffey

Source: UK Reuters

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Student rents indicating increasingly competitive market

Data from Accommodation for Students (AFS) analysing the cost of student accommodation* in 2019 has found that the average rents across many cities are close to the 20-year average of £79 per week. This is good news for students indicating that there is value to be had, but may mean that landlords have to work harder to secure student tenants.

Currently (2019) the average price for student accommodation is £86 per week but if London is removed, where its buoyant market commands an average room rent of £187, the UK average would be £79. The relatively small difference in price between the 20-year average and that of 2019 reflects the fact that in the majority of UK cities, the competitive nature of the student housing market, with the growth of the PBSA sector particularly outside the capital, has curbed rental increases.

Overall, this has been a functioning housing market, with value to be had in the majority of cities. Cities like Wolverhampton, Bolton, Hull and Dundee have 20-year average rent costs of £62, £63, £65 and £66 respectively. At the opposite end of the scale are more expensive locations like Brighton (£106), Guildford (£111) London (£115) and Kingston (£117).

While this might be anticipated, with such locations generally high cost anyway, cities with strong Universities, and hence attractive to students, like Birmingham (£70), Newcastle (£74) and Sheffield (£75) have all offered great value over the last 20 years.

Simon Thompson, Director of Accommodation for Students, comments: “AFS has been the home of student accommodation for 20 years, featuring 198,000 student houses across all major UK university towns and cities. Analysing rents over this period, demonstrates a vibrant market, where at one end of the spectrum there are properties on the market for £900 per week (Chapter Spitalfields) but students can also secure some very reasonably priced accommodation elsewhere.

“As the market has become increasingly competitive for landlords, we have invested heavily in making improvements to the AFS site. As well as offering automated feeds, enabling letting agents to instantly upload multiple properties in any format in real time, we are currently finalising a new landlord account area making it easier for landlords to connect with the 3 million students that visit the AFS portal every year.”

Following major upgrade of the AFS portal, the company has seen the number of enquiries through the site increase by 51% year on year.

Source: Property118