We are in unchartered territory in global residential property markets. Over the coming years we are likely to experience an unusual combination of factors; relatively low capital growth in property values, prolonged record low-interest rates, severe political and economic global uncertainty together with shortages of housing – particularly for genuinely affordable housing.
Historically, a combination of housing shortages together with record low-interest rates (as well as a weak currency in the UK) would have precipitated a housing boom and investors would have flocked to these markets for a piece of the pie. In the past, developers could have relied on likely future growth to entice investors to the market. However, the same set of circumstances may not necessarily lead to the same conclusion.
There is no doubt that there is likely to be some growth in capital values over the coming five years; however, in the absence of drastic changes to both levels of taxation, and improvements in the outlook for the global economy, growth is unlikely to be anywhere near levels experienced between 2009 and 2015. In a low growth environment, rental levels will likely be one of the major contributors to future growth.
Rents, or indeed the ability to pay rent, is directly linked to income levels and, in the UK, inflation-adjusted average weekly wages are yet to return to the levels they were pre the 2008 downturn. It is also notable that, for investors, much of this increased rent will simply offset costs both in terms of greater transactional costs (in the form of additional SDLT) as well as additional tax costs.
As Help to Buy continues to percolate and drive UK sales (albeit perhaps nearing capacity in terms of the transactions it is capable of delivering) what will be the stimuli required to drive much-required growth in housing supply, particularly in inner London which has been particularly hit by the current environment?
This new reality may have a profound effect on the market and the way in which participants and developers operate. Just like the GFC forced developers to change their delivery model, perhaps we are entering a new phase in the residential development delivery cycle? I have spent time recently discussing the market with various industry players and I think we are likely to see a number of significant changes over the coming years.
Changes to the property market over the coming years
Firstly, it is highly probable we will see the further ascent of the build to rent (BTR) market. This is likely to be driven through a combination of increasing rents and indeed the size of the rental market, alongside future governmental changes promoting BTR as its own use class.
In addition, developers will be looking for greater sales certainty as economic confidence remains muted. In the BTR space, we may well see operators becoming more willing to accept both planning and construction risk in order to drive returns, as well new strategic relationships being formed between operators and housebuilders who will undoubtedly find a symbiotic relationship. And perhaps even a large operator will acquire a major housebuilder or part of their business.
Similar, to the financial services industry, technology is likely to play a significant role in the new market reality and indeed some of the largest future market participants probably don’t currently exist. As we have witnessed in other industries, technology will be a double-edged sword; PropTech companies, blockchain and perhaps even cryptocurrency will all make transactions more seamless and bring simplicity.
We have often heard of the mystical tokenisation of property assets – perhaps this is now closer to becoming a reality. However, new technology will also be highly disruptive and existing players will need to change the way they do business as ‘live transaction’ information will become far more accessible. For an industry which has traded in an opaque market and been guarded with information, new technology will pose a challenge for many.
Whilst BTR will certainly be a major new contributor to housing supply, it will not be a silver bullet heralding the solution to the housing crisis. Simply not all developments will suit this market product; nor perhaps is the market deep enough to bridge the gap between demand and supply. We are likely to experience some movement in the development market where participants adapt their model to meet this new dynamic. From discussions, I suspect we are likely to see two changes in this space.
Firstly, for those developers who require pre-sales from investors in order to meet construction targets, they may well need to create new strategies to attract investors. One area in which we may see the market develop is the creation of two clear types of tenure space within the same building, delineated specifically through specification. In this scenario, the developer may indeed look to re-price the risk associated with pre-sales to investors and/or provide a tangible discount to retail pricing at launch in order to attract investors.
Additionally, we may well see the rise of a new type of developer who seeks to provide access to development profit in order to retain investors; or perhaps play a development management role to generate scale. As these businesses mature, depending on their end game, they could transition to a more traditional role; but as this would suggest a successful starting strategy, they would then likely be replaced by other start-ups occupying a similar space. Either way, the residential landscape will look rather different from today – and the speed at which this could occur may surprise us all.