I’ve now been back in the UK for just over six months and what a six months it has been. I certainly hadn’t expected to witness such volatile times economically and politically on my return home.
By Paul Winstanley, Head of Living Strategic Advisory, JLL
However, on a purely personal level, there have been so many positive highlights in the last few months; I’ve been reconnecting with family and friends and had the opportunity to work alongside long-standing industry colleagues after my time away. Yes, there are of course challenges to contend with, but, as in any market, opportunities also.
The life lesson I’ve had reiterated during this period of uncertainty is that things never seem to be as good as people talk-up in good times or as bad as people fear and talk-down in harder economic climes.
Market commentary presently tends to take a snapshot set of data and circumstances today on a single variable (interest rates, house prices, economic growth etc). When extrapolating data based on just one factor only over 12 months, two or five years, it isn’t too difficult to land on a rather sensationalist, doomsday conclusion.
This trend isn’t helpful to the market and doesn’t provide a reasonable environment for unemotional decision making.
The inspiration for my writing this piece was the launch of JLL’s Residential Forecast in early November which is an outstanding read.
Channelling my inner researcher (as a former Head of Research for JLL in New Zealand), the depth of analysis, data validation and a thorough old-fashioned strengths, weaknesses, opportunities and threats (SWOT) analysis enable conclusions that are realistic, steeped in logic and, frankly, unsensational.
The market isn’t likely to collapse; it will inevitably be a bit rocky in the short term – but long-term fundamentals are strong and, arguably, getting stronger as a direct result of short-term uncertainty. We are in a different world to the Global Financial Crisis and the ‘house’ is built on much stronger foundations.
At a helicopter level, JLL is forecasting that housing transactions in the UK will fall by circa 25% to around one million in 2023.
But there is unlikely to be much distress in the market and this will mean that vendors will not accept a fall in values above a certain level – ie more of discount than a fully blown correction and certainly not a crash.
Against this backdrop, JLL is forecasting that UK house prices will fall in value in 2023 by 6%, which equates to an average discount of £17,500 from the average UK house price of circa £290,000.
But in terms of the UK rental markets, the anticipated drop in transactional activity will translate into 125,000 fewer first time buyers getting on the ladder per year for the next two years – or to put it another way, an additional 250,000 households looking for rental accommodation.
And we know from other JLL research that these households are likely to seek modern rental homes which are more energy efficient in order to lower their bills. JLL’s recent survey of 1,000 Build to Rent tenants found 88% say their home makes them happy and 64% say their next home will be a rental.
On average these tenants dedicate 27% of their income on rent and 40% would be willing to pay more for an environmentally friendly home, the majority (60%) driven by the prospect of lower energy bills.
JLL is forecasting strong rental growth over the next five years, particularly in the next 24 months on the back of this additional rental demand. We expect cumulative UK Build to Rent rental value growth of 22.8% between 2023 and 2027, more than a 1%pa outperformance vs the wider UK PRS market of 15.9% over the same period.
Our recent Q3 Quarterly Capital Markets bulletin also underlines that interest in the UK Build to Rent sector remains strong.
Build to Rent quarterly investment has doubled year-on-year, rising to £1.8bn in Q3, compared to £0.9bn in the same period last year and bringing the year-to-date total invested to £4.9bn. Over the past year, the number of Build to Rent homes in the UK has climbed by 27% to some 152,800 either completed or in development.
Purely looking at things from the viewpoint of long term, large-scale residential fund-type investors, to continue Build to Rent’s excellent progress as an asset class in the UK, we do of course need stability to promote sound investment decision making. A housing market, legislative framework, construction environment and lending environment which is as predictable as practical are of course more than just ‘nice to haves’.
However, to JLL’s research’s point, the medium to long-term fundamentals are sufficiently strong as to likely support prices and sentiment over time. This is critical and, I would argue, ‘big news’.
Our thought leadership forecast is not just what will happen to house prices today, tomorrow, next week or next year – but how supported the sector is demographically, philosophically and practically.
Housing is, and will remain, a need and not a want – and investors are very aware of their opportunity to create long term, sustainable and quality homes for renters to live in for as long as they wish to.