Strong capital value growth was undoubtedly the key theme of 2014 and growth across all sectors was stronger than forecast at the beginning of the year, according to the spotlight report from Savills.
Growth could be slower in 2015 and the general election in May will definitely have some effect on sentiment, though in the agricultural and commercial sectors the firm expects the effects to be relatively muted.
In the residential markets the threat of a mansion tax, combined with the Mortgage Market Review introduced in 2014 could lead to a more sustained hiatus in capital value growth in 2015.
‘Generally we expect that the macroeconomic story for the UK will remain benign, with base rates remaining unchanged until early 2016, and the combination of low oil prices and recovering incomes giving a boost to the UK consumer,’ the report says.
‘The high returns that will be thrown off by all property sectors in the UK will continue to attract attention, and we expect that UK real estate will continue to deliver high returns in comparison to other asset classes,’ it explains.
‘This will mean that domestic and international demand for prime and good secondary assets will be strong, though we expect to see more focus on supply and demand fundamentals in 2015, rather than just the potential for yield shift,’ it adds.
As far as the residential outlook is concerned the report suggests that returns will be less driven by yield shift in 2015, with the best performance coming from understanding where local markets and sectors are in the rental cycle.
Following a year of strong mainstream house price growth in 2014 that ran well ahead of the economic recovery, Savills expects much more subdued price growth in 2015. This is particularly the case in London, which has now outperformed the rest of the UK for over nine years and where correspondingly, affordability is likely to look increasingly stretched as interest rates rise.
‘In addition, the mortgage market review is likely to restrict the amount which people are able to borrow. In turn, this is likely to restrict mortgaged buyers' ability to get on or trade up the housing ladder, thereby continuing to drive demand into the private rented sector and underpinning rental growth,’ the report says.
‘The ongoing debate around the taxation of high value property is likely to mean a relatively muted prime market in the run up to the election. While the mainstream market may receive a one off fillip from the stamp duty changes in the 2014 Autumn Statement, prime markets that are bearing an increased tax burden will also have to contend with political rhetoric regarding a potential mansion tax, even though the medium term prospects remain positive,’ the report adds.
In the agricultural perspective, Savills expects further growth in UK farm land values in 2015 but believes that the market will continue to be diverse and a clear understanding of local market conditions will be critical to both buyers and sellers to ensure realistic expectations.
‘There will be factors that are likely to dampen the rate of growth. Agricultural incomes are inversely correlated to economic growth and continued improvements in the economic climate will put some pressure on farm incomes and therefore capital and rental values across all sectors,’ the report says.
‘We are already seeing pressure on commodity prices and this is likely to continue into this year affecting farm profits and cash flows and may lead to increased supply at a local level,’ it adds.
It also points out that uncertainty will be a key market factor in 2015. During 2014 the Scottish Referendum and proposed Land Reforms had a significant effect on the Scottish market, both in terms of reduced activity and stifled value growth.
‘No doubt these political concerns in Scotland will continue into 2015, and across the UK the outcome of the general election will create additional market uncertainty. However, the fundamental factors driving UK farm land value growth remain,’ it explains.
It also points out that supply is historically low, the product is finite, competing land uses and diverse ownership motives all ensure value growth remains positive.
The report says that commercial markets in 2015 will still offer opportunities for both risk-averse and risk-embracing investors, although the stronger than expected bounce in capital values in 2014 will diminish.
It points out that in London offices, the low level of availability will continue to deliver strong rental growth. ‘We expect to see continuing strong demand from risk-averse international investors for the best quality stock, with the City of London still looking comparatively cheap, as are some edge of core West End submarkets that are still starved of new-build office stock,’ it says.
Regional office markets are still very early in the cycle, according to the report and this will continue to drive a steady growth in investor interest. ‘2014 saw the largest proportion of asset purchases outside London since 2006, and we expect this trend to continue,’ it explains.
