Amid uncertainty, the PRS market powers ahead

The housing market remained resilient after the EU referendum, but is now showing signs of moderation. The slowdown in house price inflation, mortgage approvals and transaction volumes has started to gather pace since the start of the year.

A further tempering in demand is indicated by balances for new buyer enquiries showing a decline in all three months of Q2, according to the July RICS UK Residential Market survey.

This highlights that incomes remain under pressure from rising inflation and heightened economic uncertainty. Despite the inference that the reduction in new instructions, caused by sellers being deterred by uncertainty and higher transaction costs, is offsetting weak demand, the supply/demand imbalance story in the housing market remains unchanged.

Fewer transactions and mortgage approvals are unwelcome for lawyers, agents, brokers and all those parties associated with moving home. The cooling market has not hampered the private rented sector, which continues to experience significant demand from occupiers.

Even rents in London are showing incremental growth as stamp duty levies make it more difficult for people to move home. However, the weight of capital in London is being driven by overseas buyers, with weakness in sterling boosting the attraction of diversifying away from their domestic market exposure.

With every quarter that passes, we move closer to an interest rate rise, albeit still some way off, forecast for 2019. Unemployment is at its lowest in 42 years, but inflation continues to outstrip wage growth. As it becomes more expensive for consumers, the low-return and inflationary environment also becomes challenging for investors searching for significant returns. However, consumer debt is creeping higher, showing that people are willing to spend despite higher inflation.

The undersupply of homes in the UK is unlikely to change soon

The question is whether there could be a storm ahead. It is amid such an uncertain environment that the defensive profile of residential property proves its mettle to investors, as there is always a need for housing and the huge undersupply of homes in the UK is unlikely to change soon.

Tight supply conditions have supported prices and prevented them falling more steeply than they would have in a prolonged period of uncertainty. The population is growing and urbanisation is increasing because people want to live, work and play in the same area. Build-to-rent (BTR) properties that meet a broad range of occupiers’ needs are preferred to standard homes.

Should there be any significant slowdown in the UK economy, among the first to adjust their business models will be housebuilders as they exercise caution in purchasing land for planning and in turn probably slow the rate of supply. Since letting is a faster process, ultimately BTR investors are motivated to build faster if there is an allocation for rental units - a more reliable and growing source of demand.

At a political level, the sector looks forward to engaging with the new housing minister, Alok Sharma, who faces some headwinds.

Tackling the housing crisis is a longstanding challenge but, in the wake of Grenfell, the safety of homes is of paramount importance. Gavin Barwell’s tenure was well received, but if Sharma can make it beyond the 17-and-a-half-month average tenure of his Conservative predecessors, there is the opportunity to make a positive impact in a sector that is integral to the health of the UK economy and significant to the everyday lives of us all.

Alex Greaves is head of residential investment at M&G Real Estate

Have your say

Sign in to make a comment on this story.

Sign In

Text size

Desktop Site | Mobile Site