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Outlook for the global housing market

Suzanne Albers, senior director, structured finance at Fitch Ratings, analyses the housing markets of countries around the world and finds similarities as well as some unique differences

Fitch examines 22 countries in its annual Global Housing and Mortgage Outlook report and national home prices are forecast to rise this year in 19 of these, with UK, Norway and Greece the exceptions. However, the rate of growth is expected to slow in most markets and risks are growing as the prospect of gradually rising mortgage rates comes into view this year.

Outlook for the global housing market Commercial Finance NetworkOver the past few years, the ideal conditions for rapid home price rises existed in several markets, with the combination of extremely low borrowing costs, readily available credit, steady economic growth and limited housing supply. Price rises have been most prominent in markets that have seen mortgage interest costs fall close to record lows, while consumers still have solid employment prospects.

Home price increases in 2017 generally exceeded our forecasts; in Ireland, Canada and the Netherlands they have been far higher than anticipated, as low interest rates outweighed home purchase affordability constraints. Stable or improving economic growth and employment will support prices in addition to mortgage rates only rising slowly in most markets, following gradual unwinding of quantitative easing, which will feed into higher policy rates and more expensive bank funding.

Positive market expectation for 2018
Marking a change from recent years, Fitch has its most positive market expectation for the Eurozone with a positive outlook for Ireland and a stable/positive outlook for six of the other eight Eurozone countries in its report.

Fitch expects home prices to rise by 10% in Ireland in 2018, which is the only prediction for a double-digit increase, as demand is boosted by government support for first-time buyers. Home prices are finally bottoming out in Italy after years of price declines, leaving Greece as the only European country with falling prices. Prices will rise by 1%-5% in the core European markets and between -2% and 5% in southern Europe.

Turning to the UK, Brexit uncertainty, stretched affordability and low income growth led to national house price growth in 2017 dropping to less than half of its 2016 level. However, low unemployment, historic low interest rates and a housing supply shortage continue to support home prices. Fitch expects average home prices to remain flat across the UK in 2018 and a small fall in London and the South East due partly to the possibility of financial services jobs being relocated to the continent.

Some global hotspots cooling
In 2018, we expect prices to stabilise or drop modestly in overheated markets in several cities, but if corrections are only limited after several years of very high growth, the risk of large price declines in future downturns remains.

In 2017, we saw three cases in which multiple factors pressured prices in overheated markets: Oslo faced heighted supply, lending limitation and falling immigration; whereas London was affected by decreasing demand from foreign nationals in light of Brexit uncertainty and buy-to-let changes, including lower tax deductibility for rental income. In China, the impact stemmed from a range of home purchase and mortgage lending restrictions. Fitch believes that in 2018 a combination of factors will be needed to constrain speculation-led house price rises.

One area that regulators are focusing on is limits on non-residents. In 2018, we expect some impact from limitations on foreign, non-resident buyers in Australia and parts of Canada, while a new limit is also expected to apply in New Zealand. When combined with the 2017 limitations on foreign currency transfers out of China by Chinese nationals, non-resident demand is expected to drop in several cities. However, many markets also have demand from first-time buyers that may enter the market if prices stabilise or fall.

The graph opposite shows the change in home prices over four years for the region with the largest increase, the smallest increase and the country average. Where price growth cooled in 2017, such as in Norway, the UK and China, the gaps shown (between the four-year growth rates from the areas with highest and lowest growth) reduced compared to these levels in 2017. The narrowing has almost exclusively come from lower growth at the top end rather than catching up from the bottom.

Some gaps are still growing, including in countries with booming centres such as the Netherlands, Austria and Canada and to a lesser extent in Italy and Germany. Going forward, we may see more cases like Vancouver in which regulation only steadies prices briefly before speculation pushes them up again. Also, large economic events that could impact large cities and potentially would also likely impact rural areas that have stagnant home prices, so we would expect regional disparities to continue.

Canada is also interesting from the question of urban versus rural fundamentals. Certain cities around the globe, such as Toronto, London and Auckland, have had high net inward migration, strong economies and strong prices rises. These markets attracted foreign, non-resident investment and expectations for further growth from residents. With the exception of Brexit’s potential impact on migration to London, these migration trends are expected to continue. However, while Toronto, Canada’s largest city by population, and Vancouver, the seventh largest city have seen this dynamic, Montreal and Calgary (the second and third largest) have not, which shows that the urban/rural relationship is only part of the cause.

Outlook for the global housing market Commercial Finance NetworkLending will grow but pace will slow
Gross new mortgage lending will rise in 2018 in 18 of the 22 markets covered in Fitch’s Global Housing and Mortgage Outlook, but rates of increase will mostly be lower or unchanged from 2017. Demand for property remains strong, although refinancing volumes are slowing after borrowers locked in low rates. Coupled with still low margins and competition to lend to strong borrowers, this could push banks down the credit curve to maintain volumes, creating a medium-term risk to performance.

The composition of new lending is changing in some markets in response to borrower preferences and regulation. For example, fixed or fixed-to-floating rate loans now represent around half of Spanish originations. Denmark has seen a shift towards longer fixed rates and amortising loans in recent years. In Australia, the regulator is restraining lending growth in high risk segments. US borrowers may seek second liens and home equity lines of credit as more lenders re-enter this market.

In North America, US lending volumes will grow after contracting slightly last year. Over half the country’s biggest lenders are now non-banks, and some are active in non-prime lending. Banks have ramped up prime quality and agency loan purchases from third-parties. Regulatory intervention, including mandatory interest rate stresses, will slow Canadian lending growth.

Like the US, the UK will continue to see activity from non-bank lenders, but in the UK, these new players are typically focussed on the buy-to-let market. We think regulatory changes and stricter underwriting guidelines will continue to dampen buy-to-let lending while overall UK mortgage lending volumes will be unchanged.

Dutch and German volumes will grow like last year, with competition in the Dutch market keeping costs low and supporting refinancing. In France and Belgium, refinancing is largely complete and volumes will contract. Other than Italy, gross new lending in the eurozone periphery will post double-digit increases. Portugal will see the largest increase (20%), but the stock of mortgage loans will fall or remain flat until 2019 at the earliest, as amortisation offsets new lending. In Ireland, Central Bank of Ireland proposals may encourage competition between lenders.

In the Asia-Pacific region, less refinancing will see Japanese new lending contract, while other developed APAC markets post single-digit gains. Australian lending growth will slow slightly due to recent limits on interest-only and investment lending, while New Zealand will see steady growth of around 3%. Lending growth in Singapore is picking up to 5%-7%. Mortgage restrictions are among the steps taken to cool the Chinese housing market. Our forecast of a 17% rise in net new lending in 2018 is high, but would be less than half that seen in 2016. Strong asset quality and relatively low risk weights will sustain banks’ appetite to lend to the extent possible.

Arrears to stay low as rates gradually rise
Mortgage arrears are at very low levels in most markets. They will only move in one direction as mortgage rates rise slowly due to higher policy rates and more expensive bank funding from the gradual unwinding of quantitative easing. Floating-rate loans and borrowers refinancing to new rates will be first affected. Long-term fixed-rate loans are less exposed to increasing rates, but fewer re-financings mean lower lending volumes, so lenders may face pressure to relax their origination standards, subject to regulatory limits.

We forecast arrears to remain below 1.0% in 12 of the 22 countries in this report, and to increase marginally in five. Monetary tightening should have a limited near-term impact, as mortgage rates will rise gradually from historic lows, and borrowers in fixed-rate markets have locked in low debt service costs. Legacy portfolios are usually resilient to modest rate rises, because borrower profiles have often strengthened and weaker borrowers have defaulted.

Outlook for the global housing market Commercial Finance NetworkArrears are close to their natural floor in many markets. But stabilising prices in some submarkets and modest pressure on household finances from sluggish income growth will drive a slight deterioration in performance. Floating-rate markets (and those with short fixed-rate periods) where household debt is high, such as Australia, New Zealand, Norway and the UK, are significantly more vulnerable to faster-than-expected rate rises. However, lenders have usually underwritten loans based on substantially higher rates, for example, under regulations for affordability stress testing in place in the UK since 2014.

US delinquencies are nearing pre-crisis levels nationally, with performance correlated with prices. The dominance of fixed-for-life loans limits the impact of Fed tightening. Canadian interest rates are also rising, but unemployment will continue to trend down, supporting performance.

For the UK, we consider in our forecasts an orderly outcome for Brexit including a transition period from March 2019. In 2018, economic uncertainty, monetary tightening and the resulting reduced access to cheap funding and potential falls in real disposable income could cause a moderate rise in UK arrears from a low level to 0.9% of prime loans being in three months or more of arrears by year end. We expect that a modest and gradual rise in interest rates would not cause major asset performance problems, although borrowers with legacy pre-crisis, interest-only non-conforming loans may be more vulnerable.

Elsewhere in core Europe and Scandinavia, we forecast no changes to arrears levels, which will remain below 0.5% for Germany, Netherlands, Norway and Denmark. With the exception of Norway, these are mostly fixed-rate markets.

All three countries where we forecast arrears to fall modestly are in the eurozone periphery, and these are Ireland, Italy and Portugal. Irish courts appear more willing to grant possession orders and the economic outlooks are more stable in Italy and Portugal. Greece’s arrears are stabilising at a very high level. Spanish banks have sold large non-performing loan (NPL) portfolios to specialist investors, whose expertise could expedite recoveries. Italian banks are also stepping up portfolio sales.

Australia and New Zealand will post small rises as home prices in big cities stabilise. Arrears in other APAC markets will remain below 0.5%. Korean delinquencies will remain close to their record lows, with Chinese performance continuing to be supported by stable economic conditions and prudent underwriting standards.

2018 – a steady year but challenges remain
Our central case predictions for most housing and lending markets for 2018 suggest a relatively steady year although we note that several overheated cities may see stabilising prices or declines in 2018. Prices will rise in most countries, but at a more modest pace than in recent years as mortgage rates increase only gradually while economic growth is maintained. We also expect a steady year in the UK, but as Brexit uncertainty continues, home prices and mortgage lending will stabilise while arrears for prime mortgage will show an increase but remain low.

The longer-term outlook is obviously less predictable. If several markets do not cool this year, then there is an increased chance that house prices in some markets will dramatically overshoot fundamental values. In that scenario the risk of a severe correction at some point thereafter becomes more likely.

Executive summary

  • Fitch forecasts that 19 out of the 22 countries in its annual Global Housing and Mortgage Outlook report will see home prices rise in 2018, with UK, Norway and Greece the exceptions. The rate of growth is likely to slow in most markets due to gradually rising mortgage rates.
  • There have been rapid home price rises in several countries in recent years due to a combination of low borrowing costs, readily available credit, steady economic growth and limited housing supply.
  • Fitch predicts a stable/positive outlook for most Eurozone countries in 2018 with home prices rising by 1%-5% in the core European markets and between -2% and 5% in southern Europe.
  • Gross new mortgage lending should rise in 2018 in 18 of the 22 markets covered in Fitch’s report, but rates of increase will mostly be lower or unchanged from 2017.
  • Mortgage arrears are very low in most markets but will move up slowly due to higher base rates and more expensive bank funding from the gradual unwinding of quantitative easing. Fitch forecasts arrears to remain below 1% in 12 of the 22 countries in its report, and to increase marginally in five.

Source: Mortgage Finance Gazette

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‘Gentrification’ makes Glasgow property market most buoyant in Scotland

Glasgow can boast the most buoyant housing market in Scotland and some of the quickest sales turnaround times in the UK, according to property experts.

The healthy state of the market has been put down to a series of property hot-spots and the continued “gentrification” of the east end of the city. Glasgow is said to be seeing consistently strong demand, despite the squeeze on household budgets and the prospect of further monetary tightening, with buyers prepared to pay prices “significantly above” Home Report valuations.

Releasing new figures, estate agency Walker Wylie said it had seen a 37 per cent rise in sales in 2017. Its average sales time of 23 days – around a third of the national average – also suggests that Glasgow is among the fastest property markets in the UK.

The area of highest growth for the firm has been the east end of the city where sales grew by 65 per cent in the 12 months to February. Other high-performing areas included the southside, where sales leapt 58 per cent, and the west end where the firm recorded a 41 per cent hike in property sales.

A more modest rise of 20 per cent was seen in East Dunbartonshire, with East Renfrewshire up 15 per cent. Bosses at the agency, which was founded by two former directors of Clyde Property, said the market had failed to be derailed by Brexit uncertainty while the Land and Buildings Transaction Tax (LBTT) had not impacted on sales figures.

LBTT has been blamed by many in the industry for a slump in transactions at the upper end of the market, particularly in Edinburgh. Co-director Stuart Wylie said: “What we are seeing is the Glasgow market out-performing the rest of Scotland and, indeed, much of the UK.

“While parts of Edinburgh continue to hold-up, that can’t be said for the city as a whole but, across the M8, it’s a different story.

“We have seen people prepared to pay prices significantly above the Home Report value for houses, particularly in the west end and the southside. “The gentrification of the east end has continued with higher prices being paid for upgraded tenement flats and even town houses in areas like Dennistoun.” The firm, which brands itself as a “hybrid estate agency”, expects the growth in sales to continue.

Fellow director Barry Walker said: “Where you have demand outstripping supply, some buyers will invariably pay more to secure the limited number of properties available. It’s a recipe for a distorted market which isn’t always healthy but we’re some way short of a bubble, as things stand.”

Source: Scotsman

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First-time buyer count highest since 2007

The number of first-time buyers has gone up by 6% in the last 12 months, reaching an estimated 359,000 in 2017.

Despite this, the Halifax First-Time Buyer Review found the deposits from first-time buyers have almost doubled from the year before, rising from £17,740 in 2007 to £33,3392 in 2017, an increase of 91%.

Russell Galley, managing director at Halifax, said: “A flow of new buyers into home ownership is vital for the overall well-being of the UK housing market.

“This ten-year high in the number of first-time buyers shows continued healthy movement in this key area despite a shortage of homes and the ongoing challenge of saving enough of a deposit.

“Low mortgage rates, high levels of employment and government schemes such as Help to Buy have helped first-time buyers become a much greater segment of the market, and the recent abolition of stamp duty on purchases of up to £300,000 is likely to continue stimulating this growth by reducing the upfront costs associated with taking the first step on to the property ladder.”

Although the average price of a typical first home has grown by 21% from £174,703 to £212,079, first-time buyer levels have almost returned to those last seen in 2007, when 359,900 took their first step on to the property ladder.

This is an increase of 87% compared to an all-time low of 192,3002 in 2008 and is now just 11% below the most recent peak of 402,800 in 2006.

First-time buyers now account for half of all house purchases with a mortgage, an increase from 36% a decade ago.

In the past decade, the number of first-time buyers in London has fallen by 26% from 57,900 in 2007 to an estimated 42,983 in 2017.

The North is the only other region to see a drop in numbers, seeing numbers decline by 5% from 17,300 to 16,430 during the same period.

However, the number of people getting on the housing ladder in Northern Ireland has grown by 65% to 9,410.

The second largest rise was in the South West (16%, from 25,400 to 29,399). The South East has the largest number of first-time buyers in the UK, totalling over 69,000 last year, edging up from 67,600 in 2007.

For first-time buyers in southern England, average deposits have more than doubled in a decade. Outside London, the largest increase was in the South East, where deposits have risen by 157% to £51,457, but still make up less than half the amount being put down in the capital (£112,604).

By comparison, first-time buyers in Northern Ireland have fared the best, with average deposits dropping by 62% from £44,270 in 2007 to £16,814 – the lowest in the UK.

The average price of a typical first-time buyer home in the South East has increased (in cash terms) by £78,855 (or 39%) since 2007 – from £199,894 to £278,749 in 2017.

In London, the average price paid by a new entrant to the property market in the capital has grown by £134,902 to £422,580, which is double the national average.

House price growth in northern areas has been considerably more modest. In the last 10 years, the average price of a typical first-time buyer home in the North has grown by £9,462 to £126,437, while in Northern Ireland it has fallen £59,240 (33%) to £120,648 – the lowest in the UK.

The average age of a first-time buyer in 2017 was 31– two years older than a decade ago. In London it has grown from 31 to 33 –the eldest in the UK.

The biggest increase in age was in Northern Ireland, up by three years from 28 to 31.

Source: Mortgage Introducer

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Auction houses bid to become bigger players in residential sales market

More auction houses are seeking to recruit estate agents as partners, in what appears to be something of a public relations battle as traditional investors – buy-to-let landlords – increasingly stay away from the market.

IAM Sold, which provides white label services to estate agents and specialises in the modern method of auction, says it anticipates a strong year ahead.

More than a third (1,000) of the 2,937 lots the business sold last year were sold online, it says.

IAM Sold said it saw a total of approximately £322.6m in sales in 2017, compared with £234.2m and 2,387 lots the previous year.

It claims that this has made it the largest independent residential auctioneer in the UK for the second year in a row, according to the EIG league table.

Claiming first place is Auction House, which also operates through a network of estate agents.

It says it sold 3,485 lots last year – a figure up 4% on 2016 and 1,269 more than its nearest rival – and which includes both residential and commercial properties.

It was the fourth year in a row that the group has passed the annual 3,000-lots sold milestone, offering 4,647 lots in 2017 with a 75% success rate, and raising over £443m.

Founder – and ex-estate agent – Roger Lake said that 2018 looks like being a year of huge opportunities for the auction sector. He added: “Disruption looks set to continue in the estate agency arena, and the buy-to-let market still needs to rebalance itself.”

He added: “We hope to attract more first-time buyers to purchase for their own occupation; they have a significant price advantage over investors, and with their confidence building we see positive benefits from their involvement.

“I also see a need for service standards to be raised, property details to improve, and more transparency introduced as the buyer mix changes. As more private purchasers attend salerooms, processes need to be simple and straightforward, and more appropriate to a retail business rather than only playing to the trade.

“After all, if the popularity of auctions is growing, the commitment by those involved to simplify the process should proceed in parallel.”

In the final quarter of last year, rival IAM Sold raised a total of approximately £83.63m on 718 residential lots, compared to £91.7m on 837 lots sold in Q3 2017.

IAM Sold said that while this was down quarter on quarter, the year-on-year lots sold and total raised were up 5.8% and 18.5% respectively, with 676 lots sold in Q4 of 2016 and a sales total of £68.15m.

Jamie Cooke, managing director of IAM Sold, said: “Auctions continue to become more mainstream, and offer agents an alternative method of achieving successful sales for their vendors.

“An increasing number of vendors are choosing online auction as the accessibility opens the market (once only reserved for the professional investor or cash-ready buyer) up to residential purchasers, creating a larger marketplace that generates more interest and activity.”

Meanwhile, auction franchise firm Town & Country Property Auctions says it has attracted four new franchises – all estate agents.

They are:

The franchise, aimed at estate agents who want to add an auction arm to their business, is a white label option, with Town & Country offering the training, auctioneer, website, support and stationery, while the franchisee runs bi-monthly auctions in their chosen territory.

Town & Country has a nationwide agreement with Quality Solicitors to provide legal packs, and referral agreements with various providers.

Sellers do not pay fees and instead the firm charges commission by way of a buyer’s premium at 5% plus VAT. If properties do not sell by private treaty then they may, if appropriate, move across to Town & Country’s auction arm free of charge.

Auction franchises start from £8,500 plus VAT with ongoing fees of 10% of turnover. In its documentation, Town & Country claims  an earnings potential in the first year of £157,730, rising to £221,300 by year three.

The business uses Adam Partridge Auctioneers and Valuers as its preferred auction house.

The new franchisees will undertake auctions at venues appropriate to the location of the office. For the north east, they will be held at Middlesbrough F.C.’s Riverside Stadium, while in the south east they will take place at the Holiday Inn London Gatwick. Venues for Dorset and Hampshire and the west midlands have yet to be announced.

Source: Property Industry Eye

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Demand for UK property fell more than seven per cent last year

The UK’s housing market continues to look shaky, after new figures showed the number of new buyers registering with estate agents dropped last year – as the number of properties on the market plunged.

Figures from estate agent Haart showed demand for homes fell 7.4 per cent in the year to December, falling 3.4 per cent between November and December.

Meanwhile, the number of homes coming onto the market fell 16.8 per cent in the year, falling by the same percentage month-on-month. That means nine buyers are now chasing every property on the market.

However, the number of transactions rose 4.6 per cent year on year, and 8.5 per cent month on month, it said.

The figures also showed house prices fell 3.3 per cent in the year to December, the figures showed, with the average house price now standing at £229,562.

There was some good news for first-time buyers: the average deposit dropped 12.5 per cent between November and December, to £37,268, although it rose 2.3 per cent on the year before.

Loan-to-value ratios for first-time buyers rose to 79 per cent, from 77 per cent the year before, while the average purchase price fell to £191,981, from £213,515 the year before.

The average age of a first-time buyer edged higher, from 31.3 in December 2016 to 31.9 in 2017.

“In December the market began to pick up and we have started to see transactions rise towards levels last seen in the months before the stamp duty surcharge change and the vote to leave the EU,” said Paul Smith, Haart’s chief executive.

“However, there remains a severe lack of homes on the market, and as a result of this I expect we see UK price growth of between three and five per cent, and a more modest one to three per cent in London.”

Source: City A.M.

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Will Brexit Make Or Break Commercial Real Estate In The UK?

This has only served to exacerbate the uncertainty surrounding Brexit, with a growing number of pro-Remain politicians imploring Chancellor Philip Hammond to publish some reports on how leaving the European Union will shape the national economy.

One particular area of concern is the commercial property market in the UK, which has struggled to deliver investor returns ever since the electorate voted to leave the EU.

With this in mind, the question that remains is whether Brexit will ultimately make or break this market in the long-term?

How is the Current Market Performing?

The commercial property market is difficult enough to crack at the best of times, with numerous issues surrounding the diversification of income. Without in-depth knowledge of the market and the typical real estate life cycle, it can be exceptionally difficult to achieve either short or long-term gains.

This market was therefore one of the first to bear the brunt of the EU referendum vote in the UK, as investors sought flight and an initial decline in valuations and rents was reported. Like with so many markets that have been impacted by Brexit, however, this decline was triggered by sentiment and perception rather than actual events, meaning that investors may be unable to determine the true state of commercial property in the UK.

This makes perfect sense on some levels, of course, particularly given the unprecedented and unknown nature of Brexit. This is compelling industry experts to issue cautious growth forecasts and timid valuations, regardless of the events that are shaping the real-time marketplace.

In fact, overseas investors (especially those based outside of the EU in nations such as China and the U.S.) are piling into commercial real estate in the UK like never before, with a recent purchase of the so-called Cheesegrater by Chinese developers being completed for £1.15 billion (which just happens to be 26 per cent higher than its September valuation).

Post-Brexit: What is the Future for Commercial Property Investment in the UK?

This highlights the chasm that often exists between perception and reality, especially when it comes to unknown elements such as Brexit. This does not mean that the market will remain buoyant when the UK eventually leaves the EU, of course, but it does suggest that it will have ample opportunity to diversify and grown in the future.

One of the biggest incentives for non-EU investors has been the depreciating value of the pound, which has improved the value proposition of commercial property in the UK. This would probably be sustained in the aftermath of Britain’s departure, so the market would most probably receive an initial boost during this period.

The long-term future of the market is far harder to call, as much will be determined by the nature of any deal with the EU and the long-term performance of the economy.

However, it’s highly unlikely that Brexit will break the commercial property business in the UK, particularly with so many opportunities existing outside of the European Union.

Source: Shout Out UK

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Real Estate Update: The Government reacts to Leasehold Issues

In July 2017 the Government published a consultation document in order to obtain the views on the most needed areas for reform within the leasehold market. Over 6,000 replies were received with leasehold houses and ground rents being the most pressing for reform. There were two headline proposals which arose as a result of the consultation document. The Arguments

Pursuant to Section 14(A) of the Limitation Act 1980 (the “Act”) the period in which a claim must be issued before it is statue barred is either, six years from the date on which the cause of action accrued, or three years from the date on which a claimant has the requisite knowledge to bring the claim.

Limiting the sale of new build Leasehold Houses

The Government have previously said that, other than in exceptional circumstances, they cannot see any good reason for new build houses to be sold on a leasehold basis, and their view on this remains the same. The results of the consultation confirm that the Government are planning to bring forward legislation as soon as Parliamentary time allows to prohibit new residential long leases from being granted, be it new build or on existing leasehold houses. However, the Government have indicated that it will still be possible for existing leaseholders to extend their lease or purchase the freehold and the Government intend to consult on proposals to support currently leasehold owners to be able to do this on more favourable terms. The Government have also indicated that they plan to ensure new legislation clearly defines terms such as “new build” and what a “house” is, in order to avoid any unintended consequences and have confirmed that they will work alongside UK Finance more in order to address the misunderstanding of lending criteria which, the results of the consultation flagged, is associated with leasehold properties.

Despite the above, the Government are aware that they will not be in a position to prevent developers building and selling leasehold houses on land that is currently subject to a lease. They will, however, ensure that future legislation contains exemptions in this regard and have confirmed that other exceptions will be considered when the legislation is brought forward, for example if there are particular cases where leasehold houses can be justified, and, if so, to work with sectoral partners to ensure that they are provided on acceptable terms to the consumer.

The Government will, however, ensure that the ban the sale of leasehold houses applies to land that is not subject to an existing lease as at December 2017.

Limiting the reservation and increase of ground rents on all new residential leases over 21 years

Overall, the results of the consultation confirmed that anything that affected the value of the property should be classed as onerous. It was also noted that ground rents can become onerous where leases on houses are extended under the 1967 Leasehold Reform Act. Over 40% of the responses given in the consultation stated that there was no justification for ground rent and no clear reason why these should be any more than a peppercorn, however others cautioned about prohibiting ground rents, indicating that they ensure that the landlords retain an interest in the investment and covered the landlord’s costs.

The Government confirmed their concerns that ground rents have risen from historically small sums, to hundreds of pounds per year in many cases. Although no specific proposals to address onerous ground rents have arisen from the results of the consultation, the Government intend to introduce legislation so that, in the future, ground rents on newly established leases of houses and flats are set at a peppercorn, i.e. have zero financial value. This would result in the costs incurred by the landlord for overseeing and appointing a managing agent being recovered through the service charge or a marginally higher sale price, meaning costs are more transparent and reasonable, with a leaseholder having the right to challenge any unfair service charges through the courts.

Following the results of this consultation, the next steps are for the Government to draft the required legislation and for this to then be brought before Parliament to be considered.

It is worth remembering that the outcome of the consultation document are currently only proposals, however, the high profile of leasehold reforms may result in the Government treating this as a priority.

Source: Lexology

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Strong growth in UK commercial sales in 2017 may not be repeated in 2018

Commercial transaction volumes in the UK are expected to reach around £50 billion for 2017 as a whole, some 15% more than sales recorded in 2016 despite Brexit and political uncertainty.

Such a strong performance in the face of continued political upheaval and economic uncertainty demonstrates that there is a long term investor commitment and confidence in the UK real estate market, according to the latest analysis from real estate services firm JLL.

The report says this is especially true of international investors, which account for around half the total volumes across the country, and 80% or more of those in London.

Indeed, investment into London’s office property has surged this year reaching £12.5 billion by the end of the third quarter, the strongest first nine months on record and 44% up on 2016.

According to Neil Prime, head of Central London Markets at JLL, while the weak pound has helped international investors get a better deal for their money, their investment criteria remains stringent; a global gateway city with strong fundamentals and that hasn’t changed.

‘Amid all the Brexit noise, negative political sentiment and pessimistic forecasts, there is some uncertainty but central London office market fundamentals remain sound in terms of supply. We are seeing new sources of occupier demand from life sciences and sustained activity from the technology, media and telecoms sector which will offset financial sector weakness,’ he explained.

The research shows that interest in prime London assets has been particularly strong from Hong Kong and mainland Chinese investors. In 2017 nearly £1 of every £2 invested in London offices was from Hong Kong. Food conglomerate Lee Kum Kee paid £1.3 billion for the Walkie Talkie building while Hong Kong-listed CC Land’s signed a £1.15 billion deal for the Leadenhall Building.

According to Alistair Meadows, head of Capital Markets in the UK, interest from Hong Kong is unlikely to change substantially in the short term. ‘The capital coming in from Hong Kong is a combination of private family money that is seeking to diversify and invest outside the territory, and mainland Chinese money that has been channelled through Hong Kong,’ he said.

‘While some capital controls have been introduced that will likely moderate the flow of capital from mainland China, suggesting volumes may be lower going forwards, we believe this trend is set to continue,’ he added.

German investors have also been active in the London market with Deutsche Asset Management, Union Investment and Deka Immobilien making significant acquisitions while Singapore’s sovereign wealth fund such as GIC, and Canadian pension funds such as CPPIB have all added to their UK holdings.

While traditional assets continue to hold their appeal, many investors are increasingly turning their attention to alternatives, a rapidly growing sector in the UK which is forecast to make up 30% of the commercial market for 2017.
‘We’re seeing both domestic and international investors looking at sectors such as retirement living, healthcare, student housing and build-to-rent as areas of investment opportunity that offer value, and prospectively sustainable and resilient income streams,’ Meadows explained.

But he warned that with Brexit very much an unfolding event, 2018 could bring many unanswered questions. ‘Political uncertainty remains the biggest threat. and there are some big question marks over how the Brexit negotiations will unfold, especially in relation to migration and skilled labour, which have a major impact on the UK’s construction and service industries,’ he pointed out.

Despite more multinationals firming up plans for post-Brexit operations, the London office market remains resilient. ‘While there is continuing uncertainty about the flow of financial services jobs out of London, the extreme downside risk to Brexit related jobs is, we believe, overstated,’ said Prime.

‘In the current environment, the market looks stable and while unlikely to deliver widespread growth, an increase in office rents is forecast to return from 2019. Office occupiers will seek flexibility, employees will seek the best places and location and asset choice selection will be key to investor performance,’ he added.

And to sum up Meadows said that while investment volumes in 2018 may not match their 2017 growth of 15% or more, international investors are keeping a very close eye on the market. ‘The fact that long term institutional global capital has continued to invest in the UK this year despite the uncertainty bodes well for the future,’ Meadows concluded.

Source: Property Wire

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Property investment strategies for 2018

As we approach the end of 2017 there are an array of differing opinions about the worldwide real estate sector and specific country markets. On one hand there were high hopes that Donald Trump would bring about a new era of growth for US real estate but so far his policies have fallen flat. After voting in favour of Brexit, there were also high hopes that the UK would prosper as a truly independent nation but these have started to falter. While European markets are mixed to say the least, the current focus on the UK and Brexit negotiations has given struggling European property markets a period of respite. So, what are your property investment strategies for 2018?

CAPITAL GROWTH INVESTMENT STRATEGIES

While short-term speculators, sometimes referred to as “flippers”, often attract derogatory comments and negative press coverage, they are a vital part of the liquidity of worldwide property markets. The truth is that even in the direst of circumstances there will be situations where properties are undervalued and there is potential for a short-term gain. However, whether property investment for capital growth will be as easy for less agile investors remains to be seen.

The UK housing market seems to have turned down from its August peak, the performance of the US housing market varies widely and there is still a significant hangover of property in Europe. It might be more challenging to utilise a successful capital growth policy in 2018 but if it was easy then everybody would be doing it.

RENTAL INCOME INVESTMENT STRATEGIES

Whether looking at traditional buy to let or HMO investments there are some very attractive rental income yields on offer in the UK and further afield. As property prices become more subdued, amid short to medium term economic and political concerns, there is the opportunity to cherry pick some double digit rental income yields. While some will point out government policies to increase the number of new builds per annum, this has been “on the cards” for decades now and little has been done. As a consequence, demand for rental property is likely to remain strong, offering support to some of the more attractive yields.

When you also consider UK base rates are at near historic lows, and unlikely to push too far ahead in the short to medium term, high single digit and potential double-digit rental yields look even more attractive. Rental income investment strategies offer the best returns on a long-term investment horizon as well as the opportunity to build up a sizeable portfolio. Unfortunately, many investors want to bank capital gains tomorrow and, as we have seen in the cryptocurrency sector, many are prepared to follow like sheep into markets in which their knowledge is at best sketchy.

CONCLUSION

There will always be opportunities to lock in attractive rental yields as there will always be opportunities to bank short-term capital gains. In the short to medium term the cost of finance is likely to increase a little although house prices in areas such as the UK may come under more pressure in light of Brexit. There will be opportunities aplenty, chances to flip undervalued properties for capital gain as well as locking in extremely attractive rental yields. However, this may take more in depth research during 2018 with so much uncertainty in the UK and around the world.

Source: Property Forum

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New mortgage lending in UK reaches highest level since 2008

British households are taking on the highest levels of fresh mortgage debt since the beginning of 2008, spurred by low interest rates from the Bank of England, even as the proportion of first-time buyers dwindles.

Banks extended new mortgage commitments to borrowers worth £69.6bn in the three months to the end of September, an increase of 14% on the same period in 2016 and the highest amount recorded over a three-month period since the start of 2008, official figures from Threadneedle Street show.

The figures come after John McDonnell, the shadow chancellor, launched a report on Monday warning that banks are becoming increasingly engaged in a “race to the bottom” on mortgages, credit cards and other consumer loans that has worrying parallels to years before the financial crisis. The report by GFC Economics on behalf of the Labour party said banks had diverted resources away from financing small businesses in favour of selling mortgages.

The boom was driven by people remortgaging their homes in order to lock in cheap deals before the Bank raised the cost of borrowing in November for the first time in a decade. There was almost £1.4tn of mortgage debt outstanding at the end of September, up 4.1% on the same point a year ago.

Philip Shaw, the chief economist at Investec, said consumers were increasingly buying fixed-rate mortgages, “lighting a fire” under the total value of new lending. He said consumers were becoming savvier about picking cheap deals before the Bank raises interest rates further and to avoid more expensive standard variable rate mortgages.

Government ministers are likely to be embarrassed by the lending figures, which show the proportion of mortgages extended to first-time buyers fell over the period, despite their efforts to encourage more young people to get on the housing ladder with help-to-buy loan support. The share of new lending to first-time buyers fell by one percentage point to stand at 21% of the overall market.

Philip Hammond was subjected to sharp criticism following the budget last month when analysis from the independent Office for Budget Responsibilityshowed steps to scrap stamp duty for most first-time buyers would push up house prices and only help 3,500 people buy a home.

There was positive news for ministers seeking to curb the buy-to-let lending market after a boom in recent years, with the number of mortgages extended to landlords at its lowest level for four years.

The figures also shine a light on cutthroat lending practices among banks, driven to offering more competitive rates by more lenders entering the market. Several small banks such as Aldermore and Atom Bank have started selling mortgages in recent years, while major banks such as RBS have also begun focusing more on home loans, viewing them as safer ways to make money than riskier investment banking.

The Bank said the proportion of new loans extended at less than 2% above its base rate – which rose from 0.25% to 0.5% last month – now accounts for 65.1% of fresh loans sold to consumers, after a steady increase over the past year.

However, the central bank will take comfort from figures showing how few people have slipped into arrears, with the lowest number of people falling behind on their monthly payments since at least the beginning of 2007. There was also a fall in the proportion of high loan-to-value mortgages, which are typically less risky for banks and easier for consumers to keep up with repayments.

Threadneedle Street revealed last month that losses on mortgage lending would reach £17bn in the event of a severe economic shock, as part of its annual health check of the financial system.

But it said banks would continue to function despite these heavy losses forecast in the stress test scenario, which included a 4.7% fall in UK GDP, a 33% drop in house prices, interest rates rising to 4% and a 27% fall in the pound.

Source: The Guardian