The Bank of England has agreed to bolster the UK mortgage market by swapping £50bn of Government bonds for banks’ mortgage-backed securities.
The Government is hopeful that the banks will use the bonds to restart lending between themselves which will improve liquidity in the market and make funds available to mortgage customers. The swap is expected to significantly undervalue the mortgage-backed securities in order to ensure the risk stays with the banks and are not passed onto taxpayers.
This follows the news that new investors hoping to get into the buy-to-let market and existing landlords looking to extend their portfolio will find it harder to get funding as more and more lenders have joined a growing list of institutions unwilling to offer products for this type of investment in the current climate.
Last year there were more than 3,600 buy-to-let mortgage products but this figure has now dramatically been reduced to around 600 as the credit crunch begins to bite.
Irish property funds hit by credit crunch
Irish property funds struggled in the first quarter of 2008, in a further sign that the Irish property market is starting to come under significant pressure.
Institutional and pension funds produced a negative total return for the first time in six years, as funds started to experience redemptions. Funds worth €4.5bn (£3.6bn) produced an average total return for the first quarter of 2008 of -5.6%, according to investment consultant Mercer. It is the first time the sector has produced a negative return since the first quarter of 2002. Mercer said the performance was affected by the fact that two funds had changed from higher-offer price to lower-bid price, which caused them to produce negative returns.
The news comes on the back of bearish research on the Irish retail and office sectors and worries in the banking sector about Irish lenders, which are heavily exposed to Irish and UK commercial property.
Much of Ireland’s private wealth is tied up in the property market after an extended boom that began in the mid-1990s, meaning a downturn could have a detrimental effect on the country’s consumer economy.
RICS believes commercial rental values will decrease 2-3%
The Royal Institute of Chartered Surveyors’ (RICS) believes that commercial rental values will fall outright this year, which, according to the latest IPF Consensus, remains very much a minority view.
All of the RICS’ headline balances deteriorated in Q1 2008, with some, including rental expectations, hitting their worst ever levels. The net balance of surveyors reporting a rise in demand across the commercial property occupier market fell from -15% to -30%. That was the second worst reading in the survey’s 10 year history, only surpassed by the -36% seen in Q4 2001. Also, the new enquiries balance dropped from -19% to -35%, suggesting active demand for space will weaken further.
On the back of falling demand, availability of space rose, with the net balance increasing from +7% to +27% in Q1 2008. In addition, the use of inducements rose sharply, with net balances of +27% in the retail sector and +36% in the industrial sector both new record highs.
Against that backdrop, surveyors have become more pessimistic (the aggregate confidence balance fell from -20% to -29%) and have also lowered further their expectations for rental value growth. Surveyors’ expectations now point to all-property rental values falling at an annual rate of 4-5% over the next few quarters.
RICS believes that the occupier market is vulnerable to a marked downturn. But the real economic forces, stemming from the GDP growth slowdown and rising unemployment will, in our view, lead to all-property rents finishing the year down by about 2-3% compared to the end of 2007.
Brakes are applied to shopping centre plans
Retail developer Centros has pulled out of a deal to build a £50m shopping centre in Dumfries town centre, in south-west Scotland.
The deal was announced in August 2007 but now the plan is shelved until the investment market has stabilised and the end value of the property is more certain.
The decision is a big blow to Dumfries and Galloway Council, which had high hopes for the creation of a 200,000 sq ft shopping precinct which would be a major step forward in its Whitesands regeneration area and create a link to the high street. Debenhams had been touted as the anchor tenant.
Richard Wise, Centros’s chief executive, said: “We will retain our ownerships in Dumfries as we still feel the town offers a good regeneration opportunity for the council, the local community and prospective retailers. However, capital values have moved significantly and until the market settles down it is difficult to be sure about the scheme’s viability.”
Abbey pulls the broker plug
Abbey has withdrawn its buy-to-let mortgage range through brokers, and it is now only available directly through the lender.
Abbey is still offering buy-to-let customers a two-year fixed rate mortgage and a two-year tracker mortgage, but it has withdrawn all other buy-to-let mortgage deals until further notice.
A new range of Abbey mortgages has been launched which include no legal fees, booking fees, or valuation fees – the new deals on offer include a two and five-year fixed rate and a two-year tracker mortgage.
Like all other lenders, Abbey has ceased to offer 100% mortgages, and a deposit of at least 5-10% is now required for all of its mortgages, except buy-to-let which requires at least 15% as a deposit. Customers with 20% or more as deposits are rewarded by the bank with competitive interest rates.
Mortgage lending down by almost 50%
The number of mortgages taken out by British home-buyers reached a record low in March, according to the British Bankers’ Association (BBA), amid continuing concern about a slowdown in the housing market and a lack of supply of residential loans.
The BBA said that mortgage approvals for house purchase slumped nearly 50% compared to a year ago. Around 35,417 new mortgages were approved in March, with a value of £5.6bn, both down on the normal level of business and the 43,147 mortgages worth £6.8bn approved in February.
Recently, the Council of Mortgage Lenders (CML) reported mortgage lending in March was almost a fifth down on the same month last year. Overall, taking into account re-mortgaging and equity withdrawal schemes, the BBA said that the value of property-backed lending was down by 15% - the lowest level since 2000.
All commercial property fares better than equities
According to the latest Jones Lang LaSalle Quarterly Commercial UK Property Index, All-Property total returns were -4.9% by the end of Q1 2008.
However, given the significant price correction witnessed in the UK market, the rate of the decrease in returns has slowed compared to the previous quarter. In Q1 2008, capital values fell (-6.3% compared to -9.8% in Q4 2007). This results in an annual return in commercial capital values (twelve months to March 2008) of -16.6%.
All three commercial sectors recorded negative total returns in the first quarter, with the office segment recording the lowest at -5.3%. The correction has been particularly marked in the Greater London and regional markets. Both markets have recorded 0.5% increase in yields over Q1 2008 to 6.25% and 6% respectively. The retail and the industrial sectors recorded total returns of -4.9% and -4.5% respectively in Q1 2008, compared to -9.2% and -7.9% in Q4 2007.
Despite the fall in returns all property fared better than equities, which recorded returns of -9.9% over the first quarter of 2008, following the turmoil that has hit the global financial markets.
Jeremy Handley, a director in valuation advisory at Jones Lang LaSalle, said: “We have already witnessed and continue to record a significant correction in pricing across all three major sectors and across growth and value properties. There is a chance that values may fall still further, given the turmoil in global credit markets. It will take a return to a new level of normality within these markets before the pricing of property relative to other asset classes can be accurately assessed.”
Landlords don’t want to sell despite uncertainty
The latest Royal Institute of Chartered Surveyors’ (RICS) Residential Lettings Survey revealed that only 4.6% of landlords want to sell their properties when their tenants’ leases expire.
This percentage is for the three months to the end of January and compares with 6.5% of landlords that wanted to sell in the previous three month period.
RICS suspected at the time that the sharp drop in the percentage of landlords looking to sell property was related to the changes in the capital gains tax regime that were planned for the start of the new financial year. The new arrangements have now been implemented with a single rate of capital gains tax of 18% replacing the previous structure which resulted in property sales by landlords incurring tax rates of somewhere between 24-40%.
In addition, RICS carried out a survey of its members to assess whether landlords are seeking to take advantage of the more favourable tax treatment. The results showed that at present they are not looking to do so, with just 2% of landlords currently planning to sell properties at the expiry of tenant leases. However, with property prices now slipping back and potential purchasers struggling to find mortgages, the incentive to cash in on the lower tax rate has diminished at least for the time being.
The fact that rents are also rising sharply is a further reason why landlords may be inclined to hold fire at the moment.
RICS acknowledged that the low estimate of landlord sales is an initial response to the tax changes and may have been conditioned by the raft of poor news flow on the housing market over the past month. However, it does suggest that fears of a wave of selling by buy-to-let landlords are misplaced and that the housing market will not, in the near term, have to cope with a sharp increase in the supply of new properties from this source.
Funding is needed to tackle poor housing conditions
The British Property Federation (BPF) believes more funding is needed to tackle poor housing conditions which were identified in a new Shelter report.
The report showed that many people on low incomes are being forced to rent slum-like homes as they struggle to find a decent, affordable place to live. The BPF fully supports Shelter on moves to improve standards and rid the sector of rogue landlords.
However, with legislation already at the disposal of local authorities to tackle the problems, the issue is where enforcers can get the money from to fully deal with this.
Ian Fletcher, director for residential policy at the British Property Federation, said: “For over 20 years rental housing has provided a quality product for the vast majority of people it has housed. The BBP however, wants everyone entering the sector to have access to a decent home and we therefore wholly support Shelter in condemning the minority of landlords that ignore poor housing conditions.”
B&B blames raised prices for decrease in mortgage lending volumes
Bradford & Bingley’s mortgage lending volumes are down because it has raised the prices on its mortgages to regulate volumes and widen new business margins, according to the company.
To improve quality of collateral it has increased minimum credit requirements and selectively lowered maximum loan-to-value (LTV) ratios.
Meanwhile, over March, one month arrears on its existing mortgages increased from 2.03% to 2.21%; three month arrears increased from 1.07% to 1.18% and repossessions increased slightly from 0.14% to 0.16%. Bradford & Bingley said this reflects increasing payment strain, and based on its assumption that house prices will fall modestly this year, it has made higher credit impairment provisions.
