The UK property market is becoming increasingly fragmented, as it is affected by the many headwinds it currently faces, according to a new report from London Central Portfolio (LCP).
The quarterly index shows that this fragmentation has resulted in different growth rates across the core property sectors, which LCP has defined as prime central London’s (PCL’s) mainstream private rental sector, PCL’s luxury property market, Greater London’s new build sector and the domestic market, outside of PCL.
The report, which analyses the latest Land Registry data, highlights a rollercoaster year to date. Demonstrating the distorting effects of changes in tax legislation, the index found that sales volumes have dropped significantly across all sectors in the second quarter (Q2), following a rush of activity in the previous quarter, when landlords pushed forward with transactions ahead of the 3% Stamp Duty surcharge deadline.
PCL’s luxury property market was hit particularly hard in Q2, resulting in a difficult quarter for the houses sector, where average prices have dropped by 21%. Price growth in PCL’s private rental sector, however, was strong in Q2, as it is less affected by the majority of the new residential property taxes introduced over the past four years, as well as being a traditionally consistent performer.
New build sector
UK Property Market Becoming Increasingly Fragmented, According to New Report
Meanwhile, Greater London’s new build sector experienced a 43% fall in sales compared to last year, as international interest for these units begins to wane.
For the rest of the domestic market, encompassing most of Greater London, England and Wales, Q2 saw large declines in prices and sales volumes. While uncertainty ahead of June’s Brexit vote caused a wait-and-see approach, harsher salary caps on mortgage lending may have also begun to hinder buyers, according to LCP.
Due to the delay in Land Registry reporting, the figures for Q3 are not yet available. However, other data indicates that the rollercoaster is continuing. The devaluation of sterling has encouraged more proactive investors to enter the UK property market, particularly in the new build sector, although they are seeking heavily discounted prices.
Flats and maisonettes
The LCP report also found that the mainstream flats and maisonettes sector, which represented 88% of PCL sales in Q2, has shown positive growth, despite pre-EU referendum pressures and changes to tax rules. In Q2, prices rose by a strong 6.6% on the previous quarter, to stand at an average of £1.32m.
This market predominately comprises one and two-bedroom flats, which form PCL’s private rental sector, where pricing usually follows a more consistent performance than the luxury market. This is due to its position as an entry-price market, making it generally more accessible and primarily a rental sector. The price point in this market is also close enough to the domestic Greater London sector to not get captured by the higher tax rates enforced at the higher end of the market.
Next quarter, LCP believes that the market may see little price movement, as there is a divide between vendors who are seeking higher prices and buyers seeking bargains. As a result, transaction levels may not increase significantly, despite the devaluation of sterling post-Brexit, which has expanded overseas appetite.
Private rental sector
Stock levels in PCL’s private rental sector have risen dramatically over the past three months, as many landlords opt to rent their properties rather than sell them. The number of properties to let has increased by almost three times over Q2, from 8,834 to 24,761. This higher level of competition means that tenants are increasingly attracted to good value, newly refurbished properties, as they continue to seek a complete lifestyle experience in their rental homes.
As a result, weekly rents for small, refurbished flats performed best in Q2, with new lets achieving a 3.6% uplift over asking rents.
One-bed properties continue to put in the strongest performance, with weekly rents in PCL now averaging £460 – 5.2% higher than expected returns. Two-bed properties, however, are becoming more popular again, as they now show particularly good value. Weekly rents for this type of property now average £700 – 1.5% higher than asking rents.
However, due to high levels of rental property supply, rents for re-lets of older properties have remained fairly static over the past quarter. This has been compensated by continued positive renewal rises from tenants in situ, with average rent price growth of 3.1%.
LCP therefore advises landlords to look to retain existing tenants if possible, rather than remarketing their properties in the hope of achieving higher rents. It adds that landlords should also be open to conducting remedial and upgrade works between tenancies to remain competitive at the re-let stage.