THE FUTURE OF RESIDENTIAL REAL ESTATE

December 2022 saw house prices contract by 1.5% and marked their fourth consecutive month of decline. With a long, drawn-out recession still a very real possibility and interest rates likely to remain high, 2023 could be a tough year for residential real estate in the UK.

Analysts are generally predicting that property prices will experience a 5% to 12% drop throughout the year. Despite this, dynamics are in place for strong rental growth. Investors are increasingly looking towards senior living and, Build to Rent (BTR), in an attempt at catering to both the country’s ageing population and the younger generations who have been priced out of the housing market. The effects of the looming recession are likely to be muted due to the prevalence of fixedrate mortgages and the increased regulatory requirements placed on mortgage providers since the 2008 financial crisis. On top of this, changes to Energy Performance Certificates

It makes sense for us to first look at the headline-grabbing prediction that house prices are expected to fall by an estimated 5% to 12% this year. Tightening policies implemented by the Bank of England have created a challenging environment for buyers. High interest rates are likely to price many first-time buyers out of the market, or at the very least make them consider postponing until rates are on the way back down. These issues are compounded by the fact that the government’s help-to-buy scheme is coming to an end and, with no effective policy alternative yet in place, many young people will once again find themselves trapped in the rental market. With Deutsche Bank now predicting rates will peak at 4.5% in May, it is reasonable to assume that we will see some further cooling in the housing market as mortgage rates move up in tandem. Even with the base rate currently at 3.5%, 670,000 UK households spend 70% of their income on their mortgages, making them vulnerable to defaulting on payments, and this will only worsen as rates rise higher. Some people will be forced to sell and this, combined with the fact that there will be fewer buyers in the market, is what is expected to drive prices down. rise, meaning BTR could well be a beneficiary of our current economic environment.

However, things are not quite as bad as they seem, as mortgages have become significantly less risky since the financial crisis in 2008. Thanks to the work of the Financial Policy Committee, virtually no new mortgages have loan-tovalue ratios of over 90% and they are seldom issued without proof of income and significant stress testing. This, along with the wider prevalence of fixed-rate mortgages, makes it unlikely that we will see a repeat of the 15% drop in house prices that we saw in 2008. Some analysts are predicting a drop as low as 2% and even the Office for Budget Responsibility, which by nature favours a conservative outlook, is predicting a return to house price growth by 2025.

You might assume that falling house prices would also lead to falling rents but, in this climate, it looks likely that the effect will be the opposite. As would-be buyers postpone their plans, they are often forced to look at the private rental sector where there is already a significant supply shortage. Landlords will also be hit by increasing borrowing costs and will likely look to pass these on to renters. This combination of factors has analysts predicting that rents will rise by 5% in 2023 and 4% in 2024, even as house prices start to fall. The combination of falling prices and rising rents could make the private rental sector look appealing to cash buyers or professional letting companies with money to spare.

The property market for seniors is also well worth keeping an eye on in the coming years. The supply of properties aimed at senior citizens has been increasing, with 7,500 dedicated units built in 2021, marking a 12% increase on the previous year.

The property market for seniors is also well worth keeping an eye on in the coming years. The supply of properties aimed at senior citizens has been increasing, with 7,500 dedicated units built in 2021, marking a 12% increase on the previous year. Yet, with the total number of people aged over 65 in the country projected to reach over 14m in the next five years, demand well outstrips supply. Knight Frank, a specialist in the real estate sector, expects the supply of housing for Integrated Retirement Communities (IRCs) that provide housing with care to increase by 46% over the next five years. This compares with an increase of only 4% in the age-restricted real estate sector over the same period. It appears that within this specific niche there is a substantial opportunity for investment. This will come as no surprise to anyone who has tried to find a space for a loved one in a care home or an assisted living facility in recent years and it is expected that there will be a shortage of 58,000 beds across the sector by 2035. The number of senior housing units per 1,000 of the population is expected to drop to 120 by 2025 from 137 in 2010 in real terms due to the increasingly ageing population. This indicates that despite the ongoing investment, the supply and demand imbalance isn’t going anywhere. As a result of this, senior real estate looks set to become an increasingly attractive proposition in the future.

This increased professionalisation of the private rental sector is a trend that is likely to continue. Individual landlords are exiting the market as an increasing regulatory burden and tax reform limit their potential income. With the average house price now more than seven times the average household income, many people find themselves unable to get on the property ladder. The decreasing number of private landlords and the emergence of ‘generation rent’ has led to the rapid expansion of a new ‘Build to Rent’ (BTR) sector that presents an interesting investment opportunity. The properties are high quality, designed exclusively for let on a long-term basis, and are professionally managed. 2022 saw a 22% year-on-year rise in the number of BTR homes that started construction and, by 2032, BTR properties are expected to represent about 8% of all rental homes built. With wouldbe buyers being pushed out of the property market, the demand for high-quality rental accommodation is likely to

Lastly, there is one piece of legislation currently making its way through parliament that could have a huge impact on residential real estate: the Minimum Energy Performance of Buildings Bill. Should it pass in its current form, it would require all properties to obtain an EPC rating of C or above by 2025. It is predicted that the average cost for landlords to upgrade their rating from an E to a C would be £4,700 and the burden of this increase has led to 20% of landlords openly admitting that they are considering exiting the market. The following reduction in available housing would drive rents even higher while providing opportunities for property management companies to extend their reach as they are more likely to be able to stomach the costs associated with the renovations. This bill could, therefore, contribute to the further professionalisation of the private rental sector.

So, even though house prices look set to take a step back over the next year or two, there are still plenty of long-term investment opportunities within residential real estate that we should be cognizant of. From population demographics to the historically high house-price-to-earnings ratio, many factors are forcing change in the sector. What connects them is the fundamental imbalance between the supply and demand of appropriate housing and, as long as this persists, there will be plenty of opportunities within the residential sector.