Research article

Where best to develop and invest in residential property

Although there has been a shift in development towards the strongest locations, there are opportunities to be found across all markets.

These are uncertain times. This creates opportunities to take positions in the UK residential market, based on its sound fundamentals, underpinned by a scarcity of housing relative to demand. This report summarises our view on the outlook for residential development and investment and how that varies across different markets.

We focus on England, but the principles are equally applicable in Scotland and Wales. For instance, Edinburgh is a hotspot of market strength in Scotland.

Strength and scarcity

Both development and investment performance are driven by the strength of local market, alongside property specifics and acquisition price. The key is to buy well then unlock latent potential to attract demand from other micro-markets.

The strongest markets, as measured by the recovery in both prices and transaction volumes, tend to be the highest value markets (see Graph 1). Purchasers in these markets have more equity-fuelled purchasing power, with less reliance on mortgage finance.

Development locations

A high proportion of development of new homes is in mid-to-lower-strength markets, as a simple consequence of the larger markets (including Birmingham, Manchester and Leeds) that are in these categories.

However, there has been a shift in development towards the stronger markets; 42% of new homes were delivered in markets in the right hand half of the chart in 2010/11, compared with 36% in the three years to 2007/08.

Volume sales of new homes is inherently easier in markets in which a high proportion of housing stock changes hands each year. Levels of market activity in the stronger and faster recovering markets are now significantly higher than in the weaker markets. Where transactions are within 40% of peak levels, 4.1% of privately held stock changed hands in 2011, whereas only 2.7% of stock transacted in markets that are more than 60% off peak levels.

Graph 3 shows which markets have seen the greatest recovery in development, relative to the upturn in residential market activity. There are development opportunities in all of these markets, but they vary in nature across the chart. The most straightforward opportunities are likely to be in the strongest markets, provided that land can be acquired at a competitive price.

Relatively strong recovery in high delivery markets such as Cambridge has underpinned an upturn in delivery of similar scale. Issues here include how new infrastructure is funded and obtaining serviced land at a competitive price.

Development volumes have bounced back sharply in Ashford, South Norfolk (including development on the fringe of Norwich) and Cornwall, underpinned by a robust recovery in market activity and the availability of deliverable land.

Equity loans, including FirstBuy and Homebuy, have been an important part of delivery rates in these markets, so developers that offer these products are well placed to compete. NewBuy mortgage indemnity has the potential to extend the positive impact. Delivery in markets such as Oxford, Solihull and Wokingham have stayed relatively low, despite strong market recovery. Scarcity of deliverable land with consent is a constraint in these markets, so development prospects are good for those who can get land with consent to the point of delivery.

There are many other markets with strong market recovery but below par levels of delivery, including Mid Sussex, Guildford and York. In London, Islington, Hackney and Wandsworth have delivered less than might have been expected given their market strength.

Some of the ‘above the line’ stronger markets have the potential to deliver significantly more. Regeneration in both Southwark and Hammersmith & Fulham will be supported by these boroughs’ proximity to central London markets.

The ‘below’ the line’ weaker markets are more difficult. Markets such as Manchester, Salford and Liverpool are heavily reliant on urban regeneration schemes, which are capital intensive and depend on capturing excess demand from neighbouring markets with scarcity of supply. Success here typically involves long-term investment, with both capital and land, on sites that offer the best long-term uplift in value, alongside investment in infrastructure and transport links.

Delivery in below par markets will be enhanced during the next two years by significant allocations of Get Britain Building funding in Manchester, Liverpool, Salford and Birmingham. Above par markets in receipt of significant allocations include Milton Keynes, Bristol and Hounslow.

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