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UK house prices are stuck in the doldrums

UK house prices are set to tread water while incomes rise, making property more affordable, says Merryn Somerset Webb.

The numbers aren’t looking good for residential property investors. House price growth in the US fell to a mere 1% at the beginning of this year, according to the latest report from the Dallas Federal Reserve. Look at global data across the 18 largest economies in the world and things don’t look much more encouraging. This could be the year in which we see “global growth dip to its lowest pace in a decade”. Investment is slowing fast, says Oxford Economics.

The UK is no outlier here. The Nationwide index and the Rightmove Asking Prices index show prices and asking prices respectively to be all but flat. The Halifax House Price index shows a better annual number but suggests prices fell mildly in June. You can see the same trend in Hometrack data, which suggests that the falling prices we have seen in London are beginning to spread: over a third of homes are now in areas with annual price falls (the higher value the market the more likely this is), although the absolute levels of falls is small. So what next? Most analysts expect the market to tread water from here (at best) – although if a new PM were to pull a Brexit deal from the hat we could of course see a little London bounce.

A flat market…
This is probably correct. There is still some support for prices. Housing starts are falling slightly (so the supply of housing is not rising much). Interest rates are low and will go lower if Brexit goes horribly wrong. The banks’ wholesale funding costs have also edged down, and that should soon feed into mortgage rates. At the same time wages have jumped (year-on-year growth excluding bonuses hit an 11-year high in April) and household disposable incomes are also on the up.

That makes houses – even at today’s silly prices – seem more affordable. Prices, says Nationwide, are likely to be at least supported by “healthy labour market conditions and low borrowing costs.” That said, there isn’t much to push prices up either. They are still high relative to incomes. The tax and regulatory hit to buy-to-let is discouraging buyers in that market. An unwelcome (to big property owners, at least) overhaul of property taxation may be on the way. And the Help to Buy scheme (which has played a clear part in pushing prices up) is likely to be at least scaled back soon. Put all those factors into the mix and it is hard to see a rebound in prices in 2019 “or beyond” says Capital Economics.

… is good news
The key thing to bear in mind there is that this is not bad news – unless you very recently paid too much for a house. One thing we have all agreed on in the UK for decades now is that houses are too expensive relative to average earnings. That makes it tough to get on the ladder and tough to move up the ladder. Add today’s high levels of stamp duty to your cost of buying and it’s nasty out there.

But the fact that house prices are not really rising in nominal terms, combined with the small real rise in wages over the last two years, is beginning to change this situation. In 2007 Nationwide’s house price to earnings ratio for the UK was 5.42. At the end of 2016 it was 5.25. Today it is 5.03 times. That’s not ideal – but if this gentle drift down continues and we end up at more like four times, it will suddenly be an awful lot easier to buy (and sell) houses. That would be a very good thing.

Head for Hampshire
Nevertheless, for those of you determined to find the next hot location in the property market and make your fortunes the easy way, Anne Ashworth writing in The Times has an idea for you. She suggests checking out age profiles. Why? Because the younger the crowd, the higher the potential for growth. In areas with an older demographic, you can expect to see sales and downsizing (the cash from which then gets spread around children and grandchildren who won’t necessarily live in the area). In one with a younger demographic you can expect to see the opposite.

Look back over the last decade, says Lucian Cook of Savills and you will see this in action. Those areas with large concentrations of people in their 40s have seen much greater price appreciation (up 56%) than elsewhere. With that in mind, look at somewhere such as Aldershot in Hampshire. There 39% of households are headed by someone between 31 and 40. They won’t be downsizing any time soon.

By: Merryn Somerset Webb

Source: Money Week

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Rising Yields Boosting Professional Buy To Let Investors

Rising yields are boosting professional buy to let investors, especially those considering adding to their portfolios.

Rents have hit a new record high at an average of £896 per calendar month, with growth accelerating to 1.3 per cent a year, according to the ninth edition of Kent Reliance for Intermediaries’ Buy to let Britain report.

As a result, rising yields have now hit a two-year high. The average yield now stands at 4.5 per cent, its highest since the first quarter of 2017.

In London, rents have only risen by 0.5 per cent. However, with property prices falling, yields in the capital have reached 4.1 per cent, their highest level since the end of 2015.

However, despite rising yields, growth of the private rental sector is subdued on the back of government intervention and the economic impact of Brexit uncertainty.

The value of the £1.3 trillion private rental sector grew by £6 billion in the last year, as the expansion of supply dwindled, and property prices weakened in several parts of the country. The value of the average rental property has risen by 0.3 per cent in the last year, with Brexit uncertainty gripping the wider housing market

As the costs of property investment rise, landlords are seeking to recoup these in higher rents to preserve their profitability and protect rising yields. Around a quarter (24 per cent) of landlords, already expect to raise rents in the next six months, nearly five times the number that expect to reduce them.

Improved finances among tenants is also allowing more leeway. Wages are currently rising at 3.4 per cent, up from 2.9 per cent a year ago and well in excess of inflation.

Professional landlords are not just seeking to recoup higher tax costs in the form of higher rents. Many now operate via limited companies to mitigate the impact of the changes to mortgage tax relief. Analysis of Kent Reliance for Intermediaries’ mortgage data shows that in the first quarter of 2019, 72 per cent of buy to let mortgage applications were made through a limited company, significantly higher than in 2016 (45 per cent).

Andy Golding, Chief Executive of OneSavings Bank, commented: ‘Landlords have rolled with the punches as best they can, but there is no escaping that growth is subdued in the private rented sector following four years of government intervention. Brexit uncertainty has only compounded this issue, having the obvious knock-on-effect on landlords’ confidence.

‘The positive news is that for those landlords looking to expand their portfolios, underlying market conditions seem to be changing. Yields are climbing as rents rise faster than house prices, providing further opportunities for committed investors.’

Source: Residential Landlord

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UK holiday let market creating opportunities for investors

UK: Thousands of Britons are opting to spend their holidays closer to home and as a result, holiday let property investors are seeing the potential business opportunities this presents.

That was the opinion of Commercial Trust Limited chief executive Andrew Turner, speaking to Property Reporter, in which he said the holiday and short-term lettings market would experience “significant” growth in 2019.

Last year, estate agent Savills analysed data which revealed 39 per cent of the British public who purchased holiday lets in 2018 opted for staycations in domestic UK properties. That contrasts starkly with the figure of 14 per cent, which was recorded to the economic recession in 2017.

Meanwhile last month, Cottages.com reported a 23 per cent rise in listings in its holiday property portfolio in the space of 12 months.

Turner’s findings included the following:

Market demand
Thousands of Britons are choosing to staycation domestically due to reasons such as Brexit and the resultant economic and passport and customs uncertainty. Tourists are still coming over to visit the UK from abroad and coupled with the weaker pound, it is leading to a larger pool of people looking for short-term letting options when travelling.

Differences in tax
Government changes to buy to let have gradually restricted the amount of mortgage interest tax relief that landlords can claim. By April 2021, landlords will be able to claim a flat level of 20 per cent as a tax credit, unlike in the past when they could previously claim 100 per cent of mortgage interest.

For furnished holiday lets, landlords can still claim all of the interest paid, as well as capital allowances on wear and tear and furniture replacement, while also potentially qualifying for capital gains tax relief as a business.

According to HMRC rules, a property must be available to let for at least 210 days a year and it must be let for at least 105 days in order to qualify for mortgage tax relief.

According to Turner, many landlords now seemingly use properties as a savings vehicle for their future pensions.

Yields
Yields on holiday lets can outperform more traditional forms of buy to let.

2018 statistics from holiday property fund Second Estates showed landlords with holiday homes in Wales were able to achieve yields of 11.7 per cent over a 12-month period.

Yields are dependent on several factors, including property value, the going rate for rent and the number of bookings or demand in the area. Second Estates predicted a further rise for holiday let yields in the coming years.

From 2018 to 2022, the holiday property fund said it envisaged an average 14 per cent return across the UK, with the North West and East of England expecting to achieve returns of around 16 per cent.

Turner summarised by saying that the holiday lets market is thriving and will continue to attract keen interest from property investors. Circumstances with uncertainty over Brexit have created a market for buy to let landlords to look for further entrepreneurial ways to generate and maintain a profit.

He also advised anyone who is considering re-mortgaging and operating a holiday let to speak with a specialist first to fully comprehend the implications of costs.

By Paul Stevens

Source: Short Term Rentalz

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More brokers searching for lenders who accept first-time landlords

In June lenders who accept first-time landlords was the most popular search on criteria sourcing system Knowledge Bank.

This follows a raft of recent product and criteria changes by lenders and suggests that potential landlords have not been put off by a loss of tax incentives and the ban on tenant fees.

Nicola Firth (pictured) chief executive of Knowledge Bank said, said: “The buy-to-let sector has taken a few punches over recent years with the removal of tax incentives, the ability to charge fees and even lenders going into administration.

“However, this is a resilient market and with competitive interest rates, and a wide product selection, potential landlords are asking brokers to find them a home for their loan requirements.

“Buy-to-let is another example of a sector where criteria changes are made on a daily basis so it’s vital for brokers to whittle down the lenders who will consider their clients in advance of any product sourcing. There’s no point finding a great product only to discover that your client is refused on criteria.”

Recent reports also show that product availability for first-time buy-to-let mortgages is the highest it has been for five years, coupled with an average fall in interest rates over the same period.

In other product areas; the monthly criteria activity tracker showed that the maximum age borrowers could be at the end of the mortgage term was the most searched-for criteria in the residential mortgage category.

Other search highlights reveal that the maximum loan-to-value continues to be the most popular search for second charge loans and the minimum age of borrowers at application the most searched for criteria within equity release.

By Michael Lloyd

Source: Mortgage Introducer

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UK economy probably shrank for first time in seven years – Bloomberg Survey

The latest Bloomberg survey of economists showed that the UK economy probably shrank for the first time since 2012 in the second quarter of this year.

Key Findings:
“Official data this week is forecast by economists to show growth rebounded to 0.3% in May, after a contraction of 0.4% in April.

Still, such a reading would mean an expansion of 0.8% was needed in June just to return a flat result for the quarter as a whole, according to Bloomberg calculations.

The latest poll follows a dismal week of reports in the U.K., with Purchasing Managers’ Indexes showing the dominant services industry barely growing in June, and both construction and manufacturing sectors suffering outright contractions.

The worsening outlook, both at home and overseas, has also left investors and economists rewriting their calls for U.K. interest rates.”

By Dhwani Mehta

Source: FX Street

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Commercial property: Lack of supply demands developments

There is no shortage of investors and developers looking to gain exposure to the Edinburgh office market.

However, as many landlords opt to hold on to their investments – attracted by rental growth and yield compression, there is a growing appetite to refurbish or redevelop older buildings in the Capital to meet the demand for quality office accommodation.

Edinburgh is experiencing historically high levels of occupier demand from a wide variety of sectors, with employers attracted by the city’s talent pool and the quality of life in the Capital.

However, the office market faces dwindling supply and we anticipate seeing a spike in rents as tenants compete for limited space.

Rents for grade-A offices in the city centre are currently around £35 per sq ft and could top £40 next year.

At present, there is little more than 250,000sq ft of prime office space available in Edinburgh and the two speculative developments currently in the pipeline – 
62 Morrison Street and 
20 West Register Street – are mostly or completely pre-let.

The Capital has lost more than 1.2m sq ft of office space to alternative uses in recent years, while take-up is running at 1m sq ft a year.

This poses two big questions: where will the money go? And where can thriving businesses house their growing numbers of staff?

Professional and legal services, the burgeoning tech sector, and a financial industry that continues to thrive – the market has rarely looked so good from an investor’s perspective.

Companies don’t want to relocate, even partially, because the city and lifestyle are key attractions for the talent that is the lifeblood of these service sector businesses.

But there are few – if any – sites in the city for large-scale speculative development still available.

Where possible, landlords are either substantially refurbishing older buildings or selling up, thereby avoiding construction and letting risks.

Competition for refurbished space is likely to hot up as the shortage becomes more acute; we are starting to see businesses actively competing for the best office locations.

Beyond that, the obvious escape valve for city centre-based companies lies to the west, around South Gyle and Edinburgh Park.

With excellent connectivity to the city and available space, we anticipate increasing demand and more interesting developments.

However, the city centre remains the most prized location for wealthy and ambitious, people-focused companies, and – where possible – older buildings will make way for more contemporary offices.

The re-development of Haymarket has been a start, but with investors poised and firms demanding more space, the next few years should see more interesting developments appearing.

Demand for office space around Edinburgh is likely to keep outstripping supply. As a result, rents look set to keep moving higher, especially as the city’s tech start-ups mature into larger companies, with a need to attract talented people.

By ELLIOT CASSELS

Source: Scotsman

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Sterling slides towards two-year lows as outlook darkens

The British pound fell towards its lowest levels in more than two years on Tuesday against the backdrop of a worsening economic outlook and rising fears about a no-deal Brexit under a new Prime Minister.

With a key $1.25 level against the dollar giving way in early Asian trade, traders quickly pushed the British currency down half a percent against the dollar to a level not seen since April 2017, barring a flash crash in early January.

The pound also weakened against the euro to a six-month low at 89.95 pence EURGBP=D3 and is on track for a tenth consecutive week of losses against the single currency.

“All the fundamental factors point to a weaker pound and the downward momentum is still intact,” said Lee Hardman, a currency strategist at MUFG in London.

In the latest sign of economic weakness, sales at British retailers rose at their slowest average pace on record over the past year, a survey from the British Retail Consortium showed on Tuesday.

Concerns about the worsening economic outlook in Britain – some analysts expect the economy contracted in the second quarter – encouraged Bank of England Governor Mark Carney to signal last week that the central bank may strike a more dovish tone at its August policy meeting.

The pound was trading 0.5% down versus the dollar at $1.2455 and within striking distance of an April 2017 low below $1.2409. It very briefly hit that low in January this year in chaotic trading during a currency market flash crash.

(For a graphic on ‘Sterling approaching Jan 2019 low of $1.2409’, click here tmsnrt.rs/2YCVA5j)

VOLATILE OUTLOOK
Markets are now pricing in a BoE rate cut over the next 12 months, as central banks around the world adopt an easing bias in the face of economic uncertainty and trade tensions between the United States and China.

Sterling has fallen for several days, its losses compounded by a dollar rallying after analysts scaled back expectations the Federal Reserve would cut interest rates by 50 basis points later this month.

RBC Capital Markets strategist Adam Cole noted that betting markets were now pricing in a 95% chance of eurosceptic Boris Johnson, who some investors fear will push Britain towards a no-deal Brexit, becoming the next leader of the Conservative party and Prime Minister.

“While a significant measure of Brexit risks have already been priced, the pound may still have more of its downside exposed, should the prospect of a no-deal Brexit ramp up meaningfully over the coming months,” said Han Tan, Market Analyst at FXTM.

Those risks are being priced into the currency derivative markets with the spread between three and six-month implied volatility in the pound widening to its highest levels in two months.

Latest headlines on the Brexit front have also pressured the pound lower.

Ireland will step up its preparations for a disorderly Brexit this week given the chances of Britain leaving the European Union without a deal have never been higher, foreign minister Simon Coveney said.

A spat between Britain and the United States following the leak to a British newspaper on Sunday of memos from the British ambassador to Washington also raised concerns.

Option markets also point to more weakness in the pound with only some relatively tiny options amounting to around $400 million struck around the $1.24 levels.

Economic growth data for May, due on Wednesday, will help analysts decide whether the British economy is likely to have shrunk in the second quarter after a series of disappointing business surveys.

Economists polled by Reuters expect the British economy grew 0.3% in May month-on-month, an improvement on the -0.4% in April.

Reporting by Tommy Wilkes and Saikat Chatterjee; editing by Ed Osmond

Source: UK Reuters

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Landlords falling behind on latest legislative reforms

Property is a hugely popular asset class among investors in the UK. Indeed, there are an estimated 2.5 million landlords across the country, and many more who would not consider themselves “a landlord” by trade, but whom rent out a second property they own.

However, over the past 12 months it has become apparent that the increasing regularity with which new legislative reforms have been introduced is a source of significant stress for professional landlords.

Most will know well that the UK government has been making sweeping changes in the buy-to-let space. From hiking up stamp duty to new rules around housing standards, investors who let residential properties to tenants must now navigate a more challenging landscape if they are to profit from this market.

To delve further into this topic, in June 2019 MFS commissioned an independent survey of more than 400 UK landlords. We asked them about how aware they are of the new legislative and regulatory reforms that have been introduced in the past year, and whether they have taken action to account for these changes.

The findings were illuminating. For one, we found that 30% do not understand the changes to House in Multiple Occupation (HMO) licensing, which came into effect in October 2018 to stipulate on the minimum sizes of rooms.

Furthermore, almost one in three (28%) landlords admitted to not fully knowing what the abolition of Section 21 means. The reform, which was implemented in June 2019, aims to prevent unfair tenant evictions.

A similar number (27%) said they do not understand the tenant fees ban (June 2019) or how it may affect them.

MFS’ research uncovered a similar lack of knowledge when it comes to tax reforms that are likely to impact UK landlords. A quarter (25%) said they are not up-to-date with the latest changes to reduce tax relief on buy-to-let mortgage repayments, while even more (28%) do not understand the reforms to inheritance tax with regards to passing down properties.

The legislation and regulation governing the UK’s rental market is constantly evolving, and landlords are quite clearly struggling to keep pace with the change. From HMO regulations to the abolition of Section 21, these are significant reforms that, for the most part, are rightly designed to protect tenants, create more transparent processes and promote better practices.

Our research shows a clear need for the government to do more to educate landlords around the reforms it introduces. Landlords, too, must be more proactive in seeking out information to ensure they abide by the new rules.

What’s more, the study highlights just how important it is for property investors and their brokers to work with service providers who have strong knowledge of the everchanging legal framework. Doing so ensures landlords will not be caught out by changes that could bring about significant financial repercussions if ignored or not properly adhered to.

By Paresh Raja

Source: Mortgage Introducer

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Why don’t banks care about SMEs?

For a service sector dealing almost solely with numbers and structured data, the world of small business lending could not be better suited to disruption by digital machines.

But recently, Bank of England governor Mark Carney rightly pointed out that, despite small and medium sized enterprises (SMEs) facing a £22bn funding gap, almost half don’t plan to use external finance, citing the hassle or time associated with applying.

The governor announced that the Bank would therefore champion a data platform to help SMEs have an easier time when applying for credit. The vision builds on Open Banking, bringing together data from a wide range of sources including Companies House, HMRC, utility companies, and telecommunications firms.

With a single “data passport”, SMEs could easily apply for finance at dozens of providers with the click of a button.

So how has it come to the humiliating point that the industry’s own regulator is proposing innovations that could accelerate growth and improve customer service? What are the banks’ armies of IT and product development staff doing?

The governor’s comments underscore a failure by banks to embrace the digital economy and invest to keep pace with the changes happening to their customers.

SME owners don’t just expect their bank’s lending process to be as seamless as their personal loan applications – they also expect banks to recognise how the financial makeup of firms has changed thanks to the digital revolution. Most SME financing from banks is centred around equipment or property assets, but digital services firms have neither.

Innovative finance providers, including my own company, have already embraced the data sources that the Bank of England will promote to open up access to finance.

Powered by new data connectors like DueDil, TrueLayer, and Codat, we automate the analysis of public data, bank transactions, and accounting records to make it faster and easier to provide credit to small businesses. Since launching, we have facilitated over £100m of lending to growing SMEs, and are rapidly expanding our operations to help more businesses across the country.

So why haven’t traditional banks made similar investments in order to price loans in the digital age? In my view, the reason is simple: it is not profitable for them to do so.

Under Basel III – the global rules governing how banks are regulated – banks are directed to hold almost double the amount of capital against an SME loan compared to a buy-to-let mortgage, for example. Holding more capital means making less profit, so all else being equal, banks naturally double down on loans that require lower amounts, such as mortgages.

And so we have seen banks close branches, sack business lending sales teams, and fail to innovate, while instead channeling more lending into the unproductive housing market, rather than the productive SME economy.

While challengers and fintechs are happy to lead the innovation in business lending, without structural reform of banking capital rules, we are unlikely to see strong competition from banks.

This is a challenge that Carney’s successor must tackle if the UK is to unleash the full potential of its SMEs.

By Greg Carter

Source: City AM

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Property schemes are confusing for investors

Investors are struggling to understand the risks in property investment platforms, research has found.

Secured property lender Fitzrovia Finance polled the clients of 20 of the top UK schemes and found three quarters wrongly believed first charge secured loans were riskier than second charge mezzanine options, while seven per cent did not know which was riskier.

The study, carried out in June, also showed 18 per cent of retail investors felt some of the property investment platforms failed to clearly explain the level of risk involved in their investments, and that returns ranged from a modest 2.8 per cent to 15 per cent, reflecting a significant variance in risk and return.

Brad Bauman, Fitzrovia Finance’s chief executive officer, said: “The industry must strive to ensure that each opportunity promoted to private investors is clearly explained, the risks are transparent and the returns appropriate. This will help ensure that investors have the necessary information they need before deciding to invest.

“There are some ‘property’ investment opportunities being offered to private investors where, for example, the returns are 8 per cent or 14 per cent – or even higher. These will include a lot of features that represent higher levels of risk such as second charge loans or unsecured debt, and this must be clearly explained to investors.”

Property investment platforms facilitate investment in individual properties or a property portfolio, and often promise high returns.

They have started to sprout up in recent years in many guises including crowdfunding, P2P lending, real estate investment trusts and bonds, and their aim is often to provide retail investors with access to property investments.

One of the easiest ways to invest is through P2P lending, where investors lend money to borrowers, with the cash secured against residential and commercial properties or new-build developments.

Fitzrovia’s findings followed last month’s announcement that later this year the FCA will introduce new rules which will mean individuals will not be permitted to have more than 10 per cent of their assets in peer-to-peer investments, unless they have taken financial advice.

The rules are designed to prevent investors taking what the regulator considers excessive risk, and will require platforms to assess casual investors’ knowledge and experience of P2P before they allow them to invest.

There will also be a more explicit requirement to clarify what governance arrangements, systems and controls platforms need to have in place to support the outcomes they advertise.

Christopher Woolard, executive director for strategy and competition at the FCA, said: “These changes are about enhancing protection for investors while allowing them to take up innovative investment opportunities.

“For P2P to continue to evolve sustainably, it is vital that investors receive the right level of protection.”

By James Colasanti

Source: FT Adviser