HOUSING SUPPLY DEVELOPMENT LAND UPDATE SECTOR OUTLOOK

RESIDENTIAL RESEARCHMAY 2016

HOUSEBUILDING REPORT 2016

EXCLUSIVE

HOUSEBUILDER SURVEY

2016

2 3

SUMMARYHousing is at the centre of the national and local political debate. The expanding UK population, a structural historical undersupply of new housing and a slowdown in movement up and down the housing chain is now injecting a sense of urgency into the need to deliver more new-build property.

RESIDENTIAL RESEARCH

Over the last five years, the Government has made significant changes to the planning system, introduced schemes to boost development – such as Help to Buy – and put pressure on local authorities and public bodies to sell surplus land.

There has been an increase in housing delivery, but the supply of new-build homes is still lagging demand on an annual basis, disregarding the historical shortfall.

The country’s largest housebuilders, along with the Home Builders Federation (HBF), have recently pledged to help deliver one million homes by 2020, recognising that there needs to be ‘significant further action from the housebuilding industry’.

Alongside the undertakings from housebuilders to continue to boost supply, maintain build-out rates and support smaller builders to help achieve these goals, this report assesses the next steps required to address the need for housing over the coming years. For example, the need to address the increasingly onerous levels of pre-commencement conditions applied in some planning permissions and the length

of time taken to sign them off. There are calls for a time limit to be applied so as not to hold up development.

This report gives a snapshot of the current state of the market, and identifies the issues which need to be tackled for volumes to continue to rise, informed by an exclusive survey* of housebuilders. The survey shows:

• More than half of respondents said their businesses would be stepping up starts and completions over the next 12 months

• Some 56% said they were planning to recruit more skilled workers in the next three years

• More than three-quarters urged additional resources in local authority planning departments. Some 30% said making the planning process for public sector land more streamlined would help boost development numbers

• 73% said the cost and availability of labour will have a negative impact on future housing supply

• 57% said they had not seen an increase in access to public sector land

The numbers Official housebuilding data released each quarter from Department for Communities and Local Government (DCLG) shows that some 152,440 new homes were completed across the UK in 2014/15, and we estimate this will rise to around 172,000 in 2015/16.

New quarterly data on English new-build completions show a 12% rise in 2015/16 to just under 140,000.

However, separate retrospective data published by the DCLG shows that 155,080 new homes were completed in 2014/15. This suggests that the quarterly data is underestimating total housebuilding across England.

While many in the industry refer to new-build completions, others look at gross additions. This is the total sum of new housing delivered once conversions,

Source: DCLG

PAST

FIV

E YE

ARS

NEXT

FIV

E YE

ARS

REMAINTHE SAME

INCREASESLIGHTLY

155,080

4,950

20,650

630

10,610

181,310

170,690

DECREASESLIGHTLY

REMAINTHE SAME

RISESLIGHTLY

FALL SLIGHTLY

RISE SIGNIFICANTLY

RISE SIGNIFICANTLY

INCREASE SIGNIFICANTLY

9%

20%

16%

42%

13%

9%16%18%

48%

9%

fall by more than 10% 6% 8% fall fall by up to 10% 2% remain unchanged 39% rise by up to 10% 19% rise by between 10% and 25% 7% 37% rise rise by between 25% and 50% 6% rise by between 50% and 75% 2% rise by between 75% and 100% 2% rise by more than 100% 2% N/A 17%

48%

48%

48%

Net change of use

Net conversions

New build completions

Net other gains

Gross additions

Net additional dwellings

Demolitions

155,080

4,950

20,650

630

10,610

181,310

170,690

Net change of use

Net conversions

New build completions

Net other gains

Gross additions

Net additional dwellings

Demolitions

FIGURE 2 Housing monitor, England, 2014/15

HOUSEBUILDING 2016

YORKSHIRE &THE HUMBER+4.4%-0.1%

Change 2015 vs 2014

NUMBER OF SCHEMES

NUMBER OF UNITS

EAST+6.1%+7.6%

LONDON+20.9% -1.8%

EAST MIDLANDS+6.1%+7.6%

WEST MIDLANDS+5.3%+15.4%

NORTHERNIRELAND+54.5%+13.2%

SCOTLAND-0.5%+0.6%

NORTH EAST+2.0%+7.3%

NORTH WEST+30.2%+31.3%

WALES-11.2%-21.3%

SOUTH WEST+6.2%+2.8%

SOUTH EAST+6.0%+7.8%

TOTAL

TOTAL+9.8%

+6.2%

and ‘change of use’ – for example changing an office into apartments – are taken into account – as shown in figure 2.

Once homes which have been demolished are discounted from the figure – this gives a ‘net additions’ figure, which is again used in some instances.

Gross and net additions in England rose by 19% in 2014/15, partly due to the 65% increase in units being completed through change of use, linked to the new rules surrounding permitted development rights. This allows office conversion without a full planning application, now that permitted development rights have been extended indefinitely, this trend may well continue. Although recent movements in the commercial market may lead some investors and developers to examine the case for residential conversions more carefully in some markets.

Housing supply Whatever data is considered, there has been a significant step up in the delivery of new homes over the last few years – large housebuilders are now constructing 60% more homes than in 2010.

FIGURE 3 A step up in housebuilding Private schemes and units currently under construction

Source: Knight Frank Research/Glenigan

“ This report gives a snapshot of the current state of the market, and identifies the issues which need to be tackled for volumes to continue to rise, informed by an exclusive survey of housebuilders.”

GRÁINNE GILMORE Head of UK Residential Research

FIGURE 1

Housebuilding by provider – England: 1969-2016

*survey conducted April/May 2016

Source: DCLG / Knight Frank Research

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

HOUSING ASSOCIATION PRIVATE ENTERPRISE LOCAL AUTHORITY

2015

-16

2014

-15

2013

-14

2012

-13

2011

-12

2010

-11

2009

-10

2008

-09

2007

-08

2006

-07

2005

-06

2004

-05

2003

-04

2002

-03

2001

-02

2000

-01

1999

-00

1998

-99

1997

-98

1996

-97

1995

-96

1994

-95

1993

-94

1992

-93

1991

-92

1990

-91

1989

-90

1988

-89

1987

-88

1986

-87

1985

-86

1984

-85

1983

-84

1982

-83

1981

-82

1980

-81

1979

-80

1978

-79

1977

-78

1976

-77

1975

-76

1974

-75

1973

-74

1972

-73

1971

-72

1970

-71

1969

-70

Dw

ellin

ga

com

ple

ted SUPPLY TARGETS

200,000220,000240,000

Government annual targetProjected annual household growthBarker Review target (2005)

Please refer to the important notice at the end of this report

4 5

RESIDENTIAL RESEARCH

On an annual basis, Knight Frank estimates a 12% rise in new-build completions in the last year. However, on both DCLG measures, this would still indicate that in England, housebuilding is some way under the Government’s goal of 200,000 new homes a year.

Reaching the Government’s target would be a milestone. However, it is still fewer new homes than government projections suggest will be needed. The household growth projections, produced by the DCLG, indicate a potential 220,000 additional households being created every year in England on average over the next decade. Achieving this level of housebuilding would mean keeping up with current demand, but would not address the structural undersupply that has been running for several decades.

Also, there is the continuing challenge of delivering the spectrum of housing to meet all household demand, something that we investigate further in our Retirement Housing Report.

HOUSEBUILDING 2016

In the wider political landscape, uncertainty remains about the outcome of the EU Referendum. The Chancellor, George Osborne, has said that a vote to leave the EU could result in a fall in house prices.

However, overall, developers expect the number of new home starts and completions to rise in the coming years, chiming with the recent pledge by the UK’s largest housebuilders to keep working towards 200,000 homes a year, and to build double the number of houses in 2019 than they did in 2010.

Housebuilders’ View: Activity The majority of housebuilders and developers questioned in our survey are set to increase their activity over the next year, with 56% saying that completions volumes will rise. Some 24% said their completions would rise by 10% and a further 11% said they expected a rise of up to 25%. Looking further into the future of supply, some 22% of respondents said that they plan to

6% fall by more than 10%9% fall by up to 10%

24% rise by up to 10%11% rise by between 10%-25%11% rise by between 25%-50%6% rise by between 50%-75%4% rise by more than 100%

11% fall by more than 10%7% fall by up to 10%

22% rise by up to 10%7% rise by between 10%-25%

17% rise by between 25%-50%9% rise by between 50%-75%

4% rise by more than 100%

COMPLETIONS VOLUMES WILL

START VOLUMES WILL

18%

59%RISE

56%RISE

FALL

15%FALL

20,000

30,000

40,000

50,000

60,000

70,000

2015201420132012201120102009200820072006200520042003200220012000

HOUSING STARTSHOUSING COMPLETIONS

20%

REMAINUNCHANGED

24%

REMAINUNCHANGED

increase start volumes by up to 10%, while 17% said their business was poised for an increase of between 25% to 50%.

This is reflected in construction data, which shows a rise in the number of private units currently being constructed in most regions of the country (see map on page 3). The data from Glenigan shows that the number of units approved and on site in April this year is up 6.2% overall compared to 2014, with a 14.3% rise in units with planning but not yet on site.

Yet while private supply looks set to rise overall, the data suggests that total supply may not be rising at the same rate, owing to the downturn in affordable housing. The number of affordable units currently on site is down 1% year-on-year in April.

Affordable housing The construction data chimes with our survey, as when it comes to affordable homes, the largest proportion of respondents expect delivery to remain unchanged in the coming 12 months.

The affordable housing sector is facing multiple hurdles at present. The cut in social rents has affected income, while Right-to-Buy has created a level of uncertainty around cash flow. In order to boost income, some registered providers are likely to move more towards developing private housing – further cutting into the prospective supply of affordable homes.

Consolidation in this sector is likely to gain momentum, with the recent proposed merger of L&Q, Hyde Group and East Thames a prime example. This merger will create the country’s fourth-largest house builder, one which has pledged to build 100,000 new homes over the next decade, with half being affordable units, either for purchasers or for renters.

The introduction of the new Starter Homes scheme is examined in more detail below. It is also likely to impact the delivery of alternative tenures of affordable housing, due to a combination of policy pressure, and the challenges faced by some registered providers.

Starter Homes The Government has pledged to deliver 200,000 Starter Homes – a new type of affordable housing – by 2020. Under the new scheme, starter homes will be sold at a 20% discount to market rates to first-time buyers under the age of 40 on homes worth up to £250,000 outside London and £450,000 in the capital. These homes are squarely aimed at those hoping to climb onto the housing ladder for the first time, underlining the Government’s commitment to home ownership.

One of the sticking points on the Housing and Planning Bill was how targets for Starter Homes should be set. The legislation says the number of starter homes will be set centrally, but there are arguments that LAs should have more input on local requirements.

Another factor that needs confirmation in the Starter Homes legislation is the discount period – in other words, how

FIGURE 4

Activity OVER THE NEXT TWELVE MONTHS HOUSEBUILDERS SAY THAT…

Housing starts and completions 2000-2016

Source for charts: Knight Frank Research

Will the Government meet its target of 200,000 Starter Homes by 2020?

Are you likely to choose Starter Homes over other types of Affordable Housing?

Starter HomesAffordable Homes Starter homes will cause total delivery of affordable homes to…

76%

11%

NO

YES

13% Don’t know

33% Don’t know

37%YES

30%NO

56%of housebuilders and developers

say completions will rise over next 12 months

Delivery of affordable homes over the next year will… Expected activity over the next year

2%2%6%7%19%2%6% 2%

39%REMAIN UNCHANGED

8%FALL

37%RISE

up to 10% 10%-25%> 10% up to 10% 25%-50% 50%-75% 75-100% >100%

13% Don’t know

33% Don’t know

**Subject to consultationFigures may not add up to 100 due to rounding

17% N/A

PAST

FIV

E YE

ARS

HELP TO BUY EQUITY LOAN (ENGLAND) STARTER HOME

NEXT

FIV

E YE

ARS

REMAINTHE SAME

INCREASESLIGHTLY

73,813 purchases to Dec 2015Scheme open to 2021

DECREASESLIGHTLY

REMAINTHE SAME

RISESLIGHTLY

FALL SLIGHTLY

RISE SIGNIFICANTLY

RISE SIGNIFICANTLY

INCREASE SIGNIFICANTLY

9%

20%

16%

42%

13%

9%16%18%

48%

9%

fall by more than 10% 6% 8% fall fall by up to 10% 2% remain unchanged 39% rise by up to 10% 19% rise by between 10% and 25% 7% 37% rise rise by between 25% and 50% 6% rise by between 50% and 75% 2% rise by between 75% and 100% 2% rise by more than 100% 2% N/A 17%

48%

48%

48%

20% Equity Loan (40% London)

ELIGIBILITY First-time buyers and home movers

None

BASICS

SIZE

AGE LIMIT

£600,000HOUSEPRICE LIMIT

Equity Loan becomes payable after 5 years Interest charged at 1.75% (rising every year by RPI+1%) Loan repayable on sale of home or after 25 years

Pledge to build 200,000 units by 2020

20% discount

First-time buyers

Under 40

£250,000 (£450,000 London)

Discount applied for 5 years**After this term, property revertsto market value

TERMS

46% Remain unchanged

37%

FALL

RISE

17%

How the schemes compare

(…continues on page 8)

6 7

HURDLES

RESIDENTIAL RESEARCHHOUSEBUILDING 2016

CHALLENGESAccessing public sector land remains a challenge for housebuilders, despite a large-scale effort from policymakers to release such unused land. Earlier this year, the Government announced another tranche of public land sales, some 600 acres. However, there still seems to be a blockage in the system, hampering the swift movement from the identification of a potential site for sale to development. This can often happen in and around the disposal, especially when the owner may want to retain an interest in the site. Only a quarter of respondents of the survey said that they had seen a rise in the availability of land owned by public bodies such as local government, the NHS or the Ministry of Defence, for sale over the last 12 months. More than a half said they had not seen a difference.

The planning system also poses challenges, housebuilders say, with four in five respondents saying it will have a negative impact on supply. While the changes brought about by the introduction of the National Planning Policy Framework (NPPF) in 2012 have largely been absorbed, there are still some key issues around the time taken to achieve planning decisions, and the conditions applied to those permissions – with suggestions for a time-limit to be applied to signing these off. The need to bolster local planning departments is still seen as the biggest priority for policymakers (see figure 7), echoing the findings of last year’s survey, and underlining that there is still room for progress in this area.

Access to labour is also an ongoing problem in the construction sector. Many skilled construction workers moved away from the

sector as activity largely ground to a halt after the financial crisis. Skilled workers from overseas have always made up a significant part of the construction sector, and this remains the case. There are wider concerns in the industry that the vote to leave the EU could ratchet up the pressure on skilled workers if free movement of labour around the EU is impaired. However any changes made as a result of June’s vote are still likely to be a couple of years away.

Luring former construction workers back to the sector and training younger entrants to the market is a key challenge, especially as the average age of workers in the sector is relatively high, exacerbating labour shortages as older workers start to retire. As a result, the Home Builders Federation (HBF) and the Construction Industry Training Board (CITB) earlier this year announced a scheme to boost

the number of workers in the industry. They pledged £2.7m to help train an additional 45,000 workers by 2019 in a bid to increase capacity in the sector – thereby allowing a continued rise in the supply of new homes.

Certainly the demand for skilled workers is set to remain strong, with more than half of respondents saying they were set to increase hiring over the next three years.

Re-examining the Community Infrastructure Levy (CIL) is also needed. The Government’s taskforce on CIL have recommended a radical overhaul of the system, stripping CIL back to its original purpose by funding local infrastructure with a simple, national base tax on all new developments, while Section 106 charges would return for infrastructure requirements on large developments. The Government will consider these proposals in the Autumn.

22%NO

56%YES

FIGURE 6 Are you planning to recruit more skilled workers in the next three years?

22%Don’t know

PUBLIC LAND PLANNING

IMPROVE ACCESSTO DEVELOPMENTFUNDING (FOR SMES)

41%

REFORM CIL

39%IMPROVE ACCESS TO,AND EASE OF PLANNINGON PUBLIC SECTOR LAND

60%

IMPROVE SKILLSAND TRAINING INHOUSEBUILDING INDUSTRY

39%

INCREASE RESOURCESFOR LA PLANNINGDEPARTMENTS

74%

LOOSEN RULES AROUNDDEVELOPMENT ONGREEN BELT LAND

59%

EXTEND HELP TOBUY EQUITY LOAN

43%

STRONGPOSITIVE EFFECT

MODERATELYPOSITIVE EFFECT

MODERATELYNEGATIVE EFFECT

STRONGNEGATIVE EFFECT

NO IMPACT

43%

15%

6% 4%

30%

Removered tape

Speed upplanning

Make it easierto meet planningconditions…

Removered tape

Speed upplanning

Make it easierto meet planningconditions…

IMPROVE ACCESS TODEVELOPMENT FUNDING(FOR SMES)

41%

REFORM CIL

39%

IMPROVE SKILLSAND TRAINING INHOUSEBUILDING INDUSTRY

39%

INCREASE RESOURCESFOR LA PLANNINGDEPARTMENTS

74%

LOOSEN RULES AROUNDDEVELOPMENT ONGREEN BELT LAND

59%

EXTEND HELP TO BUYEQUITY LOAN

43%

Removered tape

Speed upplanning

Make it easierto meet planningconditions…

2014-15

2012-13

2013-14

2011-12

2010-11

2009-10

2008-09

2007-08

2006-07

170,690

136,610

124,720

134,900

137,390

144,870

182,770

223,530

214,940

LABOURWhat effect will labour availability and costs have on supply over next year?

44%

STRONG

NEGAT

IVE

EFFE

CT ON

SUPP

LY

37%MODERATELY

NEGATIVE

EFFECT

ON SUPPLY

7%MODERATELY

POSITIVEEFFECT

NO IMPACT9%

Have you seen an increase in publicly owned land for sale over last year?

What effect will the planning system have on housing supply over next year ?

2% N/A

57%NO

24%YES

19% Don’t know

MODESTLYREDUCINGDEVELOPMENTVOLUMES

NO IMPACT

SIGNIFICANT DRAGON DEVELOPMENT

VOLUMES

43%

20%

35%

2% Other

FIGURE 5 Impact of CIL on development volumes

FIGURE 7 Net supply of housing in England

ACTIONS

Survey results

Survey results

Figures may not add up to 100 due to rounding

Front cover image: Be Newhall, Linden Homes Eastern – Image provided by Paul Riddle Our thanks to the respondents to the survey for their time

For the latest news, views and analysison the world of prime property, visit

KnightFrankblog.com/global-briefing

GLOBAL BRIEFING

RESIDENTIAL RESEARCH

Gráinne Gilmore Head of UK Residential Research+44 20 7861 5102 grainne.gilmore@knightfrank.com

RESIDENTIAL DEVELOPMENT

Justin Gaze Joint Head of Residential Development +44 20 7861 5407 justin.gaze@knightfrank.com

Ian Marris Joint Head of Residential Development +44 20 7861 5404 ian.marris@knightfrank.com

David Fenton Head of Regional Land +44 78 3658 7931 david.fenton@knightfrank.com

Knight Frank Research Reports are available at KnightFrank.com/Research

UK Housing Market Forecast - March 2016

RESIDENTIAL RESEARCH

UK RESIDENTIAL MARKET FORECAST

“ Despite a slight slowdown in UK economic growth, the annual rate of growth is still outperforming that in many countries in the G8.”

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

FORECAST OVERVIEWWe last reviewed our UK house price forecast in November 2015. At that point, a continued moderation in price growth underpinned our predictions for prices. This remains the case, although the market faces a number of new challenges.

Headlines March 2016Policy changes and political decisions could weigh on activity and prices in 2016

The uncertainty over the outcome of the EU Referendum in particular could have a dampening impact on the market

Despite new headwinds, the fundamentals underpinning the UK housing market remain positive

Household incomes are set to grow, an interest rate rise is looking more remote and demand continues to far outstrip supply

The risk that UK interest rates rise more rapidly than expected or that the global economy suffers a notable slowdown in activity remain the biggest threats to the UK housing market

Knight Frank Residential Market Forecast March 2016

2015 (actual)

2016

2017

2018

2019

2020

2016-2020

Mainstream residential sales markets

UK 4.2% 3.9% 4.1% 3.5% 3.1% 4.0% 20.0%London 12.1% 5.0% 4.5% 3.0% 3.0% 2.5% 19.3%North East 2.3% 2.5% 2.5% 2.5% 2.0% 3.0% 13.1%North West 0.6% 2.0% 2.0% 2.5% 2.5% 3.0% 12.6%Yorks & Humber 0.4% 2.0% 3.0% 3.0% 2.5% 3.0% 14.2%East Midlands 3.6% 4.0% 3.5% 3.0% 2.5% 4.0% 18.2%West Midlands 1.5% 3.5% 3.5% 3.0% 2.5% 4.0% 17.6%East 2.3% 4.5% 4.0% 4.0% 3.5% 4.5% 22.3%South East 6.7% 4.0% 4.0% 4.0% 3.0% 4.5% 21.2%South West 3.8% 4.0% 4.0% 3.5% 3.0% 4.0% 19.9%Wales 0.7% 3.5% 3.0% 2.5% 2.5% 3.0% 15.4%Scotland -2.0% 1.5% 2.5% 2.5% 2.5% 3.0% 12.6%

Prime residential sales markets

Prime Central London East* 4.5% 5.0% 5.0% 4.5% 4.5% 5.0% 26.4%

Prime Central London West** -0.6% -2.0% 0.0% 3.0% 4.0% 5.0% 10.2%

Prime Outer London 3.1% 4.0% 4.0% 4.0% 5.0% 5.0% 24.0%

Residential rental markets

UK 2.5% 2.2% 2.3% 2.3% 2.5% 2.6% 12.5%

Prime Central London East* 1.5% 2.5% 3.0% 3.5% 3.0% 3.0% 15.9%

Prime Central London West** 0.2% 1.0% 2.0% 3.0% 3.0% 3.0% 12.6%

Prime Outer London 0.6% 2.0% 2.5% 3.0% 3.5% 3.5% 15.4%

A number of policy changes and political decisions could create headwinds in the market this year. These include the introduction of the 3% additional stamp duty charge for additional homes, the Mayoral Elections in London in May and a decision on whether the UK should stay in the European Union in June.

The uncertainty over the outcome of the referendum in particular could weigh on activity in the run-up to the vote.

However, the fundamentals underpinning the housing market remain positive. Despite a slowdown in UK economic growth, the annual rate is still outperforming that seen in many countries in the G8.

The deposit ‘hurdle’ for those hoping to get onto the housing ladder still remains significant, and affordability remains a key issue in some parts of the market. However, household incomes are also set to grow,

and an interest rate rise is now looking more remote, with the first rate rise now expected in 2017, keeping mortgage rates at record lows for longer.

We have examined this, as well as other factors with the potential to impact the market, in more detail in our Risk Monitor on page 2.

The demand for housing continues to far outstrip supply, despite a significant pick-up in construction activity. The imbalance between supply and demand will continue to underpin prices.

Investment in house building is rising, especially in light of recent government initiatives, but the delivery of new homes is still well below the annual totals needed to address the shortfall in homes, particularly in London and parts of southern England.

Source: Knight Frank Research *City & Fringe, Islington, Southbank, King’s Cross and Riverside**Notting Hill, Kensington, South Kensington, Chelsea, Knightsbridge, Belgravia, Hyde Park, Marylebone, Mayfair, St John’s Wood

RECENT MARKET-LEADING RESEARCH PUBLICATIONS

UK Retirement Housing - 2016

AN AGEING POPULATION SUPPLY AND DEMAND POLICY FOCUS

RESIDENTIAL RESEARCH

RETIREMENT HOUSING 2016

Economic and housing market overview The EU Referendum is starting to dominate most discussions about the UK economy, but it is worth listening to the mood music emanating from the economy.

A slowdown in activity has led several key economic and business bodies to revise down their forecasts for GDP.

The CBI has said that the UK economy will grow by 2% this year and next, down from its previous forecast for 2.3% growth in 2016 and 2.1% in 2017, while the IMF now expects 2.2% growth in both years.

The forecasts assume that the UK stays in the European Union, so they reflect underlying trends. However, there is an argument that the “wait and see” approach currently being taken by many businesses and investors in the run up to the vote on June 23 will leave a permanent imprint on the economy, even if activity rebounds after a vote to stay in.

While a slightly slower rate of growth is expected, the UK is still forecast to outperform the wider EU area where an average growth of 1.7% is expected this year.

In the housing market, monitoring the “wait and see” effect of the EU Referendum, with some buyers and sellers choosing to hold off making a move until the outcome is clear, is more challenging given other policy changes.

RESIDENTIAL RESEARCH

UK RESIDENTIAL MARKET UPDATE

“ The market is not only feeling the effect of the run-up to the EU Referendum, but also the effect of policy changes.”Follow Gráinne at @ggilmorekf

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

GRÁINNE GILMORE Head of UK Residential Research

POLICY & PROPERTY The EU Referendum is starting to dominate most discussions about the economy and the real estate sector, however other policy changes have had a notable impact on the residential market in recent weeks, with transactions reaching a record high in March.

Key facts May 2016House prices rose by 0.2% in April, taking the annual average rise in prices across the UK to 4.9%

Prime central London prices remained unchanged in April, with an annual growth rate of 0.5%

Average UK rents are up by 2.6% on the year in March, and by 3.7% in London

UK GDP growth

Source: Knight Frank Research

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2017201620152014

IMFCBIOBR

ACTUAL FORECAST

Policy impacts on property transactions UK residential property transactions & UK house prices

Source: Knight Frank Research, HMRC, Nationwide

290300310320330340350360370380390400410

UK HOUSE PRICE INDEX (RHS)RESIDENTIAL PROPERTY TRANSACTIONS (LHS)

50,00060,00070,00080,00090,000

100,000110,000120,000130,000140,000150,000160,000170,000

201620152014201320122011201020092008200720062005

Jan 2010Stamp duty exemption for

purchases under £175,000ends (pre-announced)

24 March 2012Stamp duty holiday for first-timebuyers ends (pre-announced)

April 1 2016Introduction of extra 3% stamp duty for

additional properties (pre-announced)

May 2015General Election

Inde

x

Tran

sact

ions

The key change has been the introduction of the extra 3% stamp duty payable for the purchase of additional homes. The rule came into force on April 1, and as a result there was a rush of activity in March as buyers sought to complete their purchase and thereby avoid paying the extra tax. This took transaction levels to a record high. As can be seen from the chart below, such sharp increases usually unwind in the following months, and this is what we expect to see in May and June.

Yet even as activity levels start to normalise, the horizon period for low interest rates seems to be expanding, with some in the markets not pricing in a rate rise until 2020. Low mortgage rates will continue to underpin pricing, alongside the continuing imbalance between housing supply and demand.

Residential Market Update May 2016

LONDON HOTSPOTSRESIDENTIAL DEVELOPMENT OPPORTUNITY AREAS 2015

RESIDENTIAL RESEARCH

HOUSING DELIVERY ACROSS LONDON

IMPROVING TRANSPORT INFRASTRUCTURE MARKET FORECASTS

London Development Hotspots - 2015

The data from Knight Frank’s quarterly residential development land index shows that greenfield land prices across England declined for the fifth consecutive quarter in Q1 2016. However, in urban areas, brownfield site values are rising strongly, with a 15.4% increase in the year to the end of March.

The development land index, which is based on the valuations of more than 70 actual development sites around the country, illustrates the multi-speed nature of the housing market, with buyer demand stronger in key urban markets than more rural areas.

Greenfield land prices are now down 2.5% year-on-year, and agents report that while housebuilders are in the market for “oven-ready” sites, especially for schemes of around 50-200 units, many have replenished their pipeline of strategic land. However, the

Development Land Indexhousebuilder survey indicates that some may be ready to come back to the fray with more than a half of respondents saying they expected acquisitions of strategic land and land with outline consents to rise over the next year.

Source: Knight Frank Research

FIGURE 8 Annual change in development land values, Q1 2016

PRIM

E CE

NTRA

L LO

NDON

LAN

D-1

.8%

GREE

NFIE

LD L

AND

-2.5

%

URBA

N LA

ND+1

5.4%

long before a Starter Home returns to full market value. The Government had planned for this to be five years, and has said it will not support a period of longer than 8 years, but the House of Lords suggested a taper over 20 years. The results of the consultation on this question will come in during Summer 2016.

However, the delay in detail of the scheme seems likely to make it more challenging for the Government to meet the target it set itself for 200,000 Starter Homes by 2020.

The results of the Housebuilding Survey seem to bear this out. Only one in ten respondents said that the Government was likely to meet its Starter Home target under current market conditions.

When asked if Starter Homes would increase the total number of affordable housing units delivered across the country, some 37% of respondents said yes. However a further 46% of respondents said it would not make a difference, underlining the expectations the new regime may simply result in Starter Homes replacing other tenures of affordable housing. There is also a consideration that developers delivering Starter Homes could lose out on capital injections from social housing providers on their developments, which could ultimately affect or change viability.

There is also some expectation that demand for Help to Buy Equity loans on properties worth up to £250,000 outside London may ease as these buyers look at Starter Homes instead.

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