UK residential market: how and why is money being allocated?

Originally published at https://www.propertychronicle.com.

There’s one question above all that, in the real estate industry, we are constantly asked: ‘Is now a good time to put money into property?’

The consensus is, despite the uncertain environment, residential property in particular is still a fantastic asset — tried, tested, tangible and trusted.

People will always need to live somewhere. There’s a consistent, growing need for property, and yet we have constrained supply:

  • There is a housing shortage, with 8.4 million people in England facing a ‘housing crisis’.

That said, property is not right for all of us, all of the time. And not all approaches to investing are equal.

The ‘who, why and how’ of property have changed, and are expected to change further.

We’re in a recession. Government stimulus, effective quantitative easing, and long-term low interest rates means capital is cheap, readily available and looking for a safe home.

The good news is that residential property has proved resilient through covid:

  • Residential property values have proved stable relative to non-property and other property assets, with annual price growth of 5% in the year to September, versus a value reduction of 6.6% in just six months in the wider real estate sector. Even the Queen has lost substantial sums: the Crown Estate has suffered a £500m down-valuation, largely due to reduced retail rental income.

There’s more change to come though, including:

  • the post-covid ‘new normal’, which is likely to mean lower demand for commercial space and prime city centre locations;

I mentioned earlier that residential property is not right for all of us. It is worth thinking about who is putting money into UK residential property, and why.

In simple terms, there’s:

  • homeowners — seeking security, stability and tangibility, encouraged by the temporary reduction in SDLT, and, for now, the Help to Buy scheme;

The private rental sector (PRS) is made up of residential assets purchased to be rented out, and it’s seen as one of fastest-growing, most attractive assets. The PRS has doubled to over 20% of households, and is currently worth £1.5trn. Its investors are mostly:

  • institutions — who make up just a fraction of the highly diverse sector; and

I mentioned that not all approaches to property are equal. So how are the relevant parties allocating capital, and what issues are they facing?

  • Homeowners — Unsurprisingly, this group of buyers are focused on homes. Properties worth over £500,000 are in particularly high demand, due to affordability constraints, and encouraged by the temporary SDLT change. Much of the mini-boom in house prices seen in August was driven by appetite from homebuyers — reflected in the kind of stock (for example semi-detached houses rather than flats) increasing the most in value.

What next?

I see two key drivers of future change: the economy and new policy. Both are undeniably unpredictable, making it hard to forecast what will work going forward.

I believe it’s still a great time to invest in UK residential property — in the right ways, with risks minimised:

  • In terms of strategy: an uncertain economy means increasing rental demand. My business gives investors access to ready-to-let regional PRS assets, typically worth <£1-£5m, that have a proven income, and cash flow from day one, e.g. blocks of flats and housing portfolios in the North/Ox-Cam Arc. To me, these markets seem well-priced relative to risk. Returns are compelling, values have proved stable through recent uncertainties, value and rental growth forecasts are strong, and by investing in built assets, we avoid time lags and development risks.

Across the residential market, the biggest priority in the current environment is to strategically identify, manage and minimise risks. To do so efficiently in this complex market inevitably requires the right strategy, the right approach to operations, and the right strategic partnerships.

If you are interested in investing and are not doing so through a professional provider, now is the time to consider working with others, and it is the time to consider who you want to work with. The potential returns to residential property make a compelling case — in absolute terms and relative to the alternatives — but the difference between getting it right and making expensive mistakes just got greater.

Anna Clare Harper is a UK Property Investment Strategist, CEO of property asset manager SPI Capital, author and host of property & investment podcast The Return