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UK Cross Sector Outlook 2022: Residential

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Four to the fore

From anticipated rises in interest rates to a more diverse Build to Rent sector, Lucian Cook looks at four significant trends that are likely to shape UK housing over the next five years.


1. INTEREST RATES AND MORTGAGE REGULATION

The mini housing boom of the past 18 months has curbed the capacity for future price growth across large parts of the housing market, especially in an environment when interest rates are expected to gradually increase.

The scale and pace of anticipated interest rate rises are unlikely to put households’ finances under undue stress. This points to a soft landing in the mainstream market.

The extent to which increased rates act as a drag on the amount people are able to borrow – and therefore future house price growth – will depend on how existing mortgage regulation is applied and amended over the next five years. While the Bank of England has proposed relaxing current affordability stress tests for borrowers (which may provide a little upside on our outlook for house prices), this will be subject to consultation over the course of 2022. Furthermore, banks will still be bound by the requirement that no more than 15% of their lending can be at a loan to income ratio of 4.5 or more. This, together with our expectation the Bank of England takes a cautious approach to reform, caps prospects for further price growth.

This will put even more emphasis on the income returns for residential investors, tempering demand from mortgaged buy to-let landlords. The effect will be greatest in the markets of London and the South, where yields and future capital growth prospects are lower. The exception is prime central London, which continues to look good value – having missed out on the price growth seen in other markets primarily given the constraints on international travel.

For institutional investors, the impact of rising rates and the end of Help to Buy has the potential to increase tenant demand underpinning rental growth projections, even if current mortgage regulation is softened.

2. POST-PANDEMIC LIFESTYLES AND REALITIES

Though less intense than we have seen in the past 18 months, we expect that the pandemic will have a lasting impact in terms of where people want to live and what they want from a home (especially given uncertainty around the impact that new variants of Covid will have on the need to work from home more regularly in the future).

The desire for a dedicated space to work and better outside space have the potential to change what we build, both for owner occupiers and, as the Build to Rent sector matures, private renters. However, this will be a case of evolution rather than revolution, as the precise impact on occupier demand and the features that add value in a post-pandemic world become clear over time.

From a location perspective, we expect demand for family housing to be more focused on the commuter zone and, to a greater degree, its fringes as hybrid working patterns become more established.

However, even if people commute further but less often, the quality of that commute will remain important. Not only will it concentrate the demand for family houses to areas with good transport infrastructure, but it also looks set to create a spin off market for city centre boltholes. We also expect to see increased demand for purpose-built senior living, as older households think more carefully about their future housing and care needs.

We do not believe this spells the end of demand for city centre living. But we do expect demand to become even more weighted to those at the two ends of the housing ladder – the younger and older households for whom the amenities of urban locations remain or have become increasingly important.

3. THE ROAD TO ZERO CARBON HOMES

If one thing is for sure, there will be no shortage of opportunities for investment in improving the energy efficiency of our homes and decarbonising heating sources in the next five years. Not only is the scale of the challenge vast, but there appears to be more political urgency to effect change thanks to COP26. Importantly, the policies to deliver that change are far more advanced, not least through proposals to set specific EPC targets for lenders.

The prospect of tighter regulations for private landlords will present a cost challenge that is likely to impinge on net returns. Some will reconsider their investment in homes that are less energy efficient, pushing demand towards more modern homes.

This further plays to the hands of institutions, for whom it will be easier to achieve minimum EPC requirements on purpose-built stock, but who also have economies of scale to deal with legacy issues on large portfolios.

The road to zero carbon has also become a major financial consideration for affordable housing providers, many of which have a significant latent liability in their existing portfolios. We expect this to further open up opportunities for private investment to help those providers meet other objectives, including the delivery of new affordable homes. Already we have seen a significant increase in the funds pointed at this sector, reflecting both the security of the income streams and the ESG credentials of such investment.

 

4. A CHANGING POLICY LANDSCAPE FOR DEVELOPERS

The mini housing boom has left housebuilders with healthy balance sheets and capital to deploy, resulting in short-term upwards pressure on land values. But with reduced price growth expectations and high build cost inflation, the outlook is less clear.

2022 looks set to be the last hurrah for Help to Buy, a scheme that has underpinned private housebuilding since its inception in 2013. The economics of the delivery of First Homes and shared ownership are very different, while we wait to see what traction private initiatives such as Deposit Unlock have on grassroots demand for new homes.

In part, we expect the gap to be filled by a larger and more diverse Build to Rent sector, which looks set to provide the next best oven-ready, secure market for developers. Given the challenges facing parts of the commercial property market, demand across a spectrum of opportunities in the residential sector seems set to move it – in all its forms – from the alternative to the mainstream investment category.

In other respects, the continued merry-go-round of housing ministers means the future direction of housing policy has become more opaque over the past 12 months. Planning reforms put forward in the Queen’s Speech, so unpopular on the back benches, look set to be watered down to reduce the pressure for housing delivery in the wider South East.

Meanwhile, we wait to see what the levelling up agenda will do to local housing targets. That all points to more short-term planning risk; though we will have to wait and see what it means for the demand for strategic land in different parts of the country over the longer term.

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