A commercial double-edged sword

Developers are raising funds to buy land again

Buy-to-let mortgages face FSA regulation

Rents up, tenants behind

HCA has a total budget of £13.6bn

According to Capital Economics UK Commercial Property Focus, it is plausible that commercial property total returns could hit 15% in 2010 due to the sharp rebound in investor sentiment and the sheer weight of equity poised to (re-) enter the market, however, it emphasises that it’s central forecast is for total returns to be about 6% in 2010.

It is basing this prediction on its analysis of historical information. In 2009, total returns as a whole is likely to be -7% but Capital Economics believes that total returns can jump very sharply in the first year of a recovery as they did in 1975 (from -16% in 1974 to +11%), an increase of +27%, and also in 1993 (from -2% in 1992 to +20%).

Most significantly, according to the report, is that there is scope for the emerging economic recovery to fade away from the middle of next year, perhaps on the back of a substantial fiscal tightening.

Capital Economics believes that any commercial mini-boom over the next year or so that is founded on sentiment and liquidity rather than on fundamental drivers such as solid tenant demand and rental value growth may simply result in the market overshooting and becoming expensive again. This would set the scene for a renewed bout of capital value falls in 2011.

The report said: ‘In other words, the stronger the rebound over the next 12-15 months the greater the scope for weak performance thereafter. If total returns do turn out to be 15% in 2010, our forecasts for the subsequent two to three years will almost certainly be revised down.’

Developers are raising funds to buy land again

According to Knight Frank’s Q3 Land Index report, the value of development land has slightly risen for the second successive quarter, with an increase of +1.1% (urban land) and +1.6% (Greenfield) for the quarter to September.

Knight Frank believes the recent growth has been led by re-financed house-builders and private equity groups.

However, despite the recent growth, land values around urban areas are still below their Q4 2007 peak by -50% and on an annual basis urban land is down by -26.4% and Greenfield by -16.8%.

According to the report, there is a stand-off between land-owners – who expect values to rise still further over the next 12 months – as builders try to acquire land and to re-build stocks, and purchasers who are finding development financing still in short supply.

Therefore, as the current available stock of properties is getting rather thin on the ground, house builders and agents are becoming concerned that they will have nothing to sell when the market further improves in spring next year.

Liam Bailey, head of residential research at Knight Frank, said: “The reaction has been for many builders to raise money, to allow them to buy new land and start building. The volume of new-build starts has certainly improved since the turn of the year but there is evidence that this is the result of less complex sites being build out.”

Buy-to-let mortgages face FSA regulation

The Financial Services Authority (FSA) is proposing to introduce new regulations in October 2009 that will, for the first time, restrict buy-to-let mortgages, blaming the global financial crisis on lax home-loan lending.

The FSA is planning to introduce measures which would impose a cap on the size of the mortgages, resulting in limits on the multiple of the buyer's income or the proportion of the value of the property that could be borrowed. It does not want to see a return to loans which are either five times the buyer’s income or 125% of the properties value. The mortgage market review was started before the 2007 credit crunch that caused the collapse of several lenders, including Northern Rock, Bradford & Bingley and the Dumfermline Building Society. There will also be a crackdown on loans to sub-prime borrowers and mortgages given without clear proof of income.

The FSA is proposing this despite not originally having buy-to-let mortgages as part of its remit when mortgages came under its regulation in 2004, as they were deemed an investment and not owner-occupied homes. As the FSA can only currently propose new regulations the Government will have to agree with the change. The regulator also wants secondary loans secured against property to come under its remit. It argues that loans given in addition to conventional mortgages add to the borrower's overall debt and can circumvent rules on prudent lending.

Rents up, tenants behind

According to LSL Property Services’s latest Rental Index, residential rents have risen by +1.4% in August 2009, which is the fastest growth since July 2008 and follows on from increases in the previous two months, with UK rents having risen +8.2% over the third quarter.

The average UK rent is now £661pcm, still -4% below the peak of August 2008. Rents rose in every regions except Yorkshire and Humberside and the East Midlands.

David Brown, commercial director of LSL Property Services, said: “Sharply lower supply of rental housing, strong tenant demand and greater confidence among landlords are pushing rents sharply higher. The stock of accidental rental housing is diminishing more and more quickly as the housing market thaws.”

In Q3, house prices, according to LSL, have recovered by +2.9% causing yields to slip fractionally from their peak in April of 5.1% to just under 5% in August, but remain well above the 4.2% achieved at the end of 2007.

Brown said: “Of course, if house prices continue to outstrip rent rises, landlords should expect yields to fall, but overall the rental market looks like a very solid investment for those who know what they are doing.”

In contrast there was a sudden increase in tenants getting behind with their payments. Arrears rose in every region except Yorkshire and the Humber. Wales was the worst performer. In total, 17.4% of all UK tenants did not pay on time, up from 15.3% in July.

Brown said: “By far the largest increase in arrears was among those who just missed by a few days probably because they were trying to manage holiday cash flow. The number of serious offenders who were more than 60 days late only rose +3% in the month. We would expect to see a sharp improvement in September.”

HCA has a total budget of £13.6bn

Around half of the 260,000 new homes projected to be built in England this year and next will be directly funded by the Homes and Communities Agency (HCA).

The agency’s Corporate Plan, which covers the period April 2009 to March 2011, outlines how it will use £6.75bn of its budget to directly deliver 117,000 new homes, the vast majority of which will be for affordable rent or sale.

Thousands more homes will be unlocked by this funding and by the HCA’s wider regeneration and growth activities with a total budget of £13.6bn. Through the plan, the HCA has pledged to focus on delivery using innovative approaches such as the Public Land Initiative, new models of investment and private rental activity and to maximise the scale and impact of its Programmes.

Sir Bob Kerslake, HCA’s chief executive, said: “This plan sets out our stall for the next two years. We will continue to put a premium on new and affordable homes, but we are about building communities as well so regeneration, improving existing stock and promoting sustainability will also be critically important.

“We will continue to be creative in identifying new forms of funding and new opportunities for delivery. Despite the continued challenging market conditions and tightening public finances, we are determined to deliver on our targets.”

Within the affordable housing budget, over 63,000 of the new homes will be for social rent with nearly 43,000 for affordable sale via HomeBuy. An additional £350m will be available to local councils to build new homes for social rent.

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