Savills Research | The Residential Property Focus May 2009
Long term investment
The future of residential investment
The housing market currently offers opportunities for cash-rich investors
but, as Jacqui Daly notes, investment models will need to evolve.
T
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is year marks the 20th 2008 has been 170%. Put into perspective nominal growth is less aggressive than it
anniversary of the creation of this means that during the past 50 years has been historically. This highlights the
Savills’ residential research prices have grown on average by 2.9% potential benefits of buying during 2009 for
department, a milestone reflecting per annum according to Nationwide in real those with the cash to do so.
the benefits of a long term investment. (inflation adjusted) terms each year and by The flip-side of such long term price
One of the biggest changes in the attitude 40% over each decade. growth is that, long before the credit crunch
towards home ownership during the past This growth has vastly increased the increased deposit requirements, it became
20 years has been an increasing tendency wealth of those home owners without a increasingly difficult for first-time buyers
for residential property to be considered as mortgage, who now account for 31% of to accumulate even the more modest
a wealth generator over the medium to long all UK households (compared with 26% deposit necessary to obtain a mortgage.
term, as well as a home. in 1989). This means that some 45% of This group’s only real alternative has been
Indeed, it is the cash rich investor privately owner-occupied stock is held the private rented sector which has grown
looking to buy back into the market at, or debt-free. The use of equity is now a significantly, particularly in the last decade.
near the bottom of price falls, who will start significant driver in the economics of The foundations for this expansion were
the process of recovery in this particular home ownership. laid by the Housing Act of 1988 and was
housing market cycle. triggered by the subsequent provision of
Our experience shows that for those Benefits of buying ‘buy-to-let’ finance.
who are able to invest at this stage, the By 2019, our long term forecasts suggest Now the big unanswered question is
financial returns are significant. On average that inflation-adjusted, 10-year house price what, or who, will take the place of the
the 10 year growth in the value of UK growth should be in line with the long term geared, buy-to-let investor, who has been
residential property between 1968 and 40% inflation-adjusted average, even if pivotal in providing rented accommodation
Projected Stages
2008 Stage 1 Stage 2
of Recovery
Barren Seeds Planted Watering
Low demand / Low demand / low Prospects of further
The recovery process as illustrated by high supply supply, mortgage price falls recede
the adjoining diagram includes many constrained market
stages and regional variations. The
beginning is characterised by investor
activity, firstly in prime central London
and some favoured locations beyond n Mortgage drought Activity Activity
the capital. n Fear of future n Overseas n Cash-rich owner
This is followed by a spread in cash price falls n Funds occupiers
rich homebuyer activity into the regional n All sectors affected n Private wealth
prime markets.
Stage 3 is perhaps the stage most
sensitive to the depth and length
of the current recession. It will only Areas for investment Areas for investment
commence when credit liquidity eases, n Prime central London n Regional prime markets
banks increase their loan to value ratios n South east uber-towns
and buyers have sufficient confidence
over their job security and earnings
to consider increasing their mortgage
commitments.
The final stage is reached when the
most depressed sectors show signs
of recovery and first-time buyers and
geared buy-to-let investors reappear.
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