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UK economic growth revised down at end of 2017

The UK economy grew at a slower pace than previously thought at the end of 2017, as production industries dragged growth back.

The Office for National Statistics today said GDP rose by only 0.4 per cent in the fourth quarter of 2017, 0.1 percentage points down from its first estimate.

The growth downgrade means the UK economy grew by only 1.7 per cent in 2017, lower than thought at first with a slower first quarter than earlier estimates. That meant a bigger slowdown from the 1.9 per cent expansion seen in 2016, and the slowest since 2012.

Business investment growth was flat in the fourth quarter, although it rose by 2.1 per cent over the year.

However, financial and business services provided a rare bright spot, with growth in the sector, which covers much of the City, revised upwards from 0.8 per cent to 0.9 per cent.

The figures show the importance of preserving the City’s trade access to the EU after Brexit, according to Stephen Jones, chief executive of the UK Finance lobby group.

“This is a timely reminder of the importance of financial services in talks over a future EU-UK agreement,” he said. “An ambitious free trade deal, underpinned by the mutual recognition of closely aligned standards, will help drive jobs and growth both in the UK and across the continent.”

The figures may inject some uncertainty into the Bank of England‘s interest rate plans, although monetary policymakers have previously emphasised that wage growth will be a key metric, given a lower “speed limit” for the UK economy.

“This is not an economy that needs cooling with higher rates,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics, with the Bank of England widely expected to increase interest rates in May.

While the economy “still appears to have gathered a little momentum in the second half of last year”, data suggest the economy “remains in a fragile state”, Tombs said.

GDP per head, which strips out the effects of a rising population, grew by 0.2 per cent in the fourth quarter, meaning it is only three per cent above the peak hit before the financial crisis.

The figures give further evidence of the overwhelming dependence of the UK economy on the services sector, which accounted for 1.3 percentage points of 2017 growth – although that represented a steep fall from the two percentage point contribution to growth in 2016.

Production industries, which include the manufacturing sector, contributed only 0.3 percentage points, in spite of manufacturers enjoying a “sweet spot” thanks to the 2016 devaluation of sterling.

The figures also show output from the agriculture industry did not grow at all for the second year in a row.

Source: City A.M.

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Investment in UK commercial property sector remains strong

Investment in UK commercial property rose 66 percent in January compared to the same month last year, according to data from Savills, to £4.2 billion. In its February Market in Minutes report the international real estate advisor says that investor appetite for UK property remains very strong. In 2017, total investment into UK real estate reached £65.4 billion, representing a 26 percent increase on 2016’s annual total. According to Savills, the office and industrial sectors led the way, with overseas investors responsible for nearly half of total volumes, of which Asian investors were the most active, accounting for a fifth of all investment.

Savills says that average UK prime yields remained static in January at 4.52 percent, around 30 basis points lower than the same point in 2017, with a small amount of downward pressure on yields for M25 office and industrial distribution assets.

Investors ploughed nearly £11 billion into the industrial sector in total during 2017, 80 percent up on 2016, according to Savills. Investors continue to be attracted to the sector by the secure income it offers, with pressures on land, particularly inside major cities from other uses, likely to maintain undersupply and deliver rental growth.

Mark Ridley, CEO of Savills UK and Europe, comments: “January’s volumes demonstrate that investors are still looking beyond Brexit and are happy to commit to the UK to secure prime property with secure income characteristics. Based upon current projections, driven by a downward shift in equivalent yields, we expect total returns for average UK commercial property to be around 7 percent this year before weakening slightly for some of 2019 as investors take a ‘wait-and-see’ approach as the UK officially leaves the EU.”

Steve Lang, director in Savills commercial research team, adds: “This February marks the 10-year anniversary of the first Market in Minutes in 2008. Back then, average UK prime yields rose by over 120 basis points during the year, development activity indicators had slumped and GDP expectations were slashed. Compared to this, the impact of the Brexit vote is relatively mild. In addition, you would have been hard pushed in 2008 to have predicted the explosive growth in online shopping over the past decade which has largely driven occupier demand, and therefore investor appetite, for industrial space.”

The UK accounts for a significant proportion of the European corporate investment transactions including venture capital, private equity and mergers & acquisitions (M&A), says Savills. Volumes have increased substantially to £6.4 trillion in total over the last five years, with the UK accounting for around 30 percent, on average, of all European deals by value.

This demonstrates confidence in the UK as a centre for investment, whether it is corporate M&A or investment into the start-up community, according to Savills, and is likely to trigger future real estate activity as companies grow and expand and then recruit as a result of raising new capital.

Source: Workplace Insight

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Brexit to shut the door on lengthy London house price boom

British inflation will outstrip gains in house prices this year and next, particularly in the capital, as uncertainty over Brexit and weak consumer spending power hits demand, a Reuters poll found on Friday.

According to the latest quarterly Reuters poll of 33 housing market specialists, taken in the past week, property prices will rise 2.0 percent this year, much slower than the predicted 2.5 percent rise in general costs in the economy.

In London – long the hot-bed for foreign investors who sent prices skyrocketing in the past decade – the difference will be even starker: the average price is expected to fall 0.5 percent this year.

Next year, house prices will rise 0.9 percent in London and 2.0 nationally, still both below the 2.1 percent expected inflation rate. In 2020, London prices will increase 2.0 percent and by 2.3 percent nationally.

“A significant effect of Brexit is subdued investment confidence,” said Rod Lockhart at online mortgage lender LendInvest.

“Would-be sellers are holding onto assets for longer and buyers are being a little more diligent before committing to significant expenditures, all this against a backdrop of inflation-surpassing wage growth.”

Most respondents in the poll said the Brexit vote had been negative for both turnover and prices in London but were split over whether it had been negative or had no impact nationally.

Sterling GBP= is over 6 percent weaker than before the June 2016 decision to leave the European Union, something that should make properties more attractive to foreign investors, who can take advantage of cheaper prices.

But uncertainty over how Brexit divorce talks will pan out has deterred overseas buyers.

“Foreigners get more pounds in their pockets, but the nation and its capital has lost some of its allure,” said Tony Williams at property consultancy Building Value.

With only just over a year to go before Britain is due to leave the EU there is still little clarity on what restrictions there will be on the movement of both goods and people.

Britain’s biggest housebuilder, Barratt (BDEV.L), is considering moving production of blocks used in construction from Germany to Britain, it said on Wednesday, an example of steps some businesses are taking to mitigate any Brexit risks.

Generally, housebuilders have benefited from years of rising house prices and government incentive schemes. Bellway (BWY.L) said earlier this month it expected an over 14 percent rise in housing revenue in the first half as it sold more homes at higher prices.

Negative effects have also come from government efforts to restrain the buy-to-let market and expected interest rate rises from the Bank of England, both likely to keep prices in check and dampen turnover.

Eleven of 18 specialists who answered an extra question said turnover in London’s housing market would be lower this year than in 2017. Seven said it would be the same and none said higher.

“Given stretched income/price levels and lack of supply in London especially – plus macroprudential attempts to rein in buy-to-let – it is difficult to see turnover doing anything other than fall,” said Marcus Dewsnap at research firm Informa Global Markets.

Nationally, turnover would stay the same this year, 16 of 27 respondents said. Ten 10 said it would fall and one rise.

When asked to rate house prices, on a scale of 1 to 10 where 1 is extremely cheap and 10 extremely expensive, respondents gave a median of 9 for London and seven nationally.

“Quite simply, with loan-to-income ratios for first time buyers sitting at around four times, average salaries of 33,000 pounds ($46,000), and your average flat in London costing over 500,000 pounds, it’s extremely difficult to see how London can be viewed as anything but very expensive,” LendInvest’s Lockhart said.

Source: UK Reuters

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What makes Manchester the UK’s best buy-to-let hotspot?

Recently named as the UK’s best buy-to-let hotspot, Manchester is an ideal location for investors. The secret to Manchester’s success can be put down to a number of key factors including dramatic changes to the region which have seen business boosted, infrastructure improved and a significant rise in tenant footfall as people recognise the benefits of living in the city.

One of the largest metropolitan areas in the UK, and the UK’s de facto second city, Manchester rivals London across many sectors. Economic growth in Manchester has outstripped that of capital since 2014 and this looks unlikely to change any time soon as the city continues to attract global investment, tourism and population growth.

Similarly, Manchester’s property market offers a stark contract to that of London, where the capital’s broken housing market has resulted in average property price sitting at £678,013 according to property portal Zoopla. In addition the average deposit in London is an eye-watering £139,987 according to L&C Mortgages, who also expect that this will rise to a staggering £244,842 by 2027.

With the majority having been priced out of the market in the capital, interest has instead turned to cities like Manchester where a robust and buoyant property market appeals not only to investors, but to renters as well.

Millennials in particular have been drawn to the North West where they have found that the far more manageable rental prices and excellent employment opportunities ultimately result in a better standard of living.

Last year a study from the Office for National Statistics showed that, in 2016, 291,620 people moved away from the capital, an increase of 36,480 from 2012 – the highest rate of people moving out of London since 2007. We can combine this with similar research from Hamptons International which shows that 20% of those who departed the capital chose to relocate to the Midlands or the North West.

With this in mind, Transport for Greater Manchester anticipates that Manchester’s population will exceed three million by 2040, meaning that the city will require 200,000 new homes to keep up with growing demand. One way that this demand is being met is with an increase in the number of buy-to-let apartments which are eagerly being snapped up by savvy investors who recognise the benefits of healthy returns, low void periods and the potential for excellent capital appreciation over the build period; property prices in Manchester have increased by over 35% in the last five years alone.

As well as benefiting property investors, residential off-plan developments in some of the city’s key areas are fundamental to the successful future of the region, offering the huge number of working professionals high-quality rental accommodation which can be hard to come by. With the Greater Manchester region home to more 25-29 year olds as a percentage of the overall population than any other place in the UK, the demand is clear.

Bridgewater Wharf is the latest addition to the busy Manchester rental market and one of the premier buy-to-let opportunities available. Located just a short walk from Manchester city centre and MediaCityUK, one of the most exciting business hubs in Europe, the development will be ideal for young professionals eager to carve out a career in the city.

The development will bring 376 stylish apartments to market, with a mixture of one, two and three bedroom apartments as well as a selection of large townhouses. In addition the contemporary design looks toward the future, with a number of electric charging points for cars, secure bicycle storage, parking on additional units and a modern private residents’ gymnasium. Prices at Bridgewater Wharf start from £119,995.

Source: Property Forum

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ARLA issues stark warning – “Renters are in for a rough ride in 2018”

ARLA Propertymark has issued a downbeat report on the lettings sector’s start to 2018.

Its report on the market’s performance in January says the number of properties letting agents managed fell by eight per cent with 184 per branch compared to 200 in December.

Meanwhile the gap between supply and demand widened in January with more prospective renters coming onto the market; on average, letting agents registered 70 prospective tenants per branch in January, compared to just 59 in December.

The association says landlords kicked off 2018 with contract negotiations as one in five tenants experienced rent hikes in January, compared to 16 per cent in December.

It says that while this paints a bleak picture for renters looking into 2018, it’s actually down year on year. In January 2017, 23 per cent on tenants had their rents increased, and 30 per cent were subject to rent rises in January 2016.

“Renters are in for a rough ride in 2018. Housing stock is falling as rising taxes continue to force established landlords out of the market and deter entry into the sector – and the volume of renters is increasing as the cost of buying a home is moving further out of reach for many” explains David Cox, ARLA Propertymark chief executive.

“The fact that one in five tenants are experiencing rent increases is just another blow. Ultimately, until the prospect of investing in the buy-to-let market is more attractive for prospective landlords, and stock subsequently increases, tenants will continue to feel the burn” he adds.

Source: Letting Agent Today

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Bank of England rate rises could come faster than expected, chief economist warns

The Bank of England could end up needing to raise interest rates faster than investors expect, its chief economist told lawmakers on Wednesday, striking a slightly more hawkish tone than his central bank colleagues.

BoE Governor Mark Carney, appearing alongside Haldane, said there was no need to give a direct commitment on rates as markets broadly understood the BoE’s message – unlike in the months before November’s rate rise, the first in over a decade.

Britain is growing more slowly than other rich economies but is benefiting from a global upturn. Unemployment is close to a 40-year low, bringing higher rates back on the agenda despite the uncertainty for business about the shape of future trade ties with the European Union after Brexit next year.

The BoE said earlier this month it expected to raise rates sooner and by more than it had expected as recently as November.

Most economists now expect the BoE to raise rates to 0.75 percent in May, and financial markets see a roughly 70 percent chance of a further rise this year, taking rates to 1 percent.

Haldane, who sent an early signal last year that the BoE was heading for its first rate hike in over a decade, said growth was more likely to overshoot than undershoot the forecasts made by the BoE’s Monetary Policy Committee earlier this month.

That could require more tightening than the three rate hikes over three years which markets priced in at the time.

“I would judge the risks to the MPC’s latest projections, for both UK demand and inflation, as lying to the upside,” Haldane wrote in an annual report to parliament.

Both the world economy and Britain could do better, he said.

“In my view, this would put the balance of risks to the path of interest rates necessary to return inflation sustainably to target to the upside,” Haldane said.

Carney – who lawmakers have criticized for previous steers on rates that have not worked out – was more circumspect.

“Financial markets have started to move with the underlying data … so they’re better able to anticipate what we could do and … the need for direct almost pre-commitment of a raise goes away.”

NO HAND-BRAKE TURNS

Some BoE officials as recently as last year had emphasized the dangers of raising rates prematurely.

But Haldane took a different view. “Historically the thing that has really killed jobs has been central banks stepping on the brakes too late,” he told lawmakers of parliament’s Treasury Committee.

“We are absolutely clear we don’t want to be back there again because it’s bad news for jobs. And that means going in this limited and gradual way to head things off in advance, to prevent having to step on the brakes – a hand-brake turn.”

Asked about recent sharp moves in global financial markets triggered by concerns about central banks raising interest rates, Carney said the volatility was “small potatoes” and the most important factor for Britain remained the approach of Brexit and its effect on business and consumer confidence.

“Monetary policy is nimble. It will react to those expectations,” he said.

Haldane said if British economic growth held up at around the rates seen during 2017, and pay rises strengthened, then the case for higher rates was likely to be made.

Official data on Wednesday showed overall wage growth was stable in the three months to December but some economists said a month-by-month breakdown pointed to higher pay growth ahead.

Haldane said January 2018 data would probably show a marked pick-up in wage growth, which he expected would soon reach an annual rate of 3 percent.

Haldane also said sterling’s sharp fall after the Brexit vote in June 2016 had “worked its magic” in terms of boosting British exports.

But his Argentinean-born MPC colleague, Silvana Tenreyro, said her experience was that devaluations made people poorer, and Carney was quick to interject that weakening Britain’s currency was “not a good economic strategy”.

Source: UK Reuters

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Edinburgh homes now selling at a premium

High premiums are increasingly being required for buyers to secure homes in and around Edinburgh, Warners Solicitors and Estate Agents found.

Almost four out of five (78.6%) homes are now achieving a selling price in excess of their home report valuation – an increase of more than 20% compared to the same period last year.

The average premium being paid has also risen from 2.9% over valuation a year ago to 5.5% today.

David Marshall, operations director at Warners Solicitors and Estate Agents, said: “A great deal of the house price growth that we have seen over the last 18 months has been driven by an excess of demand over supply.

“The improvement in supply that we are now seeing will help to alleviate the pressure on buyers and bring greater balance to the market.”

Although good news for those selling their properties in and around the capital, these statistics show that the market is not looking so favourably towards first-time buyers especially.

The increase in premium prices means that first-time buyers need to have an average of £8,250, as well as their deposit, to secure a £150,000 home, as lenders will only provide lending up to the home report valuation.

However, since November the number of properties being brought to the market has risen, with Warners experiencing a 33% surge in new listings year-on-year.

This growth, spurred on by the demand for properties in Edinburgh and the Lothians, should see house prices moderate as the market balances.

Marshall added: “Moving forward in 2018 we expect that the market will still be buoyant, but with the higher premiums that we saw during 2017 becoming less prevalent as the year progresses.

“This should help to keep house price growth in the local market broadly in line with CPI inflation at between 2 and 3%.”

Source: Mortgage Introducer

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First-time buyers opting for longer mortgages

More than half of first-time buyers are opting for longer-term mortgage deals as interest rates look set to rise sooner than expected.

Research from Accord revealed 51 per cent of first-time buyer applications in January were for five-year fixes, compared to just 20 per cent a year ago.

At the same time, two-year fixed deals accounted for just 48 per cent of applications in January, down from 63 per cent in the same month last year.

Rachel Lummis, mortgage adviser at Xpress Mortgages, said: “The most popular initial period for a fixed rate has historically been two years – these always have the lower rate – but five-year fixes have increased in popularity recently.

“These deals have become competitive and that, coupled with talk of interest rates rising sooner, means some buyers are tying in for longer to give them stability for the first five years of ownership.”

Accord, the buy-to-let arm of Yorkshire Building Society, also reported that first-time buyer deposits had increased over the past year, with more buyers opting for 85 per cent loan-to-value products.

The Government’s decision to scrap stamp duty for first-time buyers on homes worth up to £300,000 is widely believed to have ramped up demand in this part of the market.

Ben Merritt, mortgage manager at Accord, said: “Our data shows first-time homeowners are making canny decisions about the type of home loan they choose, such as opting for longer terms, which reflects the advice brokers are likely giving.”

A growing number of buyers are using a mortgage broker for their purchase. Lending through intermediaries as a share of the market grew to 77 per cent in 2017 from just 53 per cent in 2012.

Ms Lummis added: “The major of mortgages are portable, which means first-time buyers can opt for a five-year team but still be able to move up the ladder, and that is a strategy we are increasingly seeing.”

Source: FT Adviser

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Number of farming building conversions falls 20 percent in a year

The number of conversions of farm buildings into new homes dropped 20% in the last year, denting hopes that these conversions could help solve the rural housing crisis.

According to Lendy, one of Europe’s largest peer-to-peer lending platforms, only 1,511 agricultural-to-residential conversion applications were approved in 2016/17.

This figure is down from 1,890 in 2015/16. Lendy adds that local authorities rejected 38% of all applications for converting farm buildings to houses last year.

It says converting outbuildings such as barns and stables into housing can be an “effective” way of combating the UK’s housing shortage, which is being felt “just as badly” in the countryside as it is in cities.

For example, a recent development of eight new houses in rural Cornwall had over 800 people apply to rent, demonstrating the demand for more rural housing.

As well as making unused buildings available for new housing, selling surplus outbuildings to convert can provide farmers with a vital source of additional income, according to Lendy.

‘Bank lending’

Lendy adds that in addition to the fall in applications and high number of refusals, another issue for developers is that bank lending to property developers remains low.

It says many developers can “struggle” to finance conversion projects through traditional means.

Bank of England figures show that in December 2013, over £34 billion in lending was outstanding from banks to property developers, but this plunged to just £14.8 billion in December 2017.

As a result, more and more developers are turning to alternative forms of finance, such as peer-to-peer lenders, to build more homes.

Liam Brooke, Co-Founder of Lendy, says: “Converting farm buildings is one of the easiest ways to help solve the rural housing shortage, so this sharp drop-off in approvals is very disappointing.

“Agricultural-to-residential conversions can be a win-win for everyone –farmers can unlock capital from their land and more homes get built for prospective buyers – helping to close the housing gap.

“It doesn’t make sense to have so many redundant outbuildings that have no aesthetic value at all slowly decaying when they could be turned into homes.”

Source: Farming UK

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Buy to let – no longer the route to retirement riches

There are some very strange contradictions in play within the world of retirement planning at present, it seems – and around the use of buy-to-let (BTL) property in particular.

The reality of life as a landlord is as follows: after two decades of tax-favoured growth for private sector landlords and the emergence of BTL as a key element of many people’s financial plans, former chancellor George Osborne introduced various tax and regulatory changes to clamp down on the burgeoning BTL industry, which he saw as a threat to first-time buyers. These changes included a 3 per cent stamp duty surcharge from April 2016 and progressive cuts to tax relief on mortgage interest payments from April 2017, as well as stricter lending criteria for BTL mortgages.

Recent research shows those measures have had a massive impact. Property consultancy Savills reports that existing BTL mortgages are being redeemed at a rate of around 50,000 a year and that growth in BTL loans as a proportion of the total mortgage market has stopped. Savills predicts the number of rental property transactions will fall by more than a quarter by 2022. In line with that, the National Landlords Association has announced that 20 per cent of its members are planning to sell some of their portfolio in 2018.

Smaller landlords getting out

A report from the Intermediary Mortgage Lenders Association (IMLA), meanwhile, provides more dramatic evidence of changing attitudes, with the revelation that new investment by private landlords has fallen by 80 per cent, from £25 billion in 2015 to just £5 billion last year.

Such changes in attitude are hardly surprising. While those with larger portfolios can sidestep the changes by setting up as limited companies, for many small landlords the sums no longer add up as tax relief on outgoings is whittled away (reducing to 20 per cent by 2020), particularly at a time of torpid house price growth. If the consequent rising costs mean they can’t produce a meaningful income stream and there’s little in the way of longer-term capital growth to focus on either, many BTL investors are surely thinking there must be easier, more rewarding ways to make provision for retirement out there.

Against this backdrop, the findings from the latest Wealth and Assets Survey by the Office for National Statistics seem completely out of kilter. This ongoing report looks at the nation’s attitudes towards saving for retirement and how they change over time, and the latest one (covering July 2016 to June 2017) indicates that property investment is still widely regarded as a great idea.

Thus, among working adults, although 40 per cent recognise employer pension schemes as the safest route to save for retirement, a further 30 per cent pin their colours to the property mast – and that figure has increased steadily since 2010. Yet occupational pensions offer not only full tax relief but also matching employer contributions. Astonishingly, almost half (49 per cent) of all adults surveyed believe property ‘makes the most of your money’ against a meagre 22 per cent favouring workplace pensions, with 6 per cent choosing Isa savings (see chart). Here too, the figure in favour of property has steadily risen over every period surveyed since 2010, supported presumably by the strength of house price growth over much of that time.

Time for a pensions facelift

In contrast, support for employer pensions as the best way to make the most of your money has dropped off since 2014, even though auto-enrolment has become increasingly widespread throughout the subsequent period.

These findings raise a big question. If the crippled buy-to-let sector still appears a better idea to the UK population at large than the occupational pension schemes offering double extras of employer and government cash, in which most of them must already be enrolled, is it time for a proper pension system facelift? People are clearly not recognising the benefits on offer. Does stock market investment seem a scarier proposition than the solidity of bricks and mortar? Or are they blinded and bemused by the tax complexities surrounding those benefits? If it’s the latter, maybe it’s time to simplify the system.

Source: Money Observer