Weakness across real estate markets during 2017 has fuelled concerns that the UK’s property sector is heading towards another collapse of the sort seen during the global financial crisis. Should we be worried? I don’t think so.
As we enter 2018, there are plenty of encouraging signs that the UK real estate market is in good health, despite persisting uncertainty on several fronts.
UK employment has remained strong and there is a massive amount of private and public investment across the UK in the sectors that underpin the market – not only housing, but infrastructure and commercial investment. Brexit continues to be the major unknown and rising interest rates may create some nervousness among buyers, but they are still at near to historic lows and do not look like rising with any speed any time soon.
In the residential market, in which my firm specialises as a lender, there is the fundamental problem of the availability of homes falling far short of the number of wanting buyers. So, in the absence of an economic shock, housebuilders should have the confidence to continue to increase output as price inflation persists. We believe this could be as much as 5 percent to 7 percent outside London.
Indeed, the picture for the residential property market differs across the UK. After a period of very strong growth up to 2016, central London looks like it will continue to plateau next year after posting a modest 3 percent rise over the past 12 months. Homes at the super-prime end of the market may struggle to even meet that expectation, although I do also think 2018 could be the bottom for that segment of the market in the capital as excess supply is absorbed through sales and lettings.
Look elsewhere and the picture is rosier. In Birmingham, Bristol, Leeds and Manchester house prices rose between 7 percent and 8 percent in 2017, and this outperformance of housing markets north of Watford Gap looks set to continue.
Taking the West Midlands as an example, there was a shortfall of nearly 45,000 new homes built over the past five years in the region. Its industrious new mayor, Andy Street, has said 165,000 new homes will be needed by 2030 so there should be a huge opportunity for the residential lending sector to support the housebuilders constructing them, supported by a devolved local government structure, significant infrastructure investment and a ‘more and better homes’ government agenda.
With challenge comes opportunity and non-bank financiers especially have a chance to help smaller developers ramp up production. In a recent survey by the Federation of Master Housebuilders, more than half its members from the SME builder community reported a shortage of finance as a barrier to increasing output. Clearly, this is a need that specialist finance providers can help serve.
We continue to support developers of all sizes, but it is clear the smaller developers that were significantly reduced after the global financial crisis in 2008 need it most. The government has made some progress on this front over the past 12 months and long may it continue. Urban Exposure has long been advocating an increase in the amount of public land made available for housing, with an emphasis on smaller sites suitable for SME developers – so we are delighted to hear this was among the proposals announced in the chancellor’s Autumn Budget.
Financiers could also look at ways to gear themselves up to finance alternative procurement methods, which also have the ability to make a significant impact on supply output.
Could the government do more to help the sector in 2018? Yes, and we are confident they will. Housing remains front and centre of public policy and the beneficiary of considerable government financial support.
I am optimistic that, despite the headwinds from Brexit-related uncertainty, the sector will continue the steady march toward the increased annual housebuilding target of 300,000 homes a year.