UK Property Market Review 2016

UK housing figures

The total value of UK housing stock broke the £6 trillion mark for the first time by the end of 2016. When trying to gauge the health of the UK housing market its useful to look at several key figures.–

Home ownership – 2016 saw the lowest rates on record for UK home ownership at just 63.5%. This has fallen from 64.4% on the previous year and from an all time high of 73.3% in 2007. This figure is recorded annually but forecasts for 2017 are demonstrating a further decline. There are several reasons for this continued fall in home ownership : the continued shortage in new housing stock ; an ageing population occupying homes for longer than before ; prohibitive house prices in comparison to wages and credit or mortgages available on the market. All these factors combined are creating a perfect storm denying many the opportunity to enter the housing market.

New home construction rates – house starts in 2016 were 151850 units. This figure is up by some 8000 units on the 2015 figure of 143830 units. There does appear to be a gradual up turn in new house building productivity after years of sluggish construction, however the up turn will need to be sustained for some time to make any significant impact on the demands of the market as a whole. Current estimates cite a 500’000 unit shortage in homes across the UK.

Mortgage approvals – mortgage approvals for Q1 2017 declined slightly, down about 2% over the 3 months with an average of 67.84% approval rate. This is actually up slightly on the previous quarter of Q4 2016 which was 67.31%. This slight increase could be attributed to the additional new housing stock aswell as the materialisation of continued government incentives like ‘help to buy’. The latest decline however, for the start of 2017 could well be an anomaly attributed to the UK political situation. Article 50 triggered in March, local elections at the start of May and general elections announced in June could be giving financial markets cause for pause while the situation settles down, this would manifest itself as a tightening in lending policy to reduce financial institutions exposure to possible turbulence.

House prices – The latest UK average house price is £217,502. This is an increase by an average 0.35% on the previous quarter and a 3.8% increase year on year. This is the smallest increase in prices seen since May 2013, following a general consensus that the UK housing market is cooling. House prices in the UK should always viewed as two separate entities, the London market and the rest of the UK. London house prices are actually continuing to decline while the increase outside London is closer to 5%. A big factor in falling house prices in London is the exodus of foreign investors that have been artificially inflating the market for several decades. Conversely many of these investors are looking to alternative UK cities to invest their funds, applying an upward pressure to house and property prices outside of the capital.

UK commercial property figures

Commercial property is defined by any property utilised for the provision of jobs. This includes shops or retail space, industry and manufacturing, service and office space. Key figures worth noting for the analysis of the UK commercial property sector are as follows :

Total asset value of UK commercial property – the latest figures are £871 billion for the end of 2015 (this data is only complied annually, 2016 figures are still awaiting publication). This is the highest valuation to date for UK commercial property and makes up 13% of the overall UK built environment.

Level of investor activity in the UK commercial property sector – Investor activity in UK commercial property is currently in a state of flux. Investors are looking further a field than the capital for good opportunities but there has also been significant continued movement in 2016 on ‘who’ has been investing in the UK commercial property sector. Traditional UK institutions such as insurance and pension funds have been moving away from the UK with a drop of 10% over the last decade, where as overseas investors have increase by 125% over the same decade. What are described as ‘collective investment schemes’ are also up by 64% for the decade, this includes crowd funding platforms, Proptech & Fintech. There was a significant drop of 18% in investor activity around the Brexit vote however this has all but bounced back. So investor activity remains very strong in the UK throughout a changing investor landscape.

Key note commercial investments

The HS2 (High Speed Rail 2) – the HS2 finally passed its last major legislative hurdle in February of 2017. This huge UK infrastructure project is estimated to cost £60 billion but could run up to as much £100 billion by the time both phases are completed in 2033. The keynote contracts have now gone out to tender. This includes not just train, rail and cable contracts but also contracts for station construction in Manchester, Birmingham, Liverpool, Glasgow and Edinburgh. There is reportedly significant interest in these tenders from both UK and foreign investors for not just the construction but also the facility management and operation.

Crossrail 2 – Crossrail 2 is an extension of Crossrail 1 designed to bring the South West and North East of London together. The rail link is estimated to cost £30 billion but could also generate up to 200 thousand new homes along the route. The infrastructure project is still going through the funding and legislative motions and has not yet been finalised.

The Verdict

Home ownership has continued to stagnate and decline slightly in 2016 as private house rents are now significantly higher than a comparable mortgages, exacerbating the situation further, smothering the positive effects of the ‘help to buy’ initiative. There continues to be wide-spread speculation and stalling in the new house building sector, however there are signs that levy could be close to bursting, which would release a substantial upturn in new build activity. Mortgage approvals remain stable as some are able to obtain the required deposits for a house purchase though ‘help to buy’, altougth this is countered by the politically uncertain situation in the UK and some key indicators are now showing consumer debt over reaching to potential unsustainable levels. House prices are continuing to cool but rise marginly. Given the consistent upward demand in the UK housing its to see how house prices will fall significantly without a massive unpredicted shock to the economy (like a global recesion), so outlook is stable despite the uncertainty of Brexit.

Commercial property looks robust across the UK in 2016 making up a significant slice of the UK property portfolio. Although there has been movement in investor type in commercial property these voids seem to have been quickly filled with new technology platforms and hungry investors looking further a field than traditional the high street bank investments. There are also a number of major infrastructure investments and large developments in the pipe line across the UK with plenty of interest from investors.

So with the exception of the Brexit blip in June 2016 both housing and commercial investment sectors remain strong with plenty to be positive about for the future. Brexit remains the big unknown especially around the operations and future locations of the UK financial sector which could affect property though contagion, however with investments still so attractive in the UK despite head winds it’s difficult to see any major exodus happening post Brexit but it remains to be seen.

 

Collateral UK – An Introduction

Introduction

Collateral UK was incorporated in 2014 to offer a peer-to-peer platform to investors interested in investing in the UK property market. It specialises in short-term asset backed bridging loans. Usually but not always the investment opportunities are based around purchasing new build properties from the developer, with investments repaid when a customer or tenant is found for the property. Typical terms are 90 to 180 days. The advertised ROI is 12% but this can vary across specific loan requests. Collateral UK also offer a secondary market allowing investors the opportunity to exit early if they feel the need to.

There is no minimum deposit or minimum investment on the Collateral UK platform. This platform only currently accepts bank transfers, it does not accept card payments.

Available Loans Page

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Image shows Collateral UK loan request page (with the property identity column removed).

The top row of the table (below the title row) shows the grand totals for all currently available loans. There are more rows on the platform than shown in this image so the totals look inaccurate but they are not.

 

Asset Value – shows the market value of the property requesting the loan.

Loan – is the value of the loan being requested on the assigned property.

% PA – displays the percentage ROI offered for each loan request.

LTV – shows the loan to value against the market value of the property. Collateral UK offer up to a maximum of 70% LTV against any property.

Available – is the current value of loan available for investment. If a loan is fully funded it is removed from this table until value becomes available again though an investor selling their loan part on the secondary market place.

Invested – Shows how much you currently have invested in to each loan request.

Remaining – displays the remaining time left on the loan term before expected repayment, in days.

Funded loans page

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The image shows the Loans Funded Page for Collateral UK (with the loan identity column removed).

 

Age – the number of days you have been invested in each loan request.

Amount – shows how much you currently have invested in each loan request.

Start – is the date you invested in the loan request.

LTV – shows the loan to value against the market value of the property. Collateral UK offer up to a maximum of 70% LTV against any property.

Remaining – displays the remaining time left on the loan term before expected repayment, in days.

Interest – shows how much interest has been accrued for each loan request to date. Interest is paid to the platform account at the end of each month.

Sell – is the option to sell the loan part on the secondary market.

Renew – sometimes a borrower may request a loan extension or a loan renewal. This option allows your investment to be automatically rolled over to the new loan request.

Funding Circle – An Introduction

Introduction

Funding Circle is a peer-to-peer lending platform, who established its UK operations in 2010, although it operates in 4 countries worldwide. The Funding Circle platform offers finance to a number of areas including property investment, business growth and expansion, working capital loans and commercial property development.

Funding Circle has an advertised average return of 6.5% ROI after bad debts and charges. This platform also operates a secondary market allowing investors to sell loan parts before term if an investor feels they need to exit a particular investment. Secondary loan part sales are subject to buyers being available in the market at the time, so this offers no guarantees of succesful loan part sales when an investor may need them.

The minimum account deposit for Funding Circle is £100 and the minimum loan part value you able to purchase is £20. Loan terms are usually between 6 months and 5 years. The platform charges investors in two areas, a 1% (of the loan part value) annual service charge and a 0.25% transaction charge when selling loan parts on the secondary market.

The summary account page.

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Image shows the Funding Circle account summary page.

This is what the main account summary page looks like for Funding Circle. It’s very straight forward to understand. The top left box shows your totals in percentages –

Gross yield – refers to your average maximum advertised return across all your current invested loan parts.

Annualised Return – this is your actual annual ROI on all current invested loan parts added to your completed investments in the financial year. The figure also subtracts Funding Circle transaction fees and bad debts incurred.

Estimated fully diversified return – this is your estimated return over all current loan part investments, subtracting Funding Circle transaction fees and bad debts.

The bottom left box shows your all time earnings summary –

Earnings – shows your total paid (interest is only paid the end of each month) return over the life time of the account (note: this is a grand total and is not broken down in to tax years, you will need to either work that out yourself when it comes time to pay your taxes, or a separate tax statement is available to account holders). Earnings are broken down in to four categories, interest, loan part sales, loan part purchases and promotions. These can been seen by clicking the ‘blue plus’ button next to ‘earnings’.

Fees – are Funding Circle’s annual service charge incurred. The service charge is set at 1% of the value of the loan part calculated over an annual term. In addition Funding circle also charge a transaction fee of 0.25% of the loan part value when selling loans on the secondary market.

Losses – show any bad debts you may have occurred. Losses are also broken down in to bad debts minus recoveries of the bad debt, this can be seen by clicking the ‘blue plus’ button next to ‘losses’.

Net earnings – is the sum of your earnings minus fees and losses.

The box on the right of the screen shows your funds summary –

Funding Circle total – is you total account balance on the Funding Circle platform. This includes any loan parts you are invested in as well as any balance you currently do not have invested in any loan parts.

Accrued interest – is any interest gained by your investments that has not yet been paid in to your account balance (accrued interest can not be withdrawn from the platform until it is paid at the end of the month).

The pie chart– is made up of 3 components; the blue section shows any funds put to a loan part but not yet accepted by the borrower; the green shows any funds accepted and is actively attributed to loan parts. There is also a grey section showing any funds on the account platform that are ‘idle’ or unassigned, this includes interest paid at the end of each month.

The loan request page.

The table below shows the format of the loan requests page (excluding the loan identity column).

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Image shows the Funding Circle loan request page (excluding the loan identity column).

Risk – Funding Circle breaks down it’s loan risk assessment in to categories as from A+ being the lowest risk and lowest interest rate, through to E being the highest risk and highest interest.

Amount – shows the total value of the loan request.

Term – is the agreed loan term between Funding Circle and borrower show in months. This term is typically between 6 and 60 months.

Rate – shows the top line annal ROI as a percentage offered by the specific loan request, excluding estimated bad debt and applicable charges.

Funded – is the percentage amount the loan has currently been funded to on the platform.

Time Left – shows the amount of time the loan will remain on the market place in its initial offering. This is typically for 7 days.

How are the new Stamp Duty changes (April 2016) effecting the UK housing market ?

What are the changes in Stamp Duty ?

As of April 1st 2016 considerable changes in payable Stamp Duty (SDLT) were introduced by the conservative government in the UK (excluding Scotland) when buying a second home. So for example if you purchase a second home on a free hold for £150,000 that you do not intend to occupy yourself the SDLT due on that property would be £5000 after April 1st 2016. Previous to this date the SDLT due would have been £500. If the property is £300,000 the SDLT due would be £14000 where as it would have been just £5000 prior to the April 2016 changes. (calculate your SDLT here). In essence 3% has been added to the Stamp Duty percentage for each ‘slice’ of property values (over £40,000). So as you can see the changes are significant to 2nd home owners or buyers.

Why were these changes introduced in to the UK housing market ?

Well quite simply the UK housing market has been overheating for some years now driven by a number of factors. A shortage of housing supply due to both lackluster new house building and a growing population. Speculative investors ie. investors buying up housing stock in the hope that prices will increase so they can sell the property on for a profit, this problem is particularly acute in London with overseas buyers dominating the higher end of the market distorting prices even further. A lack of alternatives for investors and savers. With Bank Of England interest rates remaining at record low rates traditional investments and saving options are just not attractive options for most people. Finally the ‘buy to let’ market, more homes in the UK in 2017 are now rented than ever before and while this may indicate that it is more cost-effective to rent rather than buy your 1st property this is often not the case with rents actually being higher than a mortgage on the same property, applying further upward pressure on house prices overall.

The April 2016 increases are an extension to George Osbourne’s (Chancellor Of The Exchequer) 2014 Stamp Duty reforms that fundamentally changed how Stamp Duty was charged on all properties. From a ‘slab’ format where the percentage for the corresponding threshold was applied to the whole value of the property to a ‘slice’ format where graduating percentage rates are applied to each slice of the value of the property according to the threshold parameters. Osbourne’s changes were strongly criticised by a report at the end of 2016 by Oxford Economics claiming they were causing damage to the housing market, job losses and a loss of tax revenue, which lead to campaign by The Telegraph to get the reforms over turned. However the report only focuses on properties valued over £1,000,000 most of which are in the London area. The report seemed not make much of an impression as Philip Hammond (Chancellor Of The Exchequer) decided to build on the reforms with April 2016 increases.

So how did this change effect the UK housing market ?

Many predicted a surge in housing sales and purchases ahead of this change to avoid the additional charges and the table below seems to support that prediction –

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Table shows Office For National Statistics data for property sales volume between Q1-2015 – Q3-2016

You can clearly see a significant spike in sales in Q1 – 2016 of 68,853 sales compared to the previous quarter across England and Wales, however a caveat should be applied to these figures. Q1 of any year tends to be the more popular time of year to buy and sell a house but even with that caveat extrapolated there is still a significant upturn in sales. Whats more stark however are the following figures for Q2-2016 and Q3-2016. The sales volume does drop back but not as far as the comparable previous years figures, suggesting that the increase in Stamp Duty, designed to cool the market has not worked. In fact right up to latest figures ending December 2016 all measures including sales volume and property prices appear stable. So in conclusion the robust UK housing market as a whole seems to have taken the Stamp Duty changes in its stride, at least for now.