Interview: Richard Donnell on the UK residential market
Richard Donnell is Zoopla’s Research and Insight Director and one of the UK’s long-standing property and housing gurus, having spent 12 years previously as a Research Director for Savills and 13 years with residential valuation and analytics platform, Hometrack.
We asked Richard to provide us with an analysis of the residential market ahead of our upcoming Resi Investment and Build to Rent Conference.
What’s been happening in the UK residential sales market up until now?
Well the main headline in the housing market is that it’s been very strong and there was a large rebound in demand in the wake of the lockdown. This included a mixture of pent up demand from people that had been looking to buy previously and then those who weren’t looking but have since realised the things they want in a new home; there are 40% more people in the market looking to buy year on year, even with the shutdown of the market in the spring. Plus, the stamp duty relief has, of course, brought more people in and they will now be rushing to beat the deadline by next March.
Quite a lot of would-be buyers also have homes to sell, so there are about 20% more homes on the market than this time last year. And then we’ve got a sales pipeline of business, where people have agreed to buy a property that hasn’t yet completed, and this is 50% bigger than this time last year with £120bn of housing progressing through the sales process. It’s a huge pipeline waiting to be converted into what is essentially fee income for the mortgage brokers, property agents and other professionals that only get paid when deals compete.
What people are worried about is whether this can all continue or whether, come 1st April 2021, the market will stop in its tracks and there will be a pause in market activity.
How was has lettings market fared?
Most markets are back to business as usual, but the rental market is really divided – the demand side generally remains strong and rental growth remains positive in markets outside of London, although in the capital rents are falling. Rental markets are very localised, but they’re ultimately driven by employment growth and labour mobility, so wherever that is disrupted, short or long-term, is where we see movement.
During times of economic uncertainty and a reduced availability of mortgages for young people and would-be first-time buyers, it tends to drive rental demand. Nearly 80% of first-time buyers come from the rental market, so, if it’s harder to buy, it supports that demand, and if you’re not sure about the economic outlook, then you’re likely to keep on renting.
However, in London and some other bigger cities, people working from home and a lack of labour mobility is starting to have an impact. Rents are down 5% on last year in London because of this demand shock and what we’ve seen is that London has been particularly hit by a rising supply of homes for rent, having been added to by the build to rent (BTR) sector. You also have to consider that tourism has stopped, hitting the short-term letting market, so all those landlords will have put those properties into the long-term let market.
What’s the outlook for the Build to Rent (BTR) market?
BTR has been at the forefront of huge amounts of capital coming into the UK residential market. It has attracted the most capital, but it is one of many interesting subsectors of residential investment that are emerging such as private affordable housing investment. It all comes down to the profile of strength of the underlying cash flow and the yields that can be achieved when purchasing, as well as how it’s packaged up and managed – for potential residents, it’s selling a service and a lifestyle; what’s included within the offer?
BTR created a new type of supply, which is exactly right, but the way I see it is that there is one pool of tenants in any city that will potentially rent their home. We can get quite hung up on calling something BTR or building something to maximise land value as the industry is supply-side driven and the risk is assuming there will be a pool of demand. I accept that there is a market of people that will always want to rent brand new, but every new scheme of renting needs to find its level and position in the market and I think those in the industry are learning it more as things progress and the market evolves.
All these BTR players are joining a sea of buy-to-let landlords and the real question should be: what is the rental offer? Whether it’s in London, Liverpool or Milton Keynes. Some of the higher returns to be had are in pursuing these more interesting property segments, but it can’t yet be done at scale.
What other key rental markets are emerging?
There is limited information to base a detailed comparison of different rental tenures and investment returns, but affordable housing is an area that isn’t just delivered by public sector Housing Associations anymore and there are more affordable private funders, so I think there will be a growing connection between those. At the end of the day, it’s all housing and it’s all about the underlying cash flows that these investments deliver – whether it’s a discounted or affordable rent, it’s just a different type of structure.
There’s also a lot of new build rental coming through, typically large city centre apartment-led schemes, but there is an untapped market for rental demand for lower-density family housing market – some investors have spotted this but there is much further to go here in my opinion. The middle-aged renter is a growing trend in the UK.
So, I think the residential investment market will get broader and even more segmented just as we see in commercial property as there are some attractive and profitable market sectors, but the skill will be in packaging up the capital to deliver the supply and resulting investment and cashflow.
With recent events in mind, what are your longer-term predictions for rental appetite in London?
London is a global city and the demand for rented housing in London is very much connected to when we get international travel and tourism back up and running; when people commute again and return to offices, as well as what format offices reopen in. If you go to other parts of the country, the demand is slightly more stable and seasonal, because it tends to just be domestic residents working and commuting.
It certainly won’t be a quick fix, particularly with more supply coming to the rental market in London, although the prospect of a vaccine in 2021 may limit how drawn out the recovery period is.
Do you think the residential market will be affected by the second lockdown period?
We’re at the point where we’ve got to learn to live with this. The biggest thing for the residential market is how much the pandemic and lockdown changes the way we live and work, and I think there has been a bit of a reset, but I don’t believe the fundamentals of city centres will materially change.
We’re in a particularly strange place now, but it won’t last forever. I just think the pendulum swung too far, as it always does, and we had extreme pressure on the rental market in London because so many people wanted to live there. I don’t see us getting back to those levels, so people that are rushing into a massive commute outside of London could end up regretting it in two years’ time.
The key theme will be in flexibility and a shift in the dynamic of offices and city centres; what employers will require of employees and what offices will look like or become. However, young people will always want to be in city centres, even if they’re working flexibly – it just shifts what they want from where they live.
This is where new build will have an advantage, because it soaks up the first-choice demand from being a better-quality product. New build and high-quality will win out on poor-quality, second-hand rental supply, as long as investors and their operators don’t try and push the rent too high. Landlords are rent takers and while it might not necessarily fit with their business models, you need to price in line with demand.
Richard will be joining us to provide an analysis of the Private Rented Sector and Build to Rent at the Virtual Resi Investment and Build to Rent Conference on Tuesday 1st December 2020.