Newsletter May 2007

RICS UK Commercial Property Survey Q1 2007

Demand for commercial property accelerated at the fastest pace in seven years, boosted by a strong economy and record profitability, says RICS.

Business demand for commercial property picked up at the fastest pace in seven years with the retail sector no longer acting as a drag on overall demand.  All sectors improved for the first time in two years as 16% more Chartered Surveyors reported a rise than a fall in overall demand compared to 7% in the last quarter.
In fact, demand has broadened out across all regions with the Central London market no longer the stand alone performer.

Demand in the office market accelerated in Q1 with the pace of expansion doubling to an all-time survey high. 35% more Chartered Surveyors reported a rise than a fall in demand in the office market, up from 20% in Q4 2006. Surveyors report that accelerating rents in Central London may have tempted some companies to seek peripheral accommodation.
Demand for Greater London offices outpaced Central London for the first time in 18 months. 

The retail and industrial markets continued to show improvement with surveyors reporting that demand in the retail market has stabilised for the first time in two years.
Greater pricing power and firm high street sales have offset the impact of a strong pound and interest rate hikes on the retail and industrial sectors.

Surveyor confidence was optimistic across all sectors for the first time in two years but confidence in rental growth dampened in the Central London retail market following an increase in supply.

RICS commercial property spokesperson Ian McRae said:
"A strong economy and increasing profits have encouraged businesses to continue to seek business premises across all regions of the UK.
"Any fears that commercial property investment would ease back have been unfounded with London leading the way with increased building.

“Despite interest rate hikes and a strong pound, high street sales have held their own despite increasing pressure on the retail sector.
"Expectations for commercial property remain healthy even with a further rate rise looming."

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Long Term Investors  Continue to Dominate Buy To Let

Buy to Let investors borrow an average of 73% of the purchase price for their property investments, while a sizeable minority, one in eight, borrow less than half. Over 40% of these investors buy properties that are over 50 years old and less than a fifth buy new build. On average, investors expect to keep their properties for nearly 17 years.

These figures are published today in the quarterly ARLA Review & Index for Residential Investment. The Review is the largest independent survey of the private rented sector taken from 525 letting agents and 259 investment landlords during March.

Across the board, investment landlords report that tenants stay in their properties for an average of 18 months. This is irrespective of the length of the initial term agreed. 40% said that tenants stay for more than 18 months. A further fifth reported their tenants as staying for more than two years and only a third reported stays of less than a year.

Nearly a third of these tenants are aged between 23 and 30, a quarter is between 31 and 40 and nearly another third are over 40. One in eight is under 23.

Commented Adrian Turner, Chief Executive of ARLA, "Increasingly, renting is seen as a long term option across all age groups. We believe that this is a reflection of a competitive rental market, increasingly high standards of housing that meet aspirations and a desire for flexibility."

The ARLA Index shows that the annual rates of return for a cash purchase of residential rental property average 11.18%. For geared investments the average is 21.68%. These returns include both rental income and capital appreciation.

There is only a marginal difference reported in the returns from flats and houses.The Review shows that the proportion of landlords with Houses in Multiple Occupation, HMOs, continues to fall. In the last quarter, the number of landlords reporting they had any HMOs at all fell from 54% to 49%.Those leaving the HMO market cite bureaucracy, new rules, costs of alterations and licence fees as the prime reasons for their departure.

However, in the mainstream, it is clear that the vast majority of residential landlords are in Buy to Let for the long term. Nearly two thirds, 65%, claim they expect to hold on to their property investments for more than 10 years. Less than 2% see Buy to Let as a short term speculation in property by holding their investments for under two years.
Even if house prices were to fall, the great majority, 86%, of all investment landlords say they will not sell. 12% are unsure and a very small minority of 2.3% said that will sell in the event of falling house prices. Instead, nearly six out of ten respondents expect to buy more residential investment property over the next twelve months.

More than a third of these landlords are aged between 46 and 55. Almost a third more are between 36 and 45. The average age of all Buy to Let landlords responding to the ARLA survey this quarter is 46.

Adrian Turner said, "Once again, the quarterly surveys show that the market for residential investment property is dominated by long term, mature buyers whose tenants are also happy to stay for the long term. This augers well for the private rented sector and this is what Buy to Let is all about."

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UK student accommodation market is now worth over £17 billion.

Student Accommodation sales top £500 million, says Annual Report from King Sturge. A “revolution” in student accommodation provision has created a multi-million pound investment sector with total sales of more than £500 million last year.

“Five years ago, the sector was dominated by universities offering traditional halls of residence and ‘amateur’ landlords offering multi-let houses,” says Philip Hillman, the national head of King Sturge’s student accommodation group.Today, it is a much more competitive environment with specialised corporate developers and operators expanding their portfolios through acquisition of existing stock and by the development of further sites.”

Mr Hillman says the standard of student accommodation is also continuing to rise.

“This is a far cry from the shared bed-sits of yesteryear,” he comments. “Now, en suite facilities are considered standard in most bedrooms, as are high-speed data networks. Indeed, in King’s Cross, London, one private equity developer is currently constructing 800 studios for the top end of the student market – complete with free wireless internet connection throughout the building, 24-hour security guards, coffee shops, a cinema and a gymnasium.”

According to the latest survey on UK student accommodation, the total value of the market, at the end of 2006, was in excess of £17 billion. This figure does not include accommodation where students live in shared houses.

Mr Hillman added: “Without a doubt, student accommodation is now widely recognised as an asset class in its own right.But while 100,000 or so beds have been purpose-built by private sector developer/operators in recent years, some 300,000 beds are still owned and operated by the Higher Education sector. However, a proportion of these are now outdated and fail to meet both the needs and expectations of today’s students.”

Universities have a wide range of options to meet their requirements for the future supply of student accommodation, including the refurbishment of existing accommodation, self-funding new accommodation, or entering into partnerships with third parties, such as housing associations or private sector operators.

“The partnership approach certainly offers the opportunity for universities to develop new facilities without selling the family silver,” comments Philip Hillman.

Overall, says the King Sturge research, the proportion of students now living in commercially-operated halls is growing – as the quality of new purpose-built accommodation improves compared to a perceived ageing stock of university-maintained property.

“Whatever the way forward, there appears to be a wide disparity of opinion in the university sector as to how each institution should best hold its residences,” says Mr Hillman.

“Many universities believe that ownership is essential for control of assets – others are more relaxed and are more focused on quality of accommodation and the student experience. However, there does seem to be a lesser emotional attachment to off-campus halls than for those situated at the heart of the university estate.”

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House Price Hit 5 year High

Average house prices rose by 3.6% (£8,307) in March, signalling the highest monthly percentage increase since April 2002.

Whilst an increase is to be expected within the Easter home moving season, a unique combination of factors have combined to push average prices to a new record high, reports Rightmove.As a result, the annual rate has increased to 15% from 12.2%, back to the level of September 2004. The average asking price for a property now stands at £236,490; 30,816 higher than a year ago.
 
Rightmove measured 159,718 asking prices - circa 80% of the UK market. The properties were put on sale by estate agents from 11th March to 7th April 2007 and advertised on Rightmove.co.uk.

Miles Shipside, Commercial Director of Rightmove commented:"Sellers' asking prices provide one of the earliest indicators of which way the market is headed, and whilst a boost is to be expected around Easter, £8,000 in a month is the largest amount we have ever recorded”.

Some strong regional pent up demand is being fuelled by greater affluence and availability of mortgage finance. When combined with a shortage of supply, especially in the south, the 'soft landing' price slowdown scenario has failed to materialise for many aspiring home owners.

Mr Shipside further observed: "On the cusp of the most significant legislative change to the home moving process the market has ever seen, it is of huge interest how home movers and those in the industry will react. The early indications are that the Spring timing of the run in to HIPs implementation, combined with the current market conditions, will lead to a distortion of traditional market forces over the coming months”.

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