Our latest article on Alternative Lending has been featured in Britain in Hong Kong, the official magazine of the British Chamber of Commerce. Click the image below to read more:
There are numerous factors which determine house prices. Some are based on economic theories while others are driven by geographical, political and demographical trends. One must also consider the more intangible factors, such as the feel of a neighbourhood and expectations for future growth. In this month’s article, we will outline some of the key factors that influence property prices, how they are determined, and what they mean in terms of investment.
Demand for housing is dependent upon income. With higher economic growth and rising incomes, people will be able to spend more on property; this will increase demand and push up prices. A robust and strengthening economy, low unemployment and strong wage inflation all contribute to a positive market sentiment which helps to fuel price growth.
Supply & Demand
Simply put, a shortage of supply will push prices up and excess supply will cause prices to fall. For example, in the Irish property boom of 1996-2006, an estimated 700,000 new houses were built. When the property market collapsed, the market was left with a fundamental oversupply. Vacancy rates reached 15%, and with supply greater than demand, prices fell. By contrast, in the UK, housing supply fell behind demand. As such, UK house prices did not suffer as much as those in Ireland and soon recovered – despite the ongoing credit crunch.
Housing supply depends on existing stock and new house builds. It tends to be fairly inelastic because to get planning permission and build houses is a time-consuming process. Periods of rising property prices may not cause an equivalent rise in supply, especially in countries like the UK, with limited land for home-building.
Affordability/House Prices-to-Earnings Ratio
The ratio of house prices to earnings influences the demand. As house prices rise relative to income, you would expect fewer people to be able to afford to buy. Another way of measuring the affordability of housing is to look at the percentage of take-home pay that is spent on mortgages. This takes into account the house prices, but mainly interest rates and the cost of monthly mortgage payments.
Rising Employment Rates
Related to economic growth is employment. When the employment rate is rising, more people will be able to afford to buy. Increased job creation is in many cases linked to the emergence of new industries, developing new business districts and the inward migration of large corporations to the vicinity. Similarly, when unemployment is on the rise, the fear of losing one’s job or a recession dampens buyer sentiment and tends to discourage people from entering the property market, thereby reducing demand.
Interest Rates & Mortgage Availability
Interest rates affect the cost of monthly mortgage payments. A period of high-interest rates will increase the cost of mortgage payments and will cause lower demand for buying a property. When borrowing money to purchase becomes more expensive, it naturally dampens buying sentiment and makes renting more attractive by comparison. Interest rate increases have a bigger effect if homeowners have large variable mortgages. For example, in 1990-92, the sharp rise in interest rates caused a steep fall in UK house prices because many homeowners could not afford mortgage due to the rise in interest rates.
Demographics & Geography
Urban populations are forecast to increase in the coming decades. Population growth is a major underlying factor for the demand for housing and without a new supply of homes, it pushes up the prices for both renting and purchasing a property. The underlying reasons for population increase must also be understood. If the main contributor for an increase in population is births, then this will have a less short-term effect, than if the increase is due to migration or employment. Net overseas and net intercity migration are key components for population growth as a majority of these people require accommodation immediately – fuelling demand and putting further restraint on the supply of city centre housing.
Rising first-time buyer average age coupled with low affordability has meant that more and more people are opting to rent rather than buy. This rise in rental demand and the growing number of prospective tenants clearly benefits buy-to-let landlords, however, if this trend persists long term, with fewer and fewer buyers (and therefore less demand), the property market, in general, will suffer.
The cities that consistently display the strongest price growth tend to be those with a strong university presence, a high student population and, perhaps most importantly, a healthy graduate retention rate. This results in growing populations of young, qualified professionals in need of conveniently-located accommodation, which naturally drives both buying and rental demand.
Location, Location, Location
A cliché but true nonetheless. Property located close to the CBD or with excellent transport links tends to command a higher price. If you look at a city’s property price heat map, the highest density of prime property is more often than not concentrated around the city centres. The majority of people want to live close to their place of work while also enjoying easy access to leisure and retail amenities. This naturally creates a higher demand for property prices in these areas.
Improvements in local transport infrastructure are generally seen as a good thing, both for the economic prosperity of an area and property prices. When local transport infrastructure is improved, it inevitably boosts house prices in the surrounding area, along with connectivity and employment. In recent years, we have seen the impact of the “Crossrail effect” on London house prices - property prices around the 41 stations on the Elizabeth line (Crossrail 1) are projected to increase by 25% more than the average price in central London.
In conclusion, any investors looking for buy-to-let opportunities in 2019 and beyond should undoubtedly bear in mind the factors listed above, as history shows us that they play a major part in the rise or fall of property prices in any given market.
The real estate development financing landscape in the UK has shifted in recent years. The liquidity funding gap left by the global credit crisis has long since been filled and there is now more variety than ever across the entire funding spectrum. Traditional lenders have retreated from the market, leaving a void that has been filled by non-bank and challenger lenders, who have enjoyed huge success in this period. While traditional lenders have opted to concentrate on what they do best – lower risk loans with lower leverage, alternative lenders have been quick to step in, eating up market share and taking on more leverage.
The overall value of the UK Alternative Lending market has grown exponentially since the last recession, with the total value of the market standing at £6.2bn at the end of 2017, up 35% from the previous 12 months. In terms of real estate and mortgage lending, 2017 saw specialist lenders and challenger banks drive the UK’s modest overall growth, with almost a 20% increase in activity. Despite Lloyds’ lending activity up 7% in 2016, the mainstream lenders such as Nationwide Building Society, RBS and Santander saw a decrease in activity compared to the previous year.
“Institutional clients are increasingly turning to real estate debt as a viable alternative to equity”
In an increasingly diverse market, peer-to-peer business lending now represents the largest proportion of the total alternative market, with SME borrowing at £2bn through these platforms last year, 65% more than in 2016. Peer-to-peer property lending totaled £1.2bn last year, highlighting how the industry is growing to become more diversified and sophisticated. Furthermore, institutional clients are increasingly turning to real estate debt as a viable alternative to equity, due to more and more specialised, nimble and risk-savvy lenders now in the marketplace.
While uncertainty over Brexit continues to negatively affect UK house price growth, transaction volumes and sales periods (16% longer than 2 years ago), potential rising interest rates, tighter regulations and increased capital requirements for banks have been the key factors in the withdrawal from the market of the traditional lenders, and the subsequent emergence of the alternative lender. Despite the current uncertain political climate, the UK housing market remains acutely under-supplied, with roughly 300,000 new homes needed each year, and only around 200,000 being delivered. In terms of social housing, the government has set an ambitious 20-year target of 3m new affordable homes, more than the total number of homes delivered throughout the two decades immediately after World War II.
In short, the opportunity is enormous, especially for smaller alternative lenders, who are also set to benefit most from government-supported SME focus programs. The financial requirement to even get near to meeting national housing delivery target stands at an estimated £225bn – more than four times the cost of HS2 and over five times the annual defence budget. Little wonder therefore that institutional investors are starting to pay attention.
The most recent major institutional investment in UK build-to-rent residential debt was Goldman Sachs’ £118m development loan to Apache Capital Partners/Moda Living for the construction of a 481-unit scheme that will be Birmingham’s tallest residential building once complete. It should however be pointed out that many of these institutional and new challenger providers of residential development finance may not have the expertise to finance smaller, more bespoke projects. Deals in the £2-15m range are falling through the cracks, and numerous smaller lenders have emerged, backed by more risk-savvy capital and with the ability to move faster and increase competition in both sourcing and financing of residential developments.
SME house builders often have limited access to capital and therefore need a finance partner who can deliver funding quickly and confidently. Generally borrowers are willing to pay a premium for speed of deal execution, meaning that lenders (and investors) can realistically expect absolute returns of 10%+ on stretched senior loans, which also provide first charge security over the property.
These smaller lenders will have a clear advantage in that they tend to have higher risk tolerance and often have superior real estate development, technical, financial and risk management backgrounds, allowing them to establish more relationships and take on a wider variety of loans than the larger, institutional lenders. In a marketplace where vetting developers is crucial (track record is usually considered more important than the project itself), it will be the more real-estate-savvy smaller lenders with a better understanding of costs, investor appetite, market trends and sales strategy that stand to seize this rare opportunity.
Learn more about our exclusive UK real estate development financing opportunities at Alpha SPC:
Overseas investment appetite for UK regional cities remains strong. March 2019 was a fantastic month for 𝑷𝒍𝒂𝒕𝒊𝒏𝒖𝒎 𝑹𝒊𝒔𝒆 𝑹𝒆𝒂𝒍 𝑬𝒔𝒕𝒂𝒕𝒆 with our distribution network delivering 25+ sales in our Liverpool project alone – 𝑻𝒉𝒆 𝑭𝒂𝒃𝒓𝒊𝒄 𝑽𝒊𝒍𝒍𝒂𝒈𝒆, located in the world-renowned Knowledge Quarter.
Learn more about the project here:
Rupert Bickmore, Director of Platinum Rise Real Estate
Ever since Britain voted to leave the EU on 23rd June 2016, uncertainty and discord have been the two main by-products of this decision. Even today (1015 days later, and with the original 29th March deadline for the activation of Article 50 already having been extended), neither we as political observers nor parliament itself seem any nearer to agreeing on the correct course of action for Britain’s withdrawal from the EU.
Rather than speculating on the specifics of a deal that does not yet (and quite possibly will never) exist, it makes more sense to focus on what we DO know for sure. In the 6 months leading up to the 2016 Brexit referendum, and in the years since, the Pound Sterling has devalued by over 20%, and while property price growth has undoubtedly slowed somewhat, the overall performance of the UK economy and property market has been steady.
Uncertainty and currency troubles have caused onshore transactions volumes to slow, with the majority adopting a “wait and see” approach, whereas opportunistic overseas investors have capitalized on the cheap Pound and we have seen significant investment continue to flood in, particularly in London’s commercial market, which has seen numerous landmark office buildings sold for record-breaking figures, the assumed post-referendum exodus of banking jobs never materializing, and robust demand for office and co-working space, most notably from the ever-growing TMT sector.
As far as the residential sector is concerned, history suggests that UK property has been a resilient and dependable option for investors worldwide, based on its proven performance and cyclical and predictable nature. Whether Britain’s MP’s decide to leave the EU with a deal or not, the property market is in good health, supported by strong fundamentals such as steady economic growth (GDP up 0.4% in the last quarter), record low unemployment rates, major investment into infrastructure and demand outstripping supply. For decades investors have turned to bricks and mortar for a safe, longer term option that tends to recover quickly from the effects of any damaging political or economic events. If investors do fear the impact of Brexit on property, they must first consider the alternatives. Any disruption or damage is likely to hit the equity markets and other asset classes equally hard, so while there may well be a minor correction (for a period of months, not years) from the fallout of Britain’s “divorce” with Brussels, the market will inevitably bounce back, just as it always has done. Depending on your perspective, this presents a buying opportunity, not a catastrophe.
The past three years have seen Prime London postcodes among the hardest hit by the Brexit uncertainty, with some boroughs exhibiting negative price growth, while London as a whole and the South East simply stagnated. It was inevitable therefore that the more affordable and increasingly more liveable regional cities such as Birmingham, Manchester and Liverpool would start attracting investment. On a national level, government schemes like Help-to-Buy have played a vital role in first time buyers replacing home-owners as the largest group of home buyers, while greater affordability presents less of a barrier to home-ownership than in London and the South East.
30 years ago, the city centres of places like Manchester and Birmingham were run down and suffering from urban decay, but since then they have experienced a dramatic transformation and are becoming increasingly attractive places in which to live, study and work. Coming from a low base compared to London and benefiting from the desire of knowledge-based businesses to operate out of city centres, England’s major regional cities’ central districts have seen their populations grow more than six times as quickly as that of Central London since the turn of the century.
On the back of the passing of The Cities and Local Governments Devolution Act in 2016 (designed to devolve housing, transport and planning powers to key city region local governments),
The Northern Powerhouse initiative was introduced as a way of accelerating population and economic growth of the key Northern cities through major investment into improving productivity, education, culture and connectivity. Along with HS2, the nationwide rail improvement plan, due to complete in 2027, over £13 billion has been invested into improving connectivity from Northern Cities to Birmingham and London, as well as to each other.
Extensive urban regeneration has been an equally important driver of inward business and academic migration, leading to rising job creation, economic diversity and in turn, property price growth. Leading brands and institutions, both domestic and international, for so long confined only to London, now have a choice of dynamic, fast-growing and comparatively affordable regional city alternatives. The Birmingham Curzon HS2 Masterplan, Manchester’s Deansgate Locks transformation and Liverpool’s rejuvenated Royal Albert Docks are all regeneration projects that exemplify the exciting modernization of these cities. Improved employment opportunities, cheaper way of life and more affordable property have all been factors in the recent “brain-drain” of talent from London that has seen increasing numbers of professionals opting to relocate to the West Midlands or the North West.
All three of these cities boast thriving university populations and high rates of graduate retention, which combine to offer employers a young, skilled talent pool right on their doorstep. With this abundance of highly-qualified, youthful candidates come a continuous supply of renters that ensures a high level of demand for rental and student accommodation. Similarly, when the economic future is uncertain, education typically takes on added importance, with academic qualifications becoming especially valuable in terms of candidate selection. A prime example of this trend can be seen in Liverpool’s thriving Knowledge Quarter, where a targeted focus on innovation, life science, biotech and medical research has created a world-class specialized destination for some of the leading medical and scientific brands (and personnel) both nationally and abroad. An early sign of KQ Liverpool’s scientific clout is the early anchor tenancy of the new £1 billion Paddington Village, where the Royal College of Physicians have taken up almost 100,000 sqft of office space for their Northern Centre of Clinical Excellence.
Overall, we believe that property investors have every reason to be confident about the long-term prospects of the UK market.While London is expected feel the Brexit impact hardest (projected 5-year growth of approx. 10.5%), its fundamentals and global appeal remain intact and will continue to attract overseas investment. For those looking for more generous rental yields and faster appreciation in the short term, the three aforementioned regional cities present a more immediate (and affordable) solution. With price growth forecast for 20+% over the next 5 years, the North West and West Midlands remain the best options for buy-to-let investors for the time being.
22 DUNSTER GARDENS - NW6
Located in the vibrant Kilburn district of North West London, 𝟐𝟐 𝑫𝒖𝒏𝒔𝒕𝒆𝒓 𝑮𝒂𝒓𝒅𝒆𝒏𝒔 is the latest project acquired, financed and completed by our funding arm, AlphaSPC.
This stunning townhouse conversion consists of 3 spacious, well-lit and beautifully designed apartments.
With 4 train stations within walking distance, these elegant and conveniently-located apartments offer easy access to the hustle and bustle of Central London at below market value.
Real estate finance & investment specialist Platinum Rise Capital Partners (PRCP) has hired ex-Berkeley Group, JLL & CBRE sales director Paul Bennett to head up its global real estate distribution network. Paul brings a wealth of experience and knowledge to the role and is tasked with expanding and managing the distribution of the off-plan buy-to-let projects underwritten by PRCP.
He has spent the last 18 years in a variety of leadership roles. He was most recently Senior Director and Head of International Project Marketing at CBRE, where he specialised in international residential sales operations in HK and China, while providing strategic guidance to CEOs of different regional branches.
Founded in 2014 in HK, PRCP is a real estate finance and investment firm that provides financing, underwriting, furnishing and modular construction services to an established network of property developers. For buy-to-let investors, it also offers a range of exclusive and off-market investment opportunities, via both acquisition and lending.
Bennett said he was “excited to join such a fast-growing and dynamic company” and that he “couldn’t wait to get started”. PRCP Co-founder and CEO Murray Holdgate added “we are delighted to welcome Paul to our team and look forward to benefiting from his vast experience and knowledge of the overseas property investment industry”.
- Official British Chamber of Commerce Magazine
Hong Kong-based real estate investment and development firm Platinum Rise Capital Partners (PRCP) gathered with its trade partners, investors and loyal customers for a night of appreciation. Held at the Hong Kong Jockey Club Happy Valley Racecourse, PRCP gives thanks to its stakeholders for their continuous support in the company’s endeavors. A snapshot of the event shows PRCP’s Chief Executive Officers Murray Holdgate (3rd from left) and Adam Simmons (4th from left) with some of their guests including one of Bloomberg’s longest-serving TV anchors Rishaad Salamat (1st from left).