General Election result removes uncertainty for UK residential property market
After years of “wait and see” for the UK housing market and the private rented sector, we see the outcome of the General Election as a trigger to remove some of the uncertainty. Alan Collett, Fund Manager of the TM home investor fund assesses the implications for the main drivers of investment returns:
1. Capital Growth / House price growth
The result of the General Election removes some of the uncertainty for house buyers and sellers. We expect transaction volumes to pick up and bring new impetus to the UK housing market.
Market sentiment and house price transactions. The UK housing market has since the Brexit referendum, like many other sectors, suffered from uncertainty relating to Brexit which led to a wait and see approach.
Over the past year, transaction volumes trailed some 15% below historic averages, which in turn impacted house price growth. The latest figures from ONS and LSL Acadata indicate house price growth over the past 12 months of +1.3% and -0.5% respectively. Whilst it will take years until a new relationship with the EU is formalised in detail, the fundamental binary question around Brexit has been answered. Furthermore, a No-Deal Brexit appears unlikely, and as such the BoE governor’s widely and often mis-quoted stress test from September 2018 which assumes a recession and housing crash scenario is something we can move on from.
Hearthstone now expects some of the pent-up demand to be coming into the market resulting in an uptick in transaction volumes in the New Year. We typically refer to the consensus house price forecast issued by the Treasury who track between 10 -15 independent forecasters. The latest consensus forecast from October indicated 2.1% house price growth for 2020, rising to between 2.7% and 3.7% in the next three years. The figures are revised monthly and we will update once we have the first post-election figures.
Housing policy. The Conservative manifesto proposed discounts for first time buyers. Under a new First Home scheme, homes could be sold at a 30% discount to local first-time buyers. The proposals are quite high level, so it remains to be seen how these will be implemented in practice, and how they interact with the Help-to-Buy scheme which has already been extended to 2023. Although this may facilitate demand it is hard to see how it will increase supply, which is at the heart of our housing problems.
In addition, proposals to add further tax for foreign buyers made it into the manifesto – however, many other factors drive foreign demand, including exchange rates (the pound has strengthened significantly since the summer which might dampen opportunistic demand), whilst political instability, such as in Hong Kong, has driven enquiries over recent months.
Beyond that, changes to buy-to-let investing remain unchanged and will be phased in by 2021 – this will further accelerate the trend in property ownership from amateur landlords to professional, institutional investors.
2. Rental Income
We expect rental value growth to continue as a result of high employment and continued wage inflation.
Employment. Most parties ran a campaign promising to significant investment into infrastructure, the NHS, policing and education. If these promises were implemented, it is fair to assume a short-term boost to UK GDP, and thereby employment, which is already at record high levels.
Wage inflation. Strong employment, coupled with an ageing population, a still increasing workforce participation rate and some restrictions on immigration, are likely to continue to put upward pressure on wages. Wage inflation in turn is a key driver for rental value growth.
3. Medium to long term fundamentals for UK private rented sector
Undersupply of good quality homes remains. Apologies, you might have heard me say this before but there is a chronic undersupply of good quality homes in the UK. The long-term fundamentals for the private rented sector remain robust and unchanged.
Better experience for tenants. The rented sector is still dominated by amateur landlords, and there is a need to improve standards for all renters in the UK, whether that is longer tenancies or better maintenance of properties. This is one of the few areas with cross-party consensus. Most of the proposed policies favour an institutional, professional approach to being a landlord, and as a result we welcome, and indeed already work by most of the ideas that have been discussed. Our tenants stay for an average of 2 years in their homes and we do everything that we can do retain them.
Need to improve environmental standards. The UK rented housing stock, on average, is old and not of good environmental standards. Again, one of the few areas of cross-party consensus was the need for subsidies and policies to enhance amongst others improved insulation and heating systems. The properties owned by Hearthstone already have significantly above average EPC ratings. We welcome these policies and will consider them as part of our ongoing ESG enhancement agenda. Improved standards offer better homes to our tenants, give an element of future proofing to our portfolio, and will contribute to an overall reduction of carbon emissions.
There are times in history where politics dominate economics, and we seem to be going through such a phase, but that doesn’t mean the underlying economics are on hold. Every now and then, it is worth reflecting on what is happening to fundamentals over a 10, 15, 20-year period.
Friday, December 13th, 2019
Alan Collett, Fund Manager
TM home investor fund, residential property by Hearthstone Investments
This communication is for investment professionals only and should not be distributed to or relied upon by retail clients. It is only intended for use in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Literature approved for use with retail clients is available on request, or can be downloaded from our website.
This document is not a prospectus, invitation to invest or advice. Investors may get back less than the amount invested. Information on past performance is not necessarily a guide to future performance. The value of investments in the fund can go down, and there can be no assurance that any appreciation in the value of investments will occur.
Residential property values are affected by factors such as interest rates, economic growth, fluctuations in property yields and tenant default. Property investments are relatively illiquid compared to bonds and equities, and can take a significant amount of time to trade.
Hearthstone Investments PLC is the parent company of the Hearthstone Investments Group. Regulated business is carried out by Hearthstone Asset Management Limited. Hearthstone Asset Management Limited is an appointed representative of Thesis Asset Management Limited which is authorised and regulated by the Financial Conduct Authority (114354)