Feeling sheepish about your next property development project? Don’t blame you. It’s worth considering how we got to where we are. And where exactly are we anyway?
The avalanche of bad news for residential property started as a snowflake that innocently meandered down through the bright economic skies of 2014, with the Labour election manifesto Mansion Tax threat, and the Chancellor’s subsequent December 2014 Stamp Duty overhaul.
That flake soon gathered into a pretty hefty snowball with the addition of non-domicile taxation rule changes, a Tory outright election win (a trigger for the underestimated disaster-in-waiting Brexit vote), a 3% second-property SDLT surcharge impacting the investment and buy-to-let markets, the Brexit campaign itself and then the calamitous result with all the political fallout which resulted.
If there was an uneasy sense of the property market feeling overheated in early 2014, it has progressively cooled ever since.
Some might argue that this is a good thing, as the prospect of easier property prices means more access to those not on the housing ladder. While for some this may undoubtedly be true, there are significant negative outcomes: housebuilders and developers will build fewer, and smaller homes as the economics and risk profile of more and larger properties no longer add up. Even the cost of homeowner renovations is set to go through the roof with significant materials (think sanitary-ware, tiling, kitchen and bathroom appliances, designer furniture) being imported from overseas and sterling’s purchasing power having gone through the floor.
Vast swathes of dated housing stock risks sitting unrenovated as the numbers struggle to add up. RICS reported a shortfall of 1.8 million rental properties, and that 86% of rental investors have no intention of adding to their rental portfolios, severely reducing the number of rental properties available in the market; add to this the reduction in new-build supply coming on-stream and the outlook in the medium term isn’t so good.
All this is a pity for the investor/BTL buyer, as weaker property prices and more renters would mean a likely better yield to rental investors in an otherwise ultra-low yield universe right now. Without the prospect of capital gains underlying rental investments, property might deserve to take a back seat to equities and other asset classes for some years, from a purely ‘returns’ perspective.
Having said this, the property market is far from dead. Transactions may be low, but they are happening. Right now the market is one driven by necessity: the need to move, need to sell, need to buy. Without the investment and buy-to-let market, it’s a less dynamic, smaller, lower transaction market. But it’s there.
If you are looking for a property or site to develop, you would do well to focus on areas where that necessity-driven market is robust: attractive to upsizers and down-sizers in traditionally strong residential areas (good schools, attractive period housing stock, easily commutable etc). So for the time being at least, the old formula is best: location, location, location. This will be away from the new-builds and in Zone 2 and outwards London areas, and in the countryside near established, traditional, busy towns with good rail, road and air links as well as good schools.
As well as the old ‘location…’ mantra, remember ‘what goes around, comes around’: if you don’t buy in this weakened market, you can bet your bottom dollar when prices do take off again, it will be as unforeseen as when they fall.
There’s a vanishing chance the new Chancellor might do something about the taxes that got the market to this point, but don’t count on it. That chance is probably on a par with a snowball’s in the Sahara. Or Brexit ever being resolved.