UK Commercial and Residential Property Market Outlook
If you thought the only people still investing in property were those either making reality TV shows or starting a new life in Provence, think again. The UK commercial property market is currently the most dominant investment market in Europe, and it looks likely to stay that way for the foreseeable future at least.
That's the verdict of a new report published by property consultants DTZ, who say that the commercial market continues to attract core investors, with capital inflows reaching £69.5 billion in 2005 alone – a rise of £46.9 billion over the previous year.
As the Bank of England raised interest rates to 4.75% early in August, however, and then to 5% in November, a downturn in the residential market seemed to be on the cards. When it came, though, that downturn didn't last: although house prices dropped during the summer, and appeared to have stagnated, by the end of the year they were back on the rise. And while consumer spending in general has reduced, with economists and retailers alike expressing concern over how the high street will cope this Christmas, there are no such fears about the fate of the property market – or not yet, anyway.
Rising tax, ever-increasing fuel and utility bills, combined with record levels of personal debt and a creeping rise in unemployment means that we have less disposable income than ever before. But what does all of this mean for the UK property market? Not very much, according to the country's largest house builder. Persimmon Homes announced a 16% rise in half-year profits this August, and claimed to have seen "no tangible effect" from the quarter percent rise in interest rates the same month. In fact, executive chairman, John White said the rising costs of home ownership, and of life in general, aren't putting their buyers off.
"For the majority of our homebuyers, decisions to move are driven primarily by their family dynamics and, therefore, we expect this healthy market to be sustainable," he commented.
The second interest rate hike, in November, also appears to have had little impact on prices: in fact, according to Nationwide Building Society, UK house prices rose at their fastest pace so far in November, with the average house costing £172,185 – a rise of 1.4%. According to the Bank of England, the number of mortgage approvals that month was the highest it had been in three years – a further indication that although consumer confidence is low, the property market appears to be picking up after the summer slump.
Back in the summer, predictions were being made that house prices had peaked for the year. July saw a 1.6% drop in average prices, but it now seems apparent that this blip was caused by a mini boom in the South of England earlier in the year. Indeed, the Council of Mortgage Lenders' (CML) report on the housing market states:
"The housing market appears to have gained momentum since the summer despite the rise in interest rates in August. Demand for housing remains robust and the month-to-month changes in the various house price measures have picked up in recent months, pushing up annual rates towards 10%."
While this is good news for sellers, of course, it creates a gloomy outlook for buyers. "Rising house prices are not necessarily a good thing," says former Bank of England economist, Tom Vosa. "The risk is that at some stage the value of the housing stock falls precipitously because there are no buyers left."
The lack of buyers is certainly proving a problem in the first-time buyer market, where prospective home owners are being forced to enter into property partnerships with strangers purely to get a foot on the property ladder. With London prices in particular far more than a single salary can support, such is the severity of the problem that websites such as sharedspaces.co.uk have sprung up to help first time buyers find "property partners" or "mortgage mates".
The idea behind such schemes is a simple one: it takes most first-time buyers around five years to save up the deposit for a house, and even then, their single salary may not be enough to get them a mortgage. By teaming up with a mortgage mate, such buyers can increase their spending power and finally own a home of their own. For many, it's their last chance of becoming a home owner, and even this month's decreasing prices doesn't make it any more likely that they'll be able to go it alone. The increasing popularity of buy to let mortgages – for those who can afford them – also means that the rental market benefits as first time buyers are prevented from making a purchase.
As house prices rise, so too does the number of people holding money in property. It's estimated that Britain's millionaire population will reach 1.7 million by 2020 – more than four times the current figure. A large number of those new millionaires are likely to hold their wealth in property, with the rising prices leading to greater rewards. And although the housing market wavered this summer, property experts are still predicting a 71% increase over the next 15 years.
With mortgage repayments accounting for less and less of our disposable income, and growing returns from shares and investments, the 376,000 millionaires currently resident in Great Britain are expected to rise to 1.7 million by 2020. That number is down from the 1.9 million originally predicted two years ago, however, with slower than expected growth in the property market causing the number to be revised downwards.
Commercial insurance outlook 2007 - the impact of regulation, climate change, terrorism & war
The 2006 summer heatwave and terror alert have increased attention on these risks and the outlook for the commercial insurance markets as businesses strive to ensure continuity.
Climate change
During 2004 and 2005 the hurricane season caused $75 billion in insured losses – including $45 billion from Hurricane Katrina alone. It is thought that rising sea temperatures are increasing the chance of hurricanes – while other effects attributed to global warming include floods, drought, wildfires and other extreme weather events around the world.
A report into the insurance industry from Ceres, a US coalition of investors, environmental groups and other public interest organisations, has highlighted 190 innovative products and services available or in the pipeline from insurance providers in 16 countries – many aiming to both reduce financial losses and greenhouse gas emissions.
Dr Evan Mills, co-author of the report said: "The insurance sector is poised to make a major contribution to long-term national and international efforts to curb the growth of greenhouse gas emissions, while helping to fortify society against the near term impacts of climate change.
"Last year's hurricanes were a real wake up call for the industry and many US insurers are creating programmes to help businesses minimise future losses. Many of these strategies represent new profit centres for insurers, rather than simply symbolic and charitable activities."
Lloyd's has also moved to take on the business threat of climate change, after admitting the insurance industry has ignored the threat.
A new report – entitled Climate Change, Adapt or Bust - published this year by Lloyd's warns that insurers must act to understand and actively manage risks from emerging threats such as greenhouse gases and rising sea levels.
Rolf Tolle, Lloyd's director for franchise performance, said at the report's launch: "Although it's almost two decades since the UN recognised that climate change was a catastrophic threat to earth, it’s clear that the insurance industry has not taken catastrophe trends seriously enough.
"Today's risk environment is changing and evolving – more rapidly than ever before. So at Lloyd's, understanding and anticipating major risk trends is at the heart of all we do."
The report found that recent natural disasters have revealed the inadequacy of capital and pricing models. It advised that catastrophe models should be updated regularly to keep pace with the latest scientific evidence.
It also suggested that underwriting should factor in climate change scenarios - rather than simply basing decisions on historical records – especially with extreme windstorm seasons set to continue.
Jonathan French, of life insurance, pensions and savings at the Assocation of British Insurers (ABI), said: "Over the long-term this is something which could have a big impact, as climate change potentially brings on more and more extreme weather events.
"Then we could be seeing in the global insurance market the potential for greater and more frequent claims."
He added: "Immediate or short-term impact is pretty negligible, there are potential associated issues such as flooding."
Graeme Trudgill, technical services at the British Insurance Brokers' Association (BIBA), concurred, but also said the government should step in and play a role.
He said: "Climate change is likely to have implications for insurance cover in the future.
"If there are an increased number of claims due to flooding or subsidence, for example, then clearly insurers will wish to take some underwriting action which could result in increased premiums or terms, or ultimately a withdrawal of cover entirely.
"The government must assist by continuing to invest in flood defences."
Terrorism & war
In the UK the threat of terrorism to the insurance market is somewhat mitigated by Pool Re, the mutual reinsurance company set up by the insurance industry with government backing in 1993 to cover losses from terrorism attacks.
Pool Re allows insurers of commercial property and earnings in the UK to reinsure their terrorist liabilities. With potential looses from terrorist attacks being high this allows companies to take out policies and for insurance companies to be able to cover losses, with the Treasury acting as reinsurer of the last resort.
However, terrorism cover is not a standard part of commercial property cover so firms have to specifically ask for it from insurers.
Commercial property terrorism cover normally covers risks such as biological, chemical, radiological and nuclear contamination, and the consequential business interruption losses. However, it does not include e-risks or losses due to hoaxes.
Since September 11th and the July tube bombing last year the interest in terrorism cover has grown substantially as firms try to cover themselves from losses. However, smaller firms are generally ignoring the threat.
Graeme Trudgill, of BIBA, said: "Businesses need to make special arrangements to include cover for terrorism under their insurance policies.
"Whilst many large corporate businesses will recognise the importance, perhaps due to their location, or to retain the confidence of their stakeholders, there is evidence which suggests that few small businesses carry any cover for terrorism."
Impact of FSA regulation
In January 2005 the Financial Services Authority (FSA) took over regulation of the insurance market from the General Insurance Standards Council. The impact was wide ranging as sellers of products from motor insurance to payment protection insurance (PPI) for credit cards and all companies selling or advising on the sale of insurance had to be authorised by the FSA.
Trading without authority also became a criminal offence with FSA given the power to close businesses, fine executives or in extreme cases impose jail sentences.
Around 40,000 firms became liable to the FSA rules.
A study by Datamonitor earlier this year found 70 per cent of brokers said that FSA regulation has had a considerable or very considerable affect on their business.
Steve White, BIBA head of compliance and training, said: "For most BIBA members regulation was not new at all. But the weight of FSA regulation caused a lot of head scratching."
Furthermore, research by Lloyd's and BIBA released in August found almost 90 per cent of brokers questioned said that they were actively addressing increased regulation.
The possible penalties for those breaking FSA rules can also be tough and the FSA has not been afraid of using its powers. This month the body banned the sole director of one firm from conducting any further regulated business after finding him not fit and proper to work in the general insurance industry.
The FSA has also taken up an active role in the finding breaches of insurance rules with a mystery shopper programme
Mr White did, however, recognise the benefits, from FSA regulation.
He said: "Long-term benefits are firms will become fitter, keener and leaner."
For consumers, he explained, benefits came as they now have more information up front to help them make decisions and compare products, and also they have greater levels of protection when things go wrong.
The ABI's Jonathan French explained he hoped the burden of FSA regulation could be reduced for the industry.
He said: "We have been working with the FSA on ways of moving to a more principle-based regulatory regime – the insurance industry operates within the environment set through legislation and regulation but there's been a sort of feeling in some areas the regulation could be less stringent and the FSA are making some big strides on this and we hope over time the regulatory burden in general is something that is going to be reduced."
Commercial insurance cycle - harder market in prospect?
A Lloyd's and BIBA study found more than 80 per cent of brokers believe that maintaining profit throughout the insurance cycle is still the greatest challenge for the insurance industry on the whole.
Unexpected events such as Katrina make predicting the cycle even more complex.
Graeme Trudgill of BIBA explained that nothing much can be done to hold back cycles in the market.
He said: "It's been going since the Ark so is unlikely to stop – cycles may be different in length or have different levels of peaks and troughs though.
"Competition, regulation, new law, international events like 9/11, hurricanes, the global economy, the UK economy, new governments, collapse of a major player, new entrants – so many things can start a cycle – which is why there will always be one."
Julian James, director of Worldwide Markets at Lloyd's, said: "This research gives a clear indication that, to be successful, brokers need to tackle the challenges of changing distribution trends and embrace the opportunities they present.
"It also shows, quite rightly, that maintaining profitability throughout the insurance cycle remains a key industry challenge."
Eric Galbraith, BIBA chief executive, added: "The broking and intermediary channel is responsive to change, recognises the challenges and opportunities that exist and continues to be innovative. The impact of the market cycle on intermediaries and their customers, consolidation and other changes in distribution, regulation and technology all provide continuous challenges and opportunities."
However, a Datamonitor study into the future of the UK insurance market found that the underwriting cycle will be less volatile.
It predicts improvements in premium income for many lines in 2007 and while the current cycle seems to be affecting commercial lines particularly, nest year is expected to be the first year of significant premium income growth for many lines in the commercial and personal markets.
The report stated: "The volatility of the underwriting cycle has been reduced by the level of consolidation in the market, shareholder pressure and better technical pricing models also play a role. The less severe soft cycle will improve profit margins for insurers."
Distribution: Acquisitions & mergers, networks & online opportunities
For the insurance market consolidation is a key theme with acquisitions high on the list of many firm's priority.
A Datamonitor survey earlier this year found half of the brokers polled say that they are either definitely or maybe planning on acquiring other brokers in the next 12 to18 months.
However, only 1.6 per cent of brokers said they planned to join a broker network in the next year. Datamonitor claims this illustrates the extent to which broker networks have lost their appeal.
BIBA's Graeme Trudgill said: "This is one of the busiest ever times for broker acquisitions and mergers the industry has ever seen. With the increased costs and pressures brought along by FSA Regulation brokers are pooling resources and looking to increase in size."
He added that insurers were also looking to get bigger and be major players in not just the UK market but abroad too.
"Much is going on behind the scenes and takeovers like the failed Aviva-Prudential deal are constantly being rumoured," he said
Mr Trudgill went on to explain that broker network popularity peaked a few years ago.
"There are fewer new entrants now as the established players consolidate," he said.
Outlook for 2007
The outlook for 2007 in the commercial property market now seems to be down on previous expectations.
F&C Property Asset Management predicts that single digit returns are likely next year – after the good returns seen in 2006.
The Quarterly Investment Outlook states: "The UK property market continues to perform well with all property total returns remaining above 20 per cent per annum. Investment activity continues to be strong with institutions, overseas investors and private individuals all net buyers of property."
However, the report explains, the weight of the money invested in the sector led to a fall in yields across all sectors.
It added: "Quality stock remains in short supply and high prices are being obtained for prime property but there are signs that buyers are becoming more selective. Offices, especially in central London, have continued to outperform while retail has slipped to third place behind industrials."
In the coming year the office sector, buoyed by rental growth, is expected to outperform the whole sector.
Generally, the possibility for "high teen" performance is possible but "with yields now so low, the scope for further yield compression is limited, especially if interest rates move further upwards", F&C added.
It is predicted that the coming year will see more sustainable rates of total return, driven largely by income return and if Real Estate Investment Trusts (REITs) are successfully launched in 2007 there will be further potential for growth.
Standard Life Investment's Select Property Fund outlook for the coming year is encouraging performance globally – although the fund managers are reducing the exposure to the UK commercial property market.
This is being put down to high levels of return enjoyed over the last three years tailing off, following the market cycle.
Research prepared for Stride Limited by Adfero
The future of Home Information Packs
Since it was announced in November 2003 that Home Information Packs (HIPs) would be introduced onto the housing market in July 2007, their progression towards implementation has been subject to much scrutiny. For the Labour government that introduced them, the packs would cure many of the ills experienced in the housing market. The main thrust of implementing the packs is to make sure that the selling of properties has as much transparency as possible. Expected to cost between £650 and £1,000, they will make it mandatory for Britons selling their home (hence the fact they have also been given the name seller's packs) to compile a comprehensive dossier of information on the property. The government believed that the packs would lead to major savings being made by property purchasers losing up to £1 million each day on valuations, legal advice and property purchases, only to be gazumped. But how have the packs been taken to by industry and how are expected to alter the property landscape?
Many figures within the industry have questioned the benefit of Hips from the outset. Rather than take the stress out of the homebuying process, various estate agents have speculated that the implementation of the packs will simply delay property sales. Early in 2006, Philip Davies, chief executive of Linden Homes, said the market would be "strangled" in the process. The National Association of Estate Agents (NAEA) concurred with the view, suggesting that the market would atrophy because 'impulse sellers' would be deterred from their selling their properties. Peter Bolton King, chief executive of the NAEA, said this was because the level playing field would be removed, "allowing other people who have already got their pack on the market to jump in and make an offer".
Unsurprisingly the Association of Home Information Pack Providers (AHIPP) has regularly extolled the virtues of the packs. Contrary to the notion that they would stymie the market, Mike Ockenden, director general of the organisation, stated that buyers would "embrace" the packs because they would save them the trouble of having to commission their own surveys. But what is the homebuyer to make of Hips and how will they affect the market for consumers?
Originally, the packs were supposed to contain parts which the home seller would be obliged to bring together. These include documents such as warranties and guarantees, an Energy Performance Certificate (outlining a property's energy consumption bill) and a Home Condition Report, which would gauge the general condition of a property. However, earlier this year, it was announced that the report would be postponed. According to many housing professionals, this would make the principal objective of Hips completely redundant, with the government having predicted a far more transparent process. Louise Cumming, head of mortgages at the group, also said that because part of the packs was due to be compulsory and part voluntary, even greater confusion had been caused.
The government's u-turn caused ripples of discontent within the industry. More than two thirds of mortgage brokers suggested that the plan to introduce Hips should be dropped, research from UCB Home Loans revealed. Almost three quarters of mortgage brokers felt that a purchaser would go ahead and commission their survey in any case, a statistic which would seem to render the process largely irrelevant.
In recent weeks though, the government has been rallying around the implementation of Hips. At a recent conference, Yvette Cooper, minister for housing and planning, gave a firm suggestion that the Hips would have a full roll-out by their June deadline and that the Home Condition Report (HCR) elements of the pack would also be implemented.
And, despite the Council of Mortgage Lenders having recently described Hips as a "costly indulgence" and opining that it did not think that the dry run would be a robust test of the new arrangements, the strongest supporters of the packs continue to staunchly defend them.
This week, Mike Ockenden of AHIPP, said that he looked forward to the implementation of the packs and that the forthcoming dry run would show that Hips "reduce the stress associated with buying and selling homes by reducing the number of failed transactions and providing certainty in the process". Home buyers and sellers can but wait and see.
Sustainable property development in the South East
Thousands of Londoners are flocking to the South East in search of a better quality of life. But is the South East able to sustain them?
EVERY year, hundreds of people flock to London – and cities like it – in search of wealth, career advancement, or sometimes just the excellent social and cultural opportunities the big city has to offer. At the same time, however, there's a similar movement going on in the opposite direction, with thousands more people heading out of the city, looking for a better quality of life. For many of those movers, the South East of England provides the perfect destination for a great escape. Close enough to London to make commuting possible, but far enough away to make the stresses and strains of city life seem like a distant memory, the South East has it all: a comparatively mild climate, a buoyant economy and all the fresh air and wide open spaces that a long-time city dweller could ever need.
Dubbed "Greenshifters" for their desire to leave the smog of the city behind and start a new life in the country, these new inhabitants of the South East are keenly aware of the benefits of their chosen environment. Ironically, however, their very presence there could be placing that environment at risk.
In the towns and villages of the South East, hosepipe bans have become as much a part of summer as Wimbledon, ice cream, and trips to the seaside. While lack of rainfall would normally be seen as cause for celebration, however, falling water tables and the resulting shortages are anything but. Combine the shortage of water and the increasing demand for houses, and we have a ticking time bomb which is set to explode unless a solution to the sustainable housing problem is found – and fast.
According to the Office of National Statistics, around 113,400 people quit London for good in 2003 alone, with a good number choosing the South East as their relocation destination of choice. This influx of newcomers has pushed up property prices in the area, making it that bit more difficult for native South Easterners to get a foothold on the property ladder, and although properties in the South are still significantly lower than in London, the gap is getting smaller as the population increases.
To help meet the growing demand for property, the government has now revealed plans to build over half a million new homes in the area over the next twenty years, with much of the new development taking place in Ashford and Milton Keynes. According to South East County Leaders Chairman, Keith Mitchell, however, those homes could be left without fresh water unless changes to the area's infrastructure are made.
"Without more investment in water supply and sewage treatment," he commented, "millions of families living in the South East risk regular hosepipe bans and severe water shortages."
Hosepipe bans which used to cover only the driest months of the summer are now in effect all the year round in some parts of Kent and Sussex, and the Environment Agency is now so concerned about the situation that it is calling for five new reservoirs to be created in the area in the next five years. The South East's existing reservoirs are currently only around 40% full, and as summer hots up, those levels could fall still further. If an additional 200,000 households start drawing on that rapidly dwindling water supply, there are fears that the current situation could turn into a fully-fledged crisis.
The area's water troubles don't end there, though. In fact, far from having too little water, the proposed new homes may well end up with more water than they bargained for, if rising sea levels cause the area to flood – an eventuality which insurers are already preparing for.
The threat of flood is a very real one, with many of the proposed new homes set to be built on an area already prone to flooding. Unless strict flood-prevention measures are taken, the properties may be uninsurable, warns the Association of British Insurers (ABI), leaving home owners at risk of losing everything to flood.
The ABI has already estimated that, should the new developments go ahead as planned, flood damage to the properties would be likely to cost the insurance industry something in the region of £56 million per year – an unacceptable risk. "The premiums would either be so high that people could not afford to pay them, or the industry might think the risk was unacceptable at any premium," says Jane Milne, head of household and property for the organisation. Bad news for home owners and insurers alike.
The root of the problem lies in the Thames Gateway, where flood defenses for Thames tributaries are in poor condition. This, combined with the climate changes which have seen sea levels rise, could turn the area of England with the lowest annual rainfall into the area with the highest chance of flooding. So what’s the answer?
"Insurers want to offer insurance to as many homeowners as possible," comments the ABI's Peter Downer. "With increasing demand for new homes, pressure on available land and the impact of climate change we must ensure when planning new developments that adequate measures to manage the flood risk are incorporated. We also need to see flood resilience built into new properties. This means that a high standard of protection remains in place over the life of the development, and also looking at ways to reduce the impact of flooding.”
The ABI and Environment Agency continue to try to work with the government to ensure these measures are put in place in the South East. Meanwhile, home owners who live in an area where there's a high risk of flood can do their bit to improve the resilience of their property to flood damage. Practical measures to protect against flood include replacing wood flooring with concrete or tile, replacing MDF kitchen and bathroom fixtures with plastic ones, and moving service meters, boilers and electrical plug points above the anticipated flood levels. Download more detailed advice on flood resilient homes from the ABI website here.
