Impact of EU vote 'overstated'

Property sector ‘avoiding mistakes of the past’

William Newsom

Real estate markets are handling a low inflation, low interest rate climate with greater responsibility and are likely to avoid making the mistakes of the past, a conference was told.

More than a hundred property professionals in Edinburgh heard that there were big changes in the sector, not least in the nature of lending.

The market may have peaked, but because the sector had learned the lessons of previous years, there was less likelihood of a crash.

William Newsom (pictured above), senior valuation director at Savills, noted the rise of alternative lenders. He said 36 new entrants had come to his notice in the past year alone, adding to the 150 he named last year.

“It is now a truly diverse market and I am forecasting an increasing market share for these lenders at the expense of the clearing banks,” he said.

Savills believes these alternative financiers will lend £7.5 billion by the end of the year – some 50% higher than reported by analysts at De Montfort University.  Overall such lenders are not financing speculative development and therefore are not bringing extra risk into the market, the conference heard.

Insurance companies and alternative lenders have grown their respective shares of the market to 16% and 9% respectively. Savills forecasts that these will increase to 18% and 13% by the end of 2016, while the German banks, North American banks and other international banks will retain a 13% share each.

Making his 20th and final presentation at the Financing Property event at the Roxburghe Hotel, he said the banks were faced with a list of responsibilities, including ring-fencing of their retail operations and more compliance requirements.

RBS GogarburnThe market share of the UK clearing banks is forecast to decrease from 34% in 2015 to 30% by the end of the year, compared to 70% at their 2008 peak. UK banks are still the most active in the market, with RBS being the biggest lender of 2015, according to research by De Montfort University.

Ringfencing was introduced by the government to avoid any problems in investment banking tarnishing retail banking.

“I am told this is going to be very costly,” said Mr Newsom, adding that new compliance regulations were another big challenge for the banks.

“I will be politically correct and say this is ‘all important’, but it means the banks are having to staff up their back offices with people who are pouring treacle into the machinery and incurring more cost.”

While the banks handled these extra pressures, the alternative lenders were proving to customers they could be “fast, skilled and provide greater certainty,” he said, adding that customers are willing to pay extra for this added service.

He said: “The markets have learned from past mistakes.” But he warned delegates to avoid “fancy financial structures”, getting into sectors they don’t understand, and believing that low inflation and low interest rates are the new normal.

There was a danger, he said, that because this situation had persisted for so long it will prove a challenge when rates start to rise.

Mat Oakley

Mat Oakley (above), head of commercial research at the firm, said concerns over the impact of the European referendum on property trends may be over-stated.

“A lot of people are suggesting that the EU referendum has impacted on activity,” he said, but pointed out that investment levels reached £13.8 billion in Q1 2016, well above the long term average of £9.5 billion. Further to Savills 2015 predictions, there has been continued investment in the UK’s regional commercial property markets,

Any slowdown in activity can be attributed to a number of factors, not least the lower returns in the market, said Mr Oakley.

“There isn’t a clear reason why some markets have softened, but the referendum is not the whole story. It is the cycle which is behind it,” he said.

“The conditions of 2016 are very different to those of 2007: we’re not overbuilding, nor are we pricing secondary assets as prime, and investors and lenders alike have a heightened awareness of the risks in the market. With continued strong leasing activity across all the main sectors, we’re going to see a gentle drift back to income rather than capital growth, which bodes well for the future of the market.”

Faisal Choudhry

Faisal Choudhry (above), head of research in Scotland, said the residential market was still hampered by too few homes being built. The number being constructed – 16,000 – was half the volume required.

He said there was some concern that buyers were stretching themselves, although the majority were now taking out fixed rate mortgages.

LTVs remain below the peak seen in 2007, with volumes of 90%+ LTVs forming only 2% of gross mortgage lending in Q3 2015, compared to 14 % in Q3 2007.

Mr Choudhry added: “LTVs remain low, although in London the creeping increase in LTIs is a concern, leaving the market vulnerable to an unexpected interest rate rise.

“In Scotland however, we are enjoying higher rates of affordability due to more attainable house prices, coupled with some of the most competitive mortgage rates for many years.  Furthermore, comparatively low rates of stamp duty taxation below £350,000 have supported the first time buyers and young professionals market.

“Overall, mortgage regulation has served its purpose: the key factors that preceded the 2007 crash are not present today, although we now face a different set of challenges including increasing housing delivery and a squeeze in rental supply.”

Photos: by Terry Murden

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