Newsletter May 06

Housing market zooming ahead in first quarter 2006

The monthly housing survey conducted by the National Association of Estate Agents (NAEA) has revealed that house sales have increased in March for the third month running demonstrating that consumer confidence really is back. A fast paced market is also reported with the time taken to sell decreasing, also for the third month in a row. Meanwhile first time buyers have been reclaiming a larger share of the market whilst competing with a rise in investors looking for buy to let opportunities.

Sales rocket
House sales have increased by an astounding 40% since January, from an average of 10 sales to 14 per agent in March; this is a 16% rise on March 2005. This surge in the property market has been assisted by reported increases in house prices by 3.4% in February, alongside cheaper borrowing with fixed mortgage interest rates reported to be at 4.72% on average in February 2006 compared to a rate of 5.23% March 2005.

A seller’s market
There was an 11.7% increase in the number of buyers in March with an average of 371 on estate agents’ books, and a 4.9% decrease in houses available, with an average of 61 houses per agent. Demand continues to out strip supply in many areas of the market. Noticeably the gap between asking price and final sale price closed further, indicating that sellers are being more realistic, contributing to what appears to be a vigorous market.

First time buyers slowly gaining confidence
In a positive step forward the first time buyer share of the market increased in March from 7.8% to 8.9%. This is however considerably lower than the same period last year when first time buyers’ share of the market was at a high of 22.3%. The increase in the stamp duty level could have encouraged a few new buyers onto the ladder; however it is clear that this is not enough to ensure a healthy influx into the market.

Buy to let
Another reason behind the lift in the market could be a renewed interest in the buy to let sector, with well founded public concern for financial stability in retirement. NAEA lettings agents reported an increase in vacant properties from an average of 14 to 15 per agent. As more and more people buy a second property for financial benefits, it is possible this sector of the market could become saturated.

NAEA President, Christopher Hall, comments: “It is wonderful to see confidence from both buyer and seller return to the housing market. The market is back on track, following a slight cooling-off and dip in 2005, the picture for 2006 is very positive indeed.

“I am delighted to see an increase in first time buyers and pray that this continues. Going forward, I would like to see more new instructions so that supply continually meets demand curbing boom prices and allowing the industry to continue to steadily grow.

“In January I commented that I was confident average house prices would increase by up to 100% over the coming 10 to 15 years. Looking at the latest figures I believe we are still well on track for this.”

Investors drive development

Demand for office property saw the biggest increase in nine months signalling a recovery in the sector and leaving stagnant retail and industrial markets trailing says RICS.

Office lease lengths, which have continued to fall since the dot com crash of 2001, are no longer in decline. Inducements employed by landlords to entice potential tenants, such as rent-free periods and help with fit out costs, have levelled out.

Rents in the sector are expected to increase, with confidence at its highest in four years.However, in a beleaguered retail sector, inducements rose further after a prolonged lull in consumer spending and lower tenant demand.

The run-up to the Christmas period saw an upturn in consumer spending, but this has had no significant impact on demand for retail space. Enquiries have fallen at their sharpest rate in four years over the last quarter.

Despite this, development continues apace, with the biggest increase in three years for office building project starts reported. Here, sharply rising commercial property values have been encouraging developers to take more risks.

Investors are showing a continued willingness to buy new commercial space, especially prime location, investment grade properties.
Good returns are keeping investors interested. Overall, commercial property capital values grew 12.2% last year and 11.6% in 2004, due to rising foreign investor and pension fund demand.

Further investment in the sector is expected in the run up to 6 April when the rules change for including commercial property in a Self Invested Personal Pensions (SIPPs). 2007 will see further interest with the advent of UK Real Estate Investment Trusts (REITS).

RICS spokesman Ian McRae commented:
"Development activity is up across the country which is unusual at such an early stage of a recovery in demand. Banks are still willing to back commercial property development despite the huge run-up in lending over the past decade, with banking exposure in this area rising sharply compared to other sectors of the economy.

‘Investors generally have a high level of confidence as the downturn in rents and activity since the dot com highs has been moderate compared to previous commercial property slumps. So long as the economic climate remains benign, there is no reason to expect a return to the boom and bust cycles of the past."

Commercial property opens its doors

Public interest in UK commercial property investment has soared in recent years and is expected to increase further according to the RICS annual UK commercial property forecast published today, (6 April).
Commercial property returns are continuing to attract individual private investors with total returns in 2005 remaining close to 20% for the second consecutive year.

Overseas investors have been the dominant force in the market in 2005, taking over from domestic institutional investors the previous year and accounting for £15bn or 30% of all purchases.
Buyers from the Middle East have been particularly active as rising oil revenues have increased spending power. UK institutional investment accounted for £11bn of all direct commercial purchases in 2005, though net investment receded to £2bn after peaking at £4bn in 2004.

2005 also saw the return of equities as the front running asset class with returns outstripping those of commercial property for the first time since 1999. However, the advent of UK Real Estate Investment Trusts (REITs) (given the green light in the recent UK budget) is expected to further entice retail investors into commercial property funds through tax sheltered personal finance vehicles, such as Individual Savings Accounts (ISAs) and Self Invested Pension Schemes (SIPPs).

Suggestions that a tightening of the borrowing rules governing SIPPs could hurt the investment market are dismissed by chartered surveyors who, in a recent RICS poll, said that the changes would not affect the market place or appetite for commercial property in pension plans.

RICS forecasts a decline in total commercial property returns in 2006 and 2007 - 17% and 9%respectively – as a result of a slowdown in purchaser activity.

RICS economist Oliver Gilmartin said:
"The doors to commercial property are opening up to a much wider audience and individuals are beginning to appreciate that this kind of investment can generate income whist exposing them to comparatively reduced risk.

"We are seeing a rush into tax sheltered savings plans from those wishing to diversify their portfolios and spread their investments across different asset classes and geographical areas.

"However, while the next two years will continue to see healthy returns for investors in UK commercial property, some will be disappointed if they are expecting the kind of stellar performance experienced in the last three years."

Agents predict post-Easter spring

House prices have risen for the fifth consecutive month and more people are enquiring about purchases for a record-breaking tenth month in a row, says RICS' UK housing market survey published today, (18 April).

Prices are continuing to grow but at a slower rate with 13% more chartered surveyor estate agents reporting a rise in prices than a fall, compared to 16% last month. The industry is positive about a strong post-Easter rally, with price expectations at their highest since April 2004.

Agents’ confidence is partly based on the fact that buyers often commit to a purchase at this time of year and that the economic going remains generally good. 

RICS spokesman, Ian Perry, said:
‘People traditionally put houses on the market in the new year and sales pick up around Easter. Agents are clearly expecting this year to be no exception and our figures are showing a lot of optimism in the industry.

‘Price rises are strongest in London, the South West and Scotland but remain weaker in the North and the Midlands where people are less certain over immediate employment. Unemployment has risen for almost every month for a year, particularly in these areas. Some people may be more inclined to sell while others remain unaffected by the softening employment picture and are still keen to buy. This split in the economy is one explanation for the unusual situation where both new buyer enquiries and instructions to sell are rising simultaneously.’

A numbers game

David Whittaker is managing director at Mortgages for Business
Finding a property ripe for development is relatively easy.  Finding and securing the best source of finance to maximise your return can be much harder.  A good deal will see your profit margin increase; a bad one can see it vanish.

Development finance can come in many shapes and sizes and the first job is to decide exactly what is best suited to your property’s need.  A refurbishment loan may be suitable if the property is a little shabby and needs just basic internal and cosmetic work.  Development finance, on the other hand, should be considered when fairly serious building work is needed.

Refurbishment loan
Refurbishment loans can be obtained alongside some buy-to-let mortgages allowing you to cover basic renovations. 
Some mortgage lenders will allow you to borrow on the predicted value of the property once the renovations are complete rather than on the current condition of the property, allowing you to borrow more.  In such cases you will effectively receive two loans; the first on the current property value and the second based on the value of the property once complete.  It will be necessary to provide the valuer with detail of the works you intend to carry out.  Works will also be assessed once completed to confirm the new property value.
Refurbishment loans attached to a buy-to-let mortgage are only available if you plan to keep the property as a rented investment once work is completed.  You can typically expect rates of around 6.7% on a refurbishment loan attached to a buy-to-let mortgage (based on the Paragon’s Freedom Tracker at LIBOR +2% exclusively available from Mortgages for Business).

It is still possible to get a refurbishment loan if you plan to sell the property after completing the work.  Lenders will typically lend up to 70% of the cost of the work leaving you to find the remaining 30%.  Interest rates on such loans are very similar to those on regular personal loans, many investors often choosing the personal loan route.

You could alternatively use a bridging loan to fund the refurbishment but be warned, these tend to be fairly highly priced, with typical interest rates of 1.15% per month, and add to your redevelopment costs. 

Development finance
Each development finance loan will be individually priced, so unlike residential mortgages there are no set rates.  The lender will be looking at what you propose to do, assess the property and works before creating a bespoke loan rate.
Residential development finance rates will differ dependent on your experience, type of property and the nature of the proposed development.  A good benchmark figure to consider would be Bank Base Rate plus 1.5% to 2.5%.

Finance is usually arranged on an interest only basis with the term of the loan being one year or more depending on the size and nature of the development project.Lenders will typically lend in the region of 70% to 75% of the property purchase price and building costs, leaving you to finance the difference.

It is important to plan in advance the ability to re-arrange, or re-gear finance against the enhanced value of the property at the end of the development as this will vastly increase your funding potential for your next project.

It is possible to organise a loan to finance up to 100% of the development costs if you already own the land on an unencumbered basis or if you have a strong, demonstrable track record.Development funding without full planning consent is extremely difficult to secure unless you are highly experienced with a number of completed developments under your belt.  Before seeking finance it is essential to finalise planning consents and have all documentation to show to your lender.

Putting the right finance in place on your development project will not only help increase your profit margins, it will mark you out as a professional developer making it easier to secure better rates on future projects.

David Whittaker is managing director at Mortgages for Business, a specialist buy-to-let and development finance brokerage.

Buy-to-Let: Risk of strangulation through administration and regulation?

Recent press coverage and industry research indicates that there has never been a better time to enter the buy-to-let market, but following recent developments, leading finance guide Business Moneyfacts suggests it is not necessarily the case for everyone.
Today sees the introduction of radical legislation designed to raise standards in the rented property sector. Some houses of multiple occupation (HMOs) will attract additional costs in the form of licences and regulation compliance.

Business Moneyfacts’ Editor, Lee Tillcock, comments: “Whilst efforts to improve rented accommodation are welcome, licence costs of up to £1,250 and possibly substantial modernisation expenses mean additional financial burden for investors. Already research from the National Landlords Association (NLA) has suggested that 61% of landlords will be less likely to purchase HMOs.

“This possible hurdle for additional investors comes hot on the heels of the recent A-Day confusion. According to reports, a whole host of prospective new landlords were waiting to enter the market and place their new investment into their personal pension. The U-turn by the Chancellor, blocking residential property investment from being held in a SIPP (Self Invested Personal Pension) has left many potential investors’ plans in ruins.”

Obviously whilst demand for houses in the UK remains far in excess of supply, entering the buy-to-let market can still prove to be a sound investment. Lee Tillcock suggests that: “If anything, all the factors mentioned above could mean a reduction in the number of rental properties available, and subsequently increasing rental yields. However, newcomers will be best advised to study the whole sector very carefully, displaying due diligence in researching properties and areas before committing themselves to what is long term proposition.”