Savills Global Residential Property Focus August2009

Savills Research | Residential August 2009

SavillsResearch

savills.co.uk/research

Residential PropertyFocus

The evolution of the property marketHow the world of residentialproperty is changing

http://www.savills.co.uk/research/

This publicationThis document was published on August 1. It contains a review of all the key housing market indicators and news to the end of July 2009. The data used in the charts and tables is the latest available at the time of going to press. Sources are included for all the charts. We have used a standard set of notes and abbreviations throughout the document.

Glossary of termsn Mainstream – mainstream property refers to the bulk of the UK housing market with, for example, price movements monitored by reference to national and regional average values.n Prime – the prime market consists of the most desirable and aspirational property by reference to location, standards of accommodation, aesthetics and value. Typically it comprises properties in the top five per cent of the market by house price.n Patient equity – non-income generating long-term investment.

The most commonly used abbreviations are:n Q109 – refers to the first quarter of 2009n H109 – refers to the first half of 2009n PCL – prime central Londonn Peak – refers to the first half of 2007

Savills Research | Residential Property Focus August 2009

savills 03

The evolution of the property market

Yolande BarnesDirector020 7409 [email protected]

Inside this edition…

04 Prime markets Central London leads the way

06 Mainstream market What is the significance of the recent upturn in house prices?

08 Regional forecasts Annual forecasts for regional house price growth

09 Rental market What is the legacy of the credit crunch on this market?

10 Development land A two-tier market is established

12 Coastal property The future of coastal premium

14 Summary

Just how indelible a mark will the current downturn leave on the industry? Yolande Barnes believes that the residential property market must now adapt.

There is little doubt that the credit crunch has changed the housing market. However, the uncertainty is whether the change is permanent

or temporary; and if it is the latter, will it be long-lasting or short-lived? There may have been a springtime bounce but anyone in the residential property industry who expects a return to ‘normal’ is waiting for a ship that we think sailed long ago.

Our analysis suggests there are three primary forces that could shape the future of the housing market, but we only have a precedent for one of them. When it comes to housing ownership, development and delivery, things haven’t been ‘normal’ for a while now.

Even before the credit crunch, at the height of the boom, the structure of market demand was changing. This change, in conjunction with a shortage of debt and a shortage of housing, will shape the future of the UK residential property industry for at least the next decade.

Looking at evolutionary forces in the housing and development markets, we see that a tectonic shift took place in the ownership of residential property long before the sub-prime crisis took hold. Mortgaged owner-occupiers started to decline, as a proportion of all tenures, as long ago as 1992; their absolute numbers were declining from the millennium onwards. Since then, the numbers of outright owners and the number of private renters have exploded.

We are in a new era where private occupiers divide into two groups: those with equity and those without. An increasing number of relatively affluent households are unable to access the housing market for lack of sufficient deposit. Ownership in coming decades will be in the hands of those with equity (either corporate entities or individuals) and the potential market for private renting and co-ownership is huge.

The second, and more obvious, change is to be found in the lending climate that has come after the credit crunch. A continued drought of debt finance can be expected, impacting not only the cost and availability of mortgages but also, most especially, the finance that is available to house builders and developers.

The final, and only constant, evolutionary force in the housing world is a continuing mismatch between the number and type of new households requiring shelter, and the number and type of new homes actually being built. The debt drought will only feed this stock shortage as housing starts fall to unprecedentedly low levels.

Evolve or die out?Drawing analogies between the biological sciences and the world of development finance and housing delivery may seem tenuous but, on the 150th anniversary of his seminal publication, business gurus are very fond of quoting, or misquoting, Charles Darwin: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change,” they say. This may be true, but a successful response to change depends on an accurate understanding of what that change is.

It may be appropriate to note that scholars have criticised this interpretation of Darwin’s theories. They believe it is not the species that are most responsive to change which can survive but the ones that have luck or already possess the right features to be passed on to the next generation. As Darwin states in On the Origin of Species “those which do not change will become extinct.”

If we transfer this statement into the realm of property, it means those best placed to take advantage of the post credit crunch environment are those who were already starting to evolve or who were ready to evolve before the economic crisis. Those investors and developers with low debt levels, special skills and access to equity are the most likely to become new and successful species in coming decades.

In this issue of Residential Property Focus, we examine the nature and the characteristics of the changed property environment as well as how the industry may be able to adapt and find opportunities within it. What is clear is that even if it takes a different form, demand will return as the market evolves. With inherently limited stock this means a recovery in the housing market is inevitable. The question is, how much more change is needed to sustain that recovery? n

Foreword

Yolande Barnes is a Director of Savills residential research. She joined Savills in 1989 to pioneer the then-new field of residential research. Since 2003, Yolande has also taken on another new research discipline known as Place Making, looking into mixed-use and land issues.


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Central London leads recovery

Upholding our expectations, prime central London has so far this year, led the recovery in values in the UK residential market. By the

end of June Savills prime central London index showed that values in central and south west London had increased by 4.3%, their first growth since Autumn 2007. This growth came largely on the back of a shortage of quality housing combined with a growing pent-up demand.

Beyond London, where the imbalance between demand and the supply of appropriately priced stock has been less pronounced, values have stabilised over the past few months. But in the markets most influenced by London, including the commuter strongholds of Surrey and Kent and established prime areas in the south such as Bath and Winchester, there have been small increases in values.

While the economic fundamentals remained largely unchanged, there was a noticeable shift in sentiment among buyers during the second quarter of 2009. At the turn of the year, buyers were waiting for signs that the market was sufficiently close to the bottom, but as ‘for sale’ boards became increasingly replaced with ‘sale agreed’ boards a growing number

of potential buyers took the view that the market represented good value. This change in sentiment gathered momentum as buyer and seller expectations became more closely aligned and transaction numbers improved as a result. Initially, activity picked up in the £500,000 to £1 million price band, particularly in south

west London, but this has filtered through into the higher price bands and across a wider geographical area.

Therefore, it remains too early in the recovery process for improved sentiment to bring discretionary sellers into the market. The resultant shortage of property available has meant that the predominantly cash-led

With improved buyer sentiment emanating from the capital, Lucian Cook illustrates how increased activity in central London influences the UK prime market as a whole.

Source: Savills

Prime markets

New forecasts 2008 2009 2010 2011 2012 2013 2014(as at July 2009) (Actual)

Scenario 1Stock levels ease in the Autumnno further significant financial shocks -18.3% -3.4% -0.6% 8.0% 13.9% 10.0% 7.0%

Scenario 2Further financial shocks furtherincrease City unemploymenteroding current demand -18.3% -6.9% -3.4% 9.1% 16.1% 10.0% 7.0%

Graph 1.1 Restored demand translates into price growth

Graph 1.2 London leads increase in transactions

Source: Savills

New forecasts H1 2009 Current Projected(as at July 2009) From Peak Peak to Trough

Scenario 1Stock levels ease in the Autumnno further significant financial shocks 0.1% -19.8% -25.0%

Scenario 2Further financial shocks further increase Cityunemployment eroding current demand 0.1% -19.8% -30.0%

Table 1: Prime central London projected peak to trough

Table 2: Prime central London year-to-year growth

16

14

12

10

8

6

4

2

0

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09

Prime central London q/q growth

Viewings per Property

Applicants per Property

180%

160%

140%

120%

100%

80%

60%

40%

20%

Tran

sact

ions

as

a %

of

mo

nthl

y av

erag

e

Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09

London All

Regional All


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The ripple effectFollowing the trends across the south

The ’ripple effect’, whereby market trends that often start in prime central London and filter progressively out into the other

prime and mainstream markets of the UK, is currently making its way through the wealth corridor of south west London and running into Surrey (see chart), where a dramatic improvement in market conditions was reflected in our end-of-June indices.

Along this corridor average house prices often exceeded £500,000 even during the depressed market conditions of last year. It is however too simplistic to say that what has occurred in prime central London will naturally filter through into prime south west London four weeks later and in another four weeks hit the Surrey Hills. It is important to take into account the different nature of these markets and, therefore, who is buying into them.

The improvement in sentiment in the prime south west London markets was fuelled by those looking for good-quality family accommodation and price growth in Wandsworth, Clapham and Putney has been strongest. Similarly Elmbridge, having a similar demand profile but offering an additional trade-off between commuting time and cost per square foot, has shown higher growth than both prime central London and Fulham. n

buyers who have returned to the market have been chasing a shrinking supply of stock, and this has intensified the recent price increases recorded in the prime London markets.

The prime markets of central and south west London, despite the recent price increases, remain -19.8% and -20.4% respectively off peak, while the prime regional markets are currently at a similar level, being -19.2% off peak. These price falls have been enough to maintain the growth in demand during the early summer months as buyers, whether they be investors or owner-occupiers and irrespective of whether they are buying in sterling or a foreign currency, remain conscious of the need to secure value.

With the prime markets returning to a more seasonal selling pattern, the true

test will come in the autumn, when more stock is expected to be marketed. This will test the actual depth of the current improvement in sentiment.

An improvement in the economic outlook, particularly city employment projections, would go some way to ensuring the current momentum is carried straight through into the autumn and would help sustain current prices. At the moment, demand continues to gather momentum and an increased stability in prime central London residential rents willl add further weight to market confidence. This gives rise to the potential for price falls to be less pronounced than we have previously envisaged. Conversely, a worsening economic outlook could lead to an erosion of the recent price growth by the year end and in more extreme

circumstances cause prices to fall further. Reduced availability of bonus cash from the financial sector, which has traditionally accounted for half of all buyers in the prime London markets, could also play a part.

Irrespective of any short term price movements, we consider recent improved purchaser activity means we have reached the first stages of recovery in the prime markets. Even if these price increases prove to be temporary they are, as history relates, a natural and relevant part of the bumpy bottoming out process. n

Lucian Cook joined the research team in 2007. He is a qualified chartered surveyor with over 13 years of professional experience. He has established himself as a leading commentator on residential property issues in the press.

Average Residential Value 2008n Over £500,000n £400,000 to £500,000n £300,000 to £400,000n £250,000 to £300,000n £200,000 to £250,000n £150,000 to £200,000n Under £150,000n All others

Fulham and BarnesAv £ per sq ft 631Last Quarter 3.42%Off peak -24.3%Overseas buyers 19.3%Employed in theCity of London 65.7%Employed in London 81.3%

Central LondonAv £ per sq ft 1,392Last Quarter 4.30%Off peak -19.8%Overseas buyers 48.6%Employed in theCity of London 56.7%Employed in London 61.7%

ElmbridgeAv £ per sq ft 418Last Quarter 4.41%Off peak -19.1%Overseas buyers 15.5%Employed in theCity of London 50.0%Employed in London 72.6%

Wandsworth etcAv £ per sq ft 496Last Quarter 9.02%Off peak -19.7%Overseas buyers 11.8%Employed in theCity of London 72.8%Employed in London 88.7%

Guildford etcAv £ per sq ft 368Last Quarter 0.7%Off peak -16.4%Overseas buyers 8.0%Employed in theCity of London 17.3%Employed in London 54.1%

Farnborough

Aldershot

Bracknell

Maidenhead

Guildford

Woking

Staines

Kingston upon Thames

Crawley

Richmond


06 savills


A new beginning for mainstream?Recent price increases denote the mainstream housing market has turned a corner but the key question says Yolande Barnes is, what is around that corner?

Since March, the principal monthly mainstream UK housing indices have shown tentative signs of life, with growth in values recorded

during some (but not all) months; a first since 2007. The resulting 2.9% increase in the Nationwide house price index in the second quarter (equivalent to 1.1% on a seasonally adjusted basis), has been accompanied by a halt to the dramatic decline in housing transactions witnessed during 2008. According to Inland Revenue data, by May those transactions had increased by more than 50% from their nadir in February, even though they remained 32% below those seen for the same month a year earlier.

Undeniably, the UK housing market has turned a corner with a noticeable improvement in buyer sentiment. However, it remains less clear as to what lies around that corner. In order to establish what the future holds it is essential to look at what has prompted these recent market improvements and whether the past can provide any clues.

In the early 1990s house prices decreased by a total of 13.1% over six successive quarters, a quarterly rise of (1.6%) followed in the spring of 1991. This

rise, however, was just a temporary blip, it took until the first quarter of 1993 before the bottom of the trough was reached. According to Nationwide figures, values had fallen by some 20% over three and a half years. Sustained growth was not a feature of the market until the beginning of 1996.

While recession has played a part in both downturns, undoubtedly the current situation differs to that of the early 1990s; as heavily restricted mortgage availability rather than affordability has been the primary trigger for price falls. This has led to prices falling far more quickly; it took just 16 months for the 20% price falls recorded by the end of February to occur.

Rise and fallThe severe constraints on accessibility to mortgage finance during the present downturn have contributed to a much more marked fall in transaction numbers, which have declined from a peak of 160,000 per month in August 2007 to just 41,000 during January 2009, with sales restricted to those needing to sell. Precious few new sellers have brought stock to the market, creating a shortage of available property when demand started to improve in the spring.

Mortgage approval figures bear testament to the fact that this increased demand has been driven largely by cash buyers. In 2006 and 2007 we estimate that, on average, cash buyers accounted for 23% of the market. In the first quarter of this year they accounted for nearly 36% of the market, rising in May (the most current data at the time of going to press) to an estimated 40% of all purchasers across the UK housing market as a whole.

As a result the balance between supply and demand has been restored (although both are well below peak levels). The key question is whether price increases are a temporary blip or the start of something more meaningful.

We can be confident that prices really have reached the bottom, and that growth can be sustained over the long term, when mortgage availability improves along with the prospects for economic growth. This will allow equity-rich buyers to be joined in the market by those whose property purchase is reliant on a mortgage. While we are beginning to see the re-emergence of a limited number of mortgage products with more than 75% loan-to-value (LTV), accessibility to these products remains heavily constrained and

The mainstream market

Graph 2.1 UK house prices follow supply of credit

Graph 2.2 Deposit affordability issues for first time buyers

Source: Bank of England, Nationwide Source: CML / Savills

20

10

0

-10

-20

-30

-40

-50

-60

2%

1%

0%

-1%

-2%

-3%

-4%

-5%

-6%

Bal

ance

of

Op

inio

n

Qua

rter

ly G

row

th

Quarterly Price Growth (RHS)

Supply of Secured Credit (LHS)

Q2 07 Q4 07 Q2 08 Q4 08 Q2 09

180%

160%

140%

120%

100%

80%

60%

40%

20%

0%

36%

32%

28%

24%

20%

16%

12%

8%

4%

0%Q1 1980 Q1 2010Q1 1986 Q1 1992 Q1 1998 Q1 2004

Home Mover Deposit as % of Income

Home Mover Interest as % of Income

FTB Deposit as % of Income

FTB Interest as % of Income

Dep

osi

t as

a %

of

inco

me

Inte

rest

as

a %

of

inco

me


savills 07


competitive terms tend to require that the buyer finds, at the very least, 25% cash or equity. As prices bottom out, it is anticipated that lenders will become more confident in offering higher LTV ratios as their exposure to price falls reduces. However, access to credit, despite low interest rates, remains constrained throughout the economy.

Significant developmentsThe effective closure of the securitisation markets, which increasingly underpinned mortgage availability through the boom of 1997 to 2007, means that restoring liquidity in credit could be a long and drawn-out process. Deposit affordability will therefore remain an issue for many for some time to come. As shown in Graph 2.2, there is a significant difference between the change in the affordability of mortgages and deposits for first-time buyers.

As a result, at the bottom end of the market there is likely to be a shift in the fundamentals of home ownership. Without developments in shared equity investment models, renting will be the only option for the deposit starved. This suggests a greater role for institutional investment.

‘It can’t get any worse’ Among the equity-rich it is no surprise that sentiment has improved at the same time that forecasts for the economy have bottomed out. This has allowed those taking the view that ‘it can’t get any worse’, and who have financial security, to now make decisions on whether, and at what price level, to buy.

For those more exposed to the vagaries of the economy, the confidence to buy may take much longer to return. It is important to note that unemployment numbers are not expected to peak until 2010 and the general consensus is that significant economic growth will not return until 2011, when mainstream recovery can only follow on. In such circumstances it is difficult to rule out the possibility that prices will fall further by the end of this year. However, because affordability has dramatically over-corrected we believe any further falls will not be significant. We stick by our forecasts for a total fall not exceeding 25% from peak to trough. The assumption that bank base rates will remain below 4% until 2013 and that lenders’ margins will gradually reduce as

credit constraints ease, are central to our forecast of the possibility of several years of continued house price growth, once the market conditions allow for a sustained improvement in demand across a wider range of buyers. While five-year fixed rates have risen, the indications are that this remains a very realistic assumption, even if lenders’ margins settle at a figure higher than the long-run average. n

Despite the uncertainty over employment, because affordability has dramatically over-corrected we believe that any further falls will not be significant.


08 savills


New forecasts H1 2009 Current Projected (as at July 2009) From Peak Peak to Trough

UK -1.8% -16.3% -24.9%

London -0.6% -15.6% -25.3%

South East 0.0% -15.7% -24.7%

South West -2.1% -17.3% -25.4%

East 0.2% -16.6% -25.1%

E Midlands -1.9% -16.8% -26.4%

W Midlands -2.5% -16.3% -26.0%

North East -5.2% -16.5% -26.2%

North West -3.2% -17.2% -26.0%

Yorks & Humber -1.5% -15.8% -26.0%

Wales -1.4% -13.3% -26.6%

Scotland -3.3% -11.9% -19.6%

RegionalForecastsTable 3: Regional price falls in the mainstream market from peak to trough including H109 falls

Table 4: Savills annual forecast for house price growth in the mainstream market

Source: Savills

Table 4Forecasts 2008 2009 2010 2011 2012 2013 2014(as at July 2009) (Actual)

UK -14.7% -7.2% -3.1% 1.0% 9.0% 10.0% 8.0%

London -15.1% -7.5% -2.6% 2.8% 12.0% 10.0% 9.0%

South East -15.4% -6.0% -3.1% 4.9% 14.0% 10.0% 8.0%

South West -14.9% -8.0% -2.1% 2.8% 9.0% 10.0% 10.0%

East -16.6% -6.3% -2.1% 2.8% 8.0% 12.0% 12.0%

E Midlands -14.2% -8.7% -3.1% 0.8% 8.0% 12.0% 12.0%

W Midlands -14.0% -9.3% -3.1% 0.8% 6.0% 10.0% 12.0%

North East -11.0% -11.8% -3.1% 0.0% 1.0% 6.0% 8.0%

North West -14.4% -9.9% -2.1% 0.0% 1.0% 6.0% 8.0%

Yorks & Humber -13.6% -9.3% -2.6% 0.8% 2.0% 6.0% 12.0%

Wales -12.1% -11.2% -6.0% 0.8% 6.0% 6.0% 8.0%

Scotland -8.1% -8.1% -2.1% 2.0% 8.0% 12.0% 10.0%

Table 3

South West: Growth forecast above UK average in 2011

Projected peak totrough forecastsn -18% to -24%n -24% to -25%n -25% to -26%n -26% to -28%

The mainstream market

Scotland: Smallest projected peak to trough fall of -19.6%

North East: Values start recovering in 2012 with growth of 1%

Yorks and Humber: Fall of -1.5% in H109, growth is forecast to start in 2011

The East: Strong growth of 12% forecast in 2013 and 2014

West Midlands: Growth forecast for 2011. Projected peak to trough -26%

London: 2.8% growth forecast for 2011


savills 09

The credit crunch has had a profound effect on the UK residential rental market with many sellers frustrated by the lack of

buyers and opting to find a tenant instead. According to propertyfinder.com, this has led to the volume of property available to rent increasing by more than 3.5 times since January 2008.

Even with this increase in rental stock levels, average asking rents across the UK have not fallen by anything like the rate seen in capital values at a national level. While UK house prices are currently 16.5% down from their peak in 2007, average rental values, which started to fall in the late summer of 2008, were just -5.7% off their peak by June of this year.

On a sector or regional level, the depth of falls has been largely dependent upon the capacity of a given market to absorb the additional stock that has become available. For example, the mainstream flat market is now a haven for households frozen out of ownership because of deposit affordability, and rents in this sector have, therefore, fallen by less than the average.

By contrast, in the prime markets of south east England, where renting is far less common, a relative deluge of stock has caused rents to fall by -24.2% according to our own indices. The extent to which these different rental markets have absorbed the increased stock levels has been linked to the economic drivers that underpin demand within the rental sector.

Within prime central London the fall in demand from corporate tenants has been a key factor in rental falls of -11.7%, while the market in the Docklands and Canary Wharf, which is even more reliant on demand from the financial services sector, has seen rental falls of just under -20%.

Positive signsLike the sales market there now are signs of change in the rental sector. In June, findaproperty.com recorded the first monthly increase in nationwide asking rents since August 2008, while in central London our indices indicate rental values of prime property stabilised. In part, this is due to fall in the number of accidental landlords, allowing a balance to be restored between supply and demand.

Signs of change in the rental marketWith positive signs re-emerging in the rental market, Marcus Dixon looks ahead to the lasting legacy the credit crunch will have on the sector.

Looking forward, the expectation that loan-to-value ratios will remain low means deposit-shy renters are likely to grow in number, even if government estimates for future household formation are overstated in the short term. Household numbers will continue to grow, putting demand on existing rental stock. A decline in the levels of new development will add to


Rental market

the pressure and suggests that, provided household earnings are not significantly diminished, rental growth will follow. In turn this will help bring cash-rich investors and institutions back into the residential investment market, and simultaneously help underpin the recovery in capital values.

Ultimately, we expect one consequence of the downturn to be the end of the assumption that renting is an unfashionable necessity, only to be contemplated when buying is an impossibility. n

Marcus Dixon is an Associate Director of Savills having joined the research department in 2003. Marcus specialises in consultancy projects for developers, investors and lenders concentrating on the sales and lettings market across the UK.

Even with the increase in properties available, average asking rents across the UK have not fallen by anything like the dips seen in capital values at a national level.


10 savills


T he latest housing statistics suggest that new residential development activity is starting to stabilise. However, starts are likely to have

fallen to around 70,000 in England by the end of 2009, just over 60% less than the peak levels reached in 2006. As residential turnover continues to build, we expect starts to pick up in 2010, in anticipation of a more significant market recovery in 2011.

However, during this period and beyond, development and land acquisition activity will still be constrained by the number of development players that are well capitalised. The big question is whether demand for land can increase to former levels when debt finance is not widely available. And if demand for building land does return, what type will it be?

In such an environment developers are likely to make a distinction between low-risk development projects servicing an identifiable housing requirement and those where viability has been deeply undermined because of the holes that the downturn has exposed in some development models. The two-tier market, which planted its roots prior to the downturn, is set to become more entrenched over this period.

A two-tier market is establishedThe distinction between low-risk projects and longer-term development opportunities has changed the way the market works, as Jim Ward observes.

In contrast to the greenfield development land market, urban development land values between 2004 and 2007 have effectively remained static for several reasons: the sector was already fully valued as many players had already acquired

land banks; the costs and complexities associated with brownfield development were beginning to be more fully understood and acknowledged; and the capital-intensive, longer-term promotion and preparation costs associated with this type of land were beginning to take its toll on the development industry.

This has discouraged the large, up-front speculative payments that were a feature of

the brownfield land market in the run-up to the millennium, forcing a re-think on urban land values within the industry.

Future sales ratesDespite a lack of growth in the back end of the housing cycle, values of such development land have still fallen by -57% since the peak in the UK housing market in the Autumn of 2007, which is slightly more than that seen for greenfield land.

Historically, the market for, and value of, residential development land is strongly correlated to homebuilders’ expectations of future sales rates. Accordingly it is encouraging that sales rates of new homes have begun to pick up, as part of the strengthening of residential markets in recent months. Cash-rich owner-occupier buyers, fundamental to improved turnover in the second hand market, have become equally important in the new homes market.

Their activity has been concentrated on acquiring fully completed, fully discounted schemes of a good design and high specification. This is in stark contrast to the off-plan, premium purchases made by buy-to-let investors at the height of the boom. Where the type of stock built for these

Graph 3.1Urban land was already discounted before the crunch

Graph 3.2 Values reflect housebuilder expectations of sales

Development land

It is encouraging that the sales rates of new homes have begun to pick up, as part of the strengthening of residential markets in recent months…

Source: Savills Research Source: Savills Research / Nationwide

180

160

140

120

100

80

60

40

Ind

ex (v

alue

gro

wth

q/q

)

Greenfield

Urban

Q4 01

Q2 02

Q4 02

Q2 03

Q4 03

Q2 04

Q4 04

Q2 05

Q4 05

Q2 06

Q4 06

Q2 07

Q4 07

Q2 08

Q4 08

Q2 09

Greenfield land

Developer’s sales expectations

Valu

e g

row

th y

/y

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

100

50

0

-50

-100

1979

1981

1984

1986

1989

1991

1994

1996

1999

2001

2004

2006

2009

Bal

ance

of

op

inio

n


savills 11


buyers still remains on the market, it is often dependent on a different type of investor purchaser.

Symptomatic of the underlying demand for such a product in a mortgage constrained world is the fact that less well located, designed and diversified schemes are being bought in bulk at significant discounts based on income yields in excess of 8%. Correspondingly, with this part of the market dependent on vulture buyers, the effective eradication of any new build premium has been compounded, and new build stock is trading at discounts which varies anywhere between -25% to -40% from peak.

As a result of the freeing up of the market for finished product, there are now signs of sporadic land trading activity but only where vendor and purchaser expectations are aligned around lower values. Reflective of the type of new build housing which is selling in greater volumes and at lower discounts, this land trading has tended to be of high quality, small (less than 50 units), often freehold sites in high demand locations with deliverable planning permissions and phased payment terms. Equally the market value of such small sites and serviced plots is likely to recover more quickly than that for bulk land.

The regional picture will vary around this, but some of the most significant variations will be at a local level. High value, popular, low supply locations will be in high demand from risk averse developers and their funders. These are likely to see an earlier and more marked recovery than locations with a large amount of supply, even if they are in the south of England. n

Jim Ward is Director of Savills Residential Research with 19 years experience. He specialises in market consultancy projects for developers, investors, lenders and government organisations. These projects tend to focus on market capacity and potential on a local level.

Cash-rich owner-occupier buyers, fundamental to turnover in the second hand market, have also become equally important in the new homes market

Identifying opportunities Unlocking the potential in the land development market

1 Strategic Land Turning bulk ‘strategic’ land into

fully serviced ‘enabled’ land, suitable for sale to a cash-flow driven housebuilder.

2Understanding Planning and Policy

A shift away from the old attritional S106 structures will create opportunities for the most skilled and experienced operators, pulling public sector funding into the land enabling process.

3Equity Funding of Stalled Sites Alongside public sector funding,

private equity funding could be used to unlock development as the market recovers by acquiring stock (in the markets best placed for rental and capital growth) and thereby forward funding through off-plan, bulk acquisition.

4Long Term Place Making Higher-cost sites in lower

demand markets will take more time to recover to viability within the conventional land trader development model, and longer still for peak values to be restored. These sites will benefit most from a longer term place making approach and only players with long-term, equity funding will be successful here. n


12 savills


A national pastimeFrom ultra prime destinations to faded seaside resorts, house prices are as varied as the coastline itself. But what does the future hold? Lucian Cook investigates.

F rom faded Victorian seaside resorts to the developing coastal playgrounds of affluent second home owners and those who

have bought into a better quality of life, settlements along the coastline of England and Wales are as varied as the coastline itself. Over the past decade, the differing demands on the coastline, from where is fashionable and where is not, has led to an extraordinary range in house price values.

On average house prices in the coastal postcodes of England and Wales are within 5% of their county average. Yet prices within coastal cities, traditional seaside resorts and most notably other primarily industrial, urban coastal centres carrying high levels of deprivation, all average less than prices within the counties in which they are located (see Graph 4.1).

In stark contrast, our research has identified 14 ‘ultra prime’ coastal postcodes (see Table 5), where house prices are almost twice the county average. Their appeal to a pool of wealthy buyers means that prices within these locations increased by some 295% on average over the past 10 years, even taking into account the downturn in market conditions.

Council tax data suggests that in most of the popular local authorities second home ownership rates are currently between 9% and 10%. However, figures at a ward level show second home levels are typically nearer 40% within the highly sought after locations, such as Salcombe and Rock, where wealthy buyers have snapped up the limited supply of housing, creating something of a snowball effect.

The extremely localised nature of these ultra prime locations means Land Registry data fails to capture some of the smallest, most exclusive locations such as Helford Village and Coverack. Nonetheless, the list clearly demonstrates how ultra prime locations are currently heavily concentrated in Cornwall, parts of Devon (the South Hams), Dorset (Sandbanks) and parts of the north Norfolk and Suffolk coast.

High city bonuses and ten years of significant wealth creation has propelled 11 out of the 14 ultra prime locations into this category during the past decade. The likelihood of a new culture of reduced bonuses and the fallout from the recession are likely to mean that a repeat of the explosion of ultra prime locations is unlikely during the next 10 years.

Coastal property

However, we expect the top tier of prime locations to maintain an average house price premium of at least 40% in the future as they continue to attract equity in a mortgage-constrained market place. These locations cover a wider geographical area bringing in the rural Northumberland coast, the Gower Peninsula and parts of the Isle of Wight.

Traditional seasideAs we enter the first stages of recovery the coastal locations which are most likely to lead the process will be those with a good balance in demand between those relocating to an area full time and second home buyers. As a result we would expect locations such as Brighton and Hove, Chichester and Topsham to be among the first to show signs of a recovery.

The fate of house prices within the mainstream traditional seaside resorts is far more difficult to predict as prices within these locations vary considerably. The top 25% in terms of having the highest prices relative to the county average, such as Boscombe, Bournemouth, Bude and Whitstable currently show an average house price premium of 14%. In the bottom 25% of such locations, which includes Hastings, East Sussex, Clacton-on-Sea, Essex and Scarborough, North Yorkshire, average prices are 29% less than their county average.

While such locations have been the target of regeneration schemes, such as the £45m Sea Change programme administered by CABE, issues of physical and social isolation will suppress house prices as long as problems associated with low wages and low skilled seasonal employment are combined with an out-migration of young people.

To revive housing markets in these areas new sources of equity need to be attracted, but as English Heritage stated it in its 2007 document An Asset and a Challenge: Heritage Regeneration in Coastal Towns in England, “long term decline in some areas has created negative images of many coastal towns which are deeply entrenched and can be challenging to reverse.” n

Graph 4.1Coastal house prices vs county average

Source: Land Reg / DCLG

120%

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%

Simple average

Index of multiple deprivation vs coastal average

Mix adjusted average

Ultraprime

coastal

Primecoastal

Ruralcoastline

Othercoastaltown

Coastalcity

Traditionalseasideresort

Industrialurban

coastline


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Case study on CornwallWhat is the impact on property value based on the proximity to the coast?

Properties closest to the coastline command higher values than those further away and the difference a sea view can make is significant.

Our research* shows that properties located within 100m of the coastline (and therefore most likely to benefit from sea views), carry an average premium of 61% over those properties located more than a 1km from the coast. The premium often continues to be more than 50% for properties between 100m and 250m of the coast, and although it tapers off beyond this distance there remains an average premium of 31% within 1km of the coast.

While there are significant variations around the average, depending on property type, location, and privacy, the premiums are generally highest for detached properties. In 2008 detached houses sold within 100m of the Cornish coastline averaged £525,168 in value while those between 100m and 250m from the coast averaged £460,585. This reflected premiums of as much as 85% and 63% respectively over comparable inland properties. n

*Based on analysis of just under 12,000 sales, which took place in Cornwall during 2008.

Graph 4.2Cornwall: average percentage premium vs distance from coast

Source: Land Registry / Savills

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Detached Semi-detached Terraced Flat

Within 100m 100m - 250m 250m - 500m 500m - 1km

Postcode Location Average % of county average 10-year price house price Unadjusted Adjusted growth

BH13 7 Sandbanks 812,968 281% 332% 185%

PL28 8 Padstow / St Merryn 548,977 240% 213% 493%

TQ8 8 Salcombe 519,463 217% 242% 367%

TR2 5 St Mawes 463,129 202% 194% 356%

BH13 6 Branksome 459,159 159% 214% 202%

TQ7 4 Bigbury on Sea 433,362 181% 197% 356%

PL27 6 Rock / Polzeath 414,193 181% 161% 316%

IP15 5 Aldeburgh 389,878 194% 192% 191%

TQ6 9 Dartmouth 382,671 160% 177% 362%

NR25 7 Cley Next The Sea 376,991 203% 200% 231%

PL29 3 Port Isaac 360,015 157% 152% 262%

IP18 6 Southwold 359,040 179% 203% 232%

PL23 1 Fowey 351,894 154% 160% 258%

NR23 1 Wells Next The Sea 316,945 171% 178% 313%

Average 442,049 191% 201% 295%

Table 5 The UK’s top 14 ultra prime coastal locations by average house price

Source: Savills Research / Land Registry


For further information please contact a member of Savills research team…

Savills plcSavills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company that leads rather than follows, and now has over 200 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus, agreement or other document without prior consent. While every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

Marcus DixonAssociate Director020 7409 [email protected]

Carrie Scrivener-LeaskAssociate Director020 7409 [email protected]

Neal HudsonAssociate020 7409 [email protected]

14 savills

Summary

Savills Research | The Residential Property Focus August 2009

Faisal ChoudhryAssociate0141 222 [email protected]

Yolande BarnesDirector020 7409 [email protected]

Jacqui DalyDirector020 7016 [email protected]

Lucian CookDirector020 7016 [email protected]

Jim WardDirector020 7409 [email protected]

n The property market has been irrevocably changed by the credit crunch but whatever shape it takes in the future the demand / supply imbalance makes a recovery inevitable. Those best placed to take advantage of this recovery are those investors and developers who entered the downturn with low debt levels, special skills and access to equity. These will become the new and successful players in the residential property market of the future.

n We cannot rule out further price falls in the mainstream market this year. However, because affordability has dramatically over-corrected, further falls will not be as significant. We, therefore, stand by our forecasts that total falls from peak will not exceed 25% peak, but sustained house price growth will require low interest

After the dramatic impact of the credit crunch, the residential property market has been irrevocably altered.

rates, an improvement in the accessibility of mortgage finance and a recovery in economic growth, factors which will enable mortgage-dependent buyers to join the equity-rich. n As predicted, prime central London has so far led the recovery in UK house prices where values rose by 4.3% in the three months to the end of June 2009. This positive trend has begun to filter through into the markets outside the Capital, where its influence is strongest, with small price rises seen in the commuter strongholds of Surrey and Kent and some of the established prime locations in the south such as Bath and Winchester.

n Cash-rich owner-occupier buyers have not just focussed their attentions on second hand property, but also identified opportunities in the new homes market, concentrating on acquiring fully completed, fully discounted schemes of a good design and high specification. This has boosted sales rates and in turn led to signs of sporadic land trading activity for high quality, small (less than 50 units), often freehold sites in high demand locations with deliverable planning permissions and phased payment terms.


Savills Research is a team of property and research professionals dedicated to understanding global real estate markets. Our aim is to use our knowledge to help you to add value to your property interests.

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Savills Global Residential Property Focus August2009

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