Savills Annual Residential

Development Seminar

Funding and Forecasting

Thursday 8 November 2012

Funding and Forecasting

Michael Sharpe-Neal

Divisional Director, Savills Valuations

Yolande Barnes

Director, Savills Residential Research

Lucian Cook

Director, Savills Residential Research

Roger Orf

Managing Director, Apollo Global Real Estate

2012 Housing Market

Forecasts

How the extreme conditions of the

past five years will influence the

next five

Yolande Barnes

Lucian Cook

8th November 2012

Mainstream

The legacy of the credit crunch

Constrained mortgage availability

A weak economic recovery

Low interest rates

Average UK house price v 5 years ago

11% lower in nominal terms

24% lower in real terms

Housing transactions 45% lower than 5

years ago

House price movements – comparing 2 cycles

-20%

-10%

0%

10%

20%

30%

40%

Q3 2002 Q1 2005 Q3 2007 Q1 2010 Q3 2012 Q1 2015 Q3 2017

Nominal House Price Growth 1984 - 1999

Much stronger

house price growth

pre downturn in

previous cycle

Shorter sharper

period of price falls

in current cycle

Temporary rally in

2010 not seen in

previous cycle

House prices

stagnate, falling in

real terms before

recovery

Source: Savills Research using Nationwide House Price Index

The extremes 2012-2017

5 year House Price

Growth Nominal

Real (Inflation

adjusted)

London 6.6% -8.9%

South East -5.7% -19.5%

East -7.9% -21.4%

South West -10.2% -23.3%

West Midlands -14.0% -26.5%

East Midlands -14.6% -27.1%

Wales -15.5% -27.9%

Yorks & Humber -17.2% -29.3%

North West -18.3% -30.2%

North East -21.1% -32.6%

Scotland -12.4% -25.2%

Source: Land Registry, Savills Research

Mortgage lending

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Q3

02

Q1

03

Q3

03

Q1

04

Q3

04

Q1

05

Q3

05

Q1

06

Q3

06

Q1

07

Q3

07

Q1

08

Q3

08

Q1

09

Q3

09

Q1

10

Q3

10

Q1

11

Q3

11

Q1

12

Q3

12

Annual Change in Levels of Outstanding Mortgage Debt

Source: FSA Source: Bank of England

Gross

Mortgage

Lending £m Q2 2007 Q2 2012

Q2 2012

v

Q2 2007

75% LTV

or below 46,014 24,840 -46%

75%+ to

90% LTV 36,408 11,197 -69%

90%+ to

95% LTV 8,983 649 -93%

95%+ LTV 5,290 235 -96%

The Economy

Source: Oxford Economics

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2012 2013 2014 2015 2016 2017

GD

P g

row

th f

ore

ca

st (%

)

Oct-11 Oct-12

Affordability

Current By 2017

Bank Base Rate 0.5% 1.9%

Lenders’ Margin 3.2% 2.4%

Mortgage Rate 3.7% 4.3%

10.9% 11.1%

16.1%

19.5%

0%

5%

10%

15%

20%

25%

30%

Mortgage payments as % of income

Interest Only Including Capital repayments

Source: Savills Research, Oxford Economics Source: Savills Research, CML

House price movements – comparing 2 cycles

-20%

-10%

0%

10%

20%

30%

40%

Q3 2002 Q1 2005 Q3 2007 Q1 2010 Q3 2012 Q1 2015 Q3 2017

Nominal House Price Growth Forecast 1984 - 1999

Much stronger

house price growth

pre downturn in

previous cycle

Shorter sharper

period of price falls

in current cycle

Temporary rally in

2010 not seen in

previous cycle

House prices

stagnate, falling in

real terms before

recovery

Delayed recovery

given lack of

mortgage finance

Savills Research using Nationwide House Price Index

UK mainstream forecasts

5 years

to end

2012

2013 2014 2015 2016 2017

5 years

to end

2017

Market

conditions

Nominal Price

Growth -11% 0.5% 1.5% 2.0% 3.5% 3.5% 11.5%

UK mainstream forecasts

5 years

to end

2012

2013 2014 2015 2016 2017

5 years

to end

2017

Market

conditions

Nominal Price

Growth -11% 0.5% 1.5% 2.0% 3.5% 3.5% 11.5%

Real Price

Growth* -24% -2.0% -1.0% -0.5% 0.5% 0.0% -3.0%

* using RPI

UK mainstream

The generation game

Transaction forecasts

Actual

Transactions (000s) 2007 Av 2008 -

2011 v 2007

Up to £150,000 651 385 59%

£150,000 - £250,000 599 302 50%

£250,000 - £500,000 289 149 51%

£500,000 - £1m 58 35 60%

£1m+ 16 11 70%

Total 1,613 882 55%

Source: HMRC, CML, Savills Research

Transaction forecasts

Actual Forecast 2017 v

2008 – 11

average Transactions (000s) 2007 Av 2008 -

2011 v 2007 2017

Up to £150,000 651 385 59% 492 128%

£150,000 - £250,000 599 302 50% 400 132%

£250,000 - £500,000 289 149 51% 205 137%

£500,000 - £1m 58 35 60% 53 152%

£1m+ 16 11 70% 19 174%

Total 1,613 882 55% 1,169 133%

Source: HMRC, CML, Savills Research

The 2012 legacy

Cost of mortgage interest + rent to rise

from £103bn to £135bn

Amount of housing wealth held by :

under 35s to fall 24% to £62bn

over 55’s to rise 16% to £1.65 trillion

Rent bill paid by under 35s to rise by 53%

from £24bn to £37bn

Source: Savills Research

The Rental Sector

Demand-supply gap will lead to further rent rises

Rental

Growth 2013 2014 2015 2016 2017

5 years

to end

2017

UK Mainstream

2.5%

2.5%

3.0%

4.5%

4.5%

18.2%

Greater London

3.0%

4.0%

4.5%

6.0%

6.5%

26.4%

... especially where demand is strongest

Rental

Growth 2013 2014 2015 2016 2017

5 years

to end

2017

UK Mainstream

2.5%

2.5%

3.0%

4.5%

4.5%

18.2%

Greater London

3.0%

4.0%

4.5%

6.0%

6.5%

26.4%

Prime London demand reflects business prospects

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Q3 1996

Q3 1997

Q3 1998

Q3 1999

Q3 2000

Q3 2001

Q3 2002

Q3 2003

Q3 2004

Q3 2005

Q3 2006

Q3 2007

Q3 2008

Q3 2009

Q3 2010

Q3 2011

Q3 2012

An

nu

al

Ch

an

ge

in

FT

SE

An

nu

al

RV

Gro

wth

All Prime London rents Change in FTSE100 Index (RHS)

Source: FTSE, Savills Research

.....supporting medium term growth

Rental

Growth 2013 2014 2015 2016 2017

5 years

to end

2017

UK Mainstream

2.5%

2.5%

3.0%

4.5%

4.5%

18.2%

Greater London

3.0%

4.0%

4.5%

6.0%

6.5%

26.4%

Prime Central

London

3.0%

5.5%

4.5%

4.5%

4.5%

24.0%

Prime London

Which way is the world going?

Debt

Corporate money

Equities

Capital growth

Derivatives

- Services

- Management consultants

- Automobiles

- Offices

‘Global’

Equity

Private Wealth

Commodities

Income

Direct Investment

- Land

- Utilities

- Food

- Residential Property

‘World’

Arrivals

Departures

Yields are low in the new world

75

100

125

150

175

200

225

250

Dec-0

5

Ma

r-06

Ju

n-0

6

Sep-0

6

Dec-0

6

Ma

r-07

Ju

n-0

7

Sep-0

7

Dec-0

7

Ma

r-08

Ju

n-0

8

Sep-0

8

Dec-0

8

Ma

r-09

Ju

n-0

9

Sep-0

9

Dec-0

9

Ma

r-10

Ju

n-1

0

Sep-1

0

Dec-1

0

Ma

r-11

Ju

n-1

1

Sep-1

1

Dec-1

1

Ma

r-12

Ju

n-1

2

Shanghai values Shanghai rents

Source: Savills World Research

... but fundamentals look stronger in the old world

75

100

125

Dec-0

5

Mar-

06

Jun-0

6

Sep-0

6

Dec-0

6

Mar-

07

Jun-0

7

Sep-0

7

Dec-0

7

Mar-

08

Jun-0

8

Sep-0

8

Dec-0

8

Mar-

09

Jun-0

9

Sep-0

9

Dec-0

9

Mar-

10

Jun-1

0

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

London values London rents

Source: Savills World Research

Past 5 year growth

Source: Savills Research

+11%

+22%

+13%

+7%

Ultra Prime Central

London +36%

Currency

-60% -40% -20% 0% 20% 40%

Indian Rupee

Russian Ruble

UK Pound Sterling

Euro

US Dollar

Hong Kong Dollar

Australian Dollar

Chinese Yuan

Swiss Franc

Japanese Yen

Prime Central London - currency adjusted distance from peak

Q3 2012 Q1 2009

Source: Savills Research

Global economy and sentiment

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Global GDP Forecasts 2012 - 2014

2011 2012

Source: Oxford Economics

A catalyst?

Stamp Duty

Mansion Taxes

Annual Charges

Capital Gains Tax

Inheritance Tax

Domestic wealth

Source: CEBR

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

180,000

200,000

220,000

240,000

260,000

280,000

300,000

320,000

340,000

360,000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

20

11

2012

2013

2014

2015

2016

2017

Annual Change City Jobs

Prime London forecasts

2012 2013 2014 2015 2016 2017 5 yrs to

end 2017

Central

London

4.0%

0.0%

3.5%

8.0%

6.5%

5.5%

25.6%

Other

London

3.5%

0.0%

3.5%

6.5%

5.5%

5.0%

22.1%

Development

There is plenty of potential supply

Source: Savills and Molior

The funding issue

Borrowers/developers must be very experienced with a good track record of delivering

added value

Often banks will follow individuals who have the proven skills

Mainstream flatted schemes are particularly difficult to finance due to the potential sales risk

Forward sales or pre-lets make funding a whole lot easier

“Development finance is available to the right people in the right circumstances and on the right terms”

Only 66,500 units will be delivered

over next 5 years

Source: Savills and Molior

Supply against past sales capacity

(which has never satisfied demand)

0

2,000

4,000

6,000

8,000

10,000

12,000

Mid mainstream (£450-£700 psf)

Upper mainstream (£700-£1,000 psf)

Lower prime (£1,000-£1,500 psf)

Upper Prime (£1,500-£2,000 psf)

Annual m

ark

et

com

ple

tions

Past sales capacity

2012-2017 average

Source: Savills

Prime supply

Source: Savills

Lower Prime Upper Prime

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

£5m

+ s

ale

s

New build sales Resales

Super prime supply is set to more than

double - BUT an expanding market

Source: Savills

The unanswered questions

Who is going

to fund it?

UK clearers (4)

The specialists (5)

Sharia compliant (2)

Private bankers (4)

Other senior debt providers (10+)

Mezzanine providers (12+)

The unanswered questions

What do

they want

out of it?

Most lenders are at 60% LTC

Terms are often IRR driven

Profit shares are typically sought

savills.com

Roger Orf

Managing Director, Apollo Global Real Estate

Thank you