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Investing in Property - UK - June 2009

Following more than a decade of rising property prices, the housing bubble burst in 2008 as the effects of the credit crunch deepened and the UK economy stalled. As the downturn has evolved into a recession, property transactions have slumped and new private building developments have been put on hold or shelved.

In the buy-to-let sector, there has been a sharp drop in the supply of finance, as lenders have ceased writing new business or withdrawn from the market, while those remaining have imposed stricter criteria. In the commercial sector, many property funds are under pressure from falling confidence and rising redemptions, forcing some to impose a temporary ban on withdrawals.

Real estate investment trusts (REITs) have also been at the sharp end of the downturn. Since being introduced to the UK in 2007, the sector has been hit by falling property prices, prompting the disposal of assets and a series of rights issues to bolster dwindling cash reserves. Yet not all is doom and gloom. While some are undoubtedly suffering, others are proving resilient and are even discovering new opportunities.

This report provides a comprehensive overview of the UK property investment market. It assesses how the main sectors of the market are faring in these testing times and assesses their future prospects. The report draws on a range of information sources, including Mintel’s consumer survey findings, and covers both direct and indirect forms of property investment.

Key issues explored

  • Restricted supply of mortgages – How is the credit crunch affecting availability of finance to landlords? What other pressures do buy-to-let investors face?

  • Forced/accidental landlords – There’s a growing trend for homeowners who cannot sell their property to rent it out instead. Then, there are people who have inherited property and newly cohabiting couples who each have their own property, allowing for one to be rented out. How have these trends impacted on the supply of rental property?

  • Commercial sector – What impact has the collapse of commercial property prices had on the market? What strategies are being employed to shore up balance sheets and return confidence to the sector?

  • Sentiment – Is there still demand for property investment? Has people’s faith in bricks and mortar been shaken by the downturn? Can confidence be rebuilt?

  • Outlook – Are we at or near the bottom of the market yet? Are there still opportunities to be had even in these difficult times?

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Table of contents

  1. Issues in the Market

      • Key issues explored
        • Market definitions
          • Abbreviations
          • Future Opportunities

            • Despite the downturn, property investment is still appealing to many…
              • …although appetite has waned over the past year or so
                • New property fund business will mainly come from virgin investors
                  • Falling house prices present an opportunity for some
                    • Property or pension?
                    • Market in Brief

                      • Current state of the buy-to-let market
                        • Buy-to-let outlook: Some positives as well as negatives
                          • Current state of the property fund market
                            • Property fund outlook: Finding opportunity in a crisis
                              • One in eight UK adults own some form of property investment
                                • Figure 1: Ownership of direct and indirect property investments, by types, March 2009
                              • Indirect property investors are a pragmatic bunch
                                • Collective investments perceived riskier than UK residential property
                                  • Consumers expect prices to fall further over the next 12 months…
                                    • Figure 2: Expectation of house price movement, March 2009
                                  • …but there are still potential buyers out there
                                    • Figure 3: Financial priorities over the next 12 months, March 2009
                                  • Buy-to-let has wide appeal
                                    • Most people think property is a good bet for the long term
                                      • Figure 4: Agreement with statements about buying and investing in property, March 2009
                                  • Economic and Investment Environment

                                    • Key points
                                      • Summary of the main macroeconomic indicators
                                        • Bank base rate slashed
                                          • Figure 5: Average annual changes in the bank base rate, CPI and RPI – UK, 2000-09
                                        • LIBOR and base rate gap narrows
                                          • Stockmarket turmoil – have we passed the bottom?
                                            • Figure 6: FTSE 100 and FTSE All-Share – daily index movements, April 2000-April 2009
                                          • Commercial property fund returns take a dive
                                            • Figure 7: Commercial property returns, by sector, 2003-08
                                          • Implication and opportunity
                                          • Housing and Rental Markets

                                            • Key points
                                              • Credit crunch slows housing activity…
                                                • Figure 8: Number of UK residential property transactions with a value of £40,000 upwards – seasonally adjusted, Q2 2005-Q1 2009
                                              • …leading to growth in accidental landlords
                                                • Sharp drop in house prices
                                                  • Figure 9: Annual house price growth in the UK – comprison of four sources, 2003-08 (Quarter 4)
                                                • A silver lining?
                                                  • Rental yields edging up?
                                                    • Figure 10: Average rental yields – England and Wales, May 2003-June 2008
                                                  • Geared investments offer better returns than cash buys
                                                    • Figure 11: Annual rates of return on buy-to-let investment – cash purchase, by region, Q1 2009
                                                    • Figure 12: Annual rates of return on buy-to-let investment – geared investment, by region, Q1 2009
                                                  • Most residential investment landlords are in it for the long haul
                                                    • Landlords must contend with increased paperwork
                                                    • Social Drivers – UK Rental Market

                                                      • Key points
                                                        • One in seven dwellings in England and Wales are privately rented
                                                          • Figure 13: Distribution of dwellings, by tenure – England and Wales, 1981-2008
                                                        • Buy-to-let finances two fifths of privately rented homes
                                                          • Changing social trends fuel demand for rented property
                                                            • Rise in one-person households
                                                              • Figure 14: Total number and average size of households in the UK, 1991-2014
                                                            • Recession could drive up the divorce rate
                                                              • Figure 15: Number of marriages and divorces – England and Wales, 1996-2006
                                                            • Students are a key target market for private landlords
                                                              • Figure 16: Number of students in Further and Higher Education – UK, 1970/71-2006/07
                                                            • Recent years have seen more people enter the UK than leave…
                                                              • Figure 17: International migration flows, 1975-2007
                                                            • …but is this about to change?
                                                              • Sharp drop in new private builds expected
                                                                • Figure 18: Number of permanent dwellings completed, by tenure – UK, 1990/91-2007/08
                                                            • Competitive Context

                                                              • Key points
                                                                • Rising house prices boosted personal wealth over 1999-2007 period
                                                                  • Figure 19: Net worth of the UK household sector, 1999-2007
                                                                • All change
                                                                  • Second homes
                                                                    • The allure of property…
                                                                      • …but cash is king
                                                                        • Figure 20: Preferred option for saving for the future, March 2009
                                                                      • Competition comes from within the property sector as well as from outside
                                                                        • Figure 21: Summary of the competitive environment for retail property investment, 2009
                                                                      • Returns on property versus other major asset classes
                                                                        • Figure 22: Total returns, by asset class, 2004-07
                                                                      • Implication and opportunity
                                                                      • Direct Investment: Strengths and Weaknesses

                                                                          • Figure 23: Buy-to-let mortgage market – SWOT analysis, 2009
                                                                      • Direct Investment: Buy-to-let Market Overview

                                                                        • Key points
                                                                          • The rise of buy-to-let
                                                                            • Credit crunch forces major market contraction
                                                                              • Many lenders have exited the market
                                                                                • Figure 24: Market share of the top buy-to-let mortgage lenders, by amounts outstanding, 2008
                                                                              • Market expansion slows
                                                                                • Figure 25: Number and value of buy-to-let mortgages outstanding, 2000-08 (year end)
                                                                              • New business levels fall
                                                                                • Figure 26: Number and value of new buy-to-let mortgage advances, 2000-08
                                                                              • Arrears and repossessions rise
                                                                                • Figure 27: Buy-to-let mortgages three or more months in arrears and with receiver of rent in place, 2007 and 2008
                                                                              • Outlook for 2009
                                                                                • Make way for the big boys
                                                                                  • Not all bad news
                                                                                  • Indirect Investment: Strengths and Weaknesses

                                                                                      • Figure 28: Indirect property investment market – SWOT analysis, 2009
                                                                                  • Indirect Investment: Property Funds Overview

                                                                                    • Key points
                                                                                      • Financial crisis damages confidence in property funds
                                                                                        • Figure 29: UK domiciled unit trust and OEIC funds under management – property versus whole market, 2004-08
                                                                                      • In 2008, more money flowed out of the sector than in
                                                                                        • Figure 30: Net sales of property unit trusts and OEICs, 2004-08
                                                                                      • Meeting demand for instant accessibility can be problematic
                                                                                        • Outlook for property funds
                                                                                          • REITs experience tough times
                                                                                            • Falling value of UK-based REITs
                                                                                              • Figure 31: Market capitalisation of UK-based REITs, July 2008 and May 2009
                                                                                            • Outlook for REITs
                                                                                            • The Consumer – Preferred Investment Approach

                                                                                              • Key points
                                                                                                • Survey background
                                                                                                  • Cash is best
                                                                                                      • Figure 32: Preferred option for saving for the future, by gender and socio-economic group, March 2009
                                                                                                    • Implication and opportunity
                                                                                                      • Over a third of 25-34-year-olds put their faith in property
                                                                                                        • Figure 33: Preferred option for saving for the future, by age, March 2009
                                                                                                      • Implication and opportunity
                                                                                                      • The Consumer – Asset Ownership

                                                                                                        • Key points
                                                                                                          • One in eight in the UK invest in property
                                                                                                              • Figure 34: Ownership of savings and investments, by gender, March 2009
                                                                                                            • Profile of a typical property investor
                                                                                                              • The results in detail
                                                                                                                • Most property investors invest directly
                                                                                                                  • Figure 35: Ownership of property investments, by gender and socio-economic group, March 2009
                                                                                                                • Implication and opportunity
                                                                                                                  • Over-55s represent the key target market for property funds
                                                                                                                    • Figure 36: Ownership of property investments, by age, March 2009
                                                                                                                  • Implication and opportunity
                                                                                                                    • Note
                                                                                                                    • The Consumer – Perception of Risk

                                                                                                                      • Key points
                                                                                                                        • More people think investing in property is ‘risky’ than ‘safe’
                                                                                                                            • Figure 37: Perceived level of risk associated with selected savings and investments over the medium to long term, March 2009
                                                                                                                          • Property investors get wake-up call
                                                                                                                            • AB, C2s and those aged 45-54 have the greatest faith in UK residential property
                                                                                                                              • Figure 38: Perceived level of risk associated with UK residential property over the medium to long term, by gender, age and socio-economic group, March 2009
                                                                                                                            • Four in five over-55s view overseas residential property as risky
                                                                                                                              • Figure 39: Perceived level of risk associated with overseas residential property over the medium to long term, by gender, age and socio-economic group, March 2009
                                                                                                                            • Commercial property gets riskier with age
                                                                                                                              • Figure 40: Perceived level of risk associated with commercial property over the medium to long term, by gender, age and socio-economic group, March 2009
                                                                                                                          • The Consumer – Investor Experiences

                                                                                                                            • Key points
                                                                                                                              • Property investors are down but not out
                                                                                                                                  • Figure 41: Agreement with statements about investing in property funds, March 2009
                                                                                                                                • Implication and opportunity
                                                                                                                                • The Consumer – House Price Predictions

                                                                                                                                  • Key points
                                                                                                                                    • Two thirds expect house prices to fall further over the coming year
                                                                                                                                        • Figure 42: Expectation of house price movement, March 2009
                                                                                                                                      • Implication and opportunity
                                                                                                                                        • Expectations are influenced by personal aspirations
                                                                                                                                          • Figure 43: Expectation of house price movement, by gender and age, March 2009
                                                                                                                                        • Implication and opportunity
                                                                                                                                          • Property investors are generally more bullish
                                                                                                                                            • Figure 44: Expectation of house price movement – total sample versus property investors, March 2009
                                                                                                                                        • The Consumer – Financial Priorities

                                                                                                                                          • Key points
                                                                                                                                            • Managing household expenses and repaying debts are people’s top priorities
                                                                                                                                                • Figure 45: Financial priorities over the next 12 months, March 2009
                                                                                                                                              • Subdued investment environment…
                                                                                                                                                • …and reduced housing activity
                                                                                                                                                  • Figure 46: Financial priorities relating to property over the next 12 months, 2008 and 2009
                                                                                                                                                • Implication and opportunity
                                                                                                                                                  • Men and women have slightly different financial concerns
                                                                                                                                                    • Figure 47: Financial priorities over the next 12 months, by gender, March 2009
                                                                                                                                                  • Priorities change with age
                                                                                                                                                    • Figure 48: Financial priorities over the next 12 months, by age, March 2009
                                                                                                                                                  • Implication and opportunity
                                                                                                                                                    • One in eight landlords expect to make further acquisitions
                                                                                                                                                      • Figure 49: Financial priorities over the next 12 months – total sample versus property investors, March 2009
                                                                                                                                                  • The Consumer – Attitudes towards Property Investing

                                                                                                                                                    • Key points
                                                                                                                                                      • Buying property is a good investment, say over half of all adults
                                                                                                                                                          • Figure 50: Agreement with statements about buying and investing in property, by gender, March 2009
                                                                                                                                                        • Implication and opportunity
                                                                                                                                                          • The over-55s have the greatest faith in property
                                                                                                                                                            • Figure 51: Agreement with statements about buying and investing in property, by age, March 2009
                                                                                                                                                          • Implication and opportunity
                                                                                                                                                            • 42% of direct investors prefer to invest in property than in a pension
                                                                                                                                                              • Figure 52: Agreement with statements about buying and investing in property – total sample versus property investors, March 2009
                                                                                                                                                            • Implication and opportunity
                                                                                                                                                            • The Consumer – Identifying Buy-to-let Targets

                                                                                                                                                              • Key points
                                                                                                                                                                • A third of adults are open to the possibility of buy-to-let
                                                                                                                                                                    • Figure 53: Agreement with statements about investing in buy-to-let, by gender, March 2009
                                                                                                                                                                  • Implication and opportunity
                                                                                                                                                                    • The younger age groups have higher concentrations of BTL prospects…
                                                                                                                                                                      • Figure 54: Agreement with statements about investing in buy-to-let, by age, March 2009
                                                                                                                                                                    • …as do those on the higher end of the socio-economic scale
                                                                                                                                                                      • Figure 55: Agreement with statements about investing in buy-to-let, by socio-economic group, March 2009
                                                                                                                                                                    • Further analysis
                                                                                                                                                                    • Appendix – Property Investor Profile

                                                                                                                                                                        • Figure 56: Demographic profile of property investors, March 2009

                                                                                                                                                                    Companies Covered

                                                                                                                                                                    • Abbey
                                                                                                                                                                    • Aegon UK
                                                                                                                                                                    • Aldi Stores Ltd (UK & Ireland)
                                                                                                                                                                    • Asda Group Ltd
                                                                                                                                                                    • Association of Residential Letting Agents
                                                                                                                                                                    • AXA UK plc
                                                                                                                                                                    • Bank of England
                                                                                                                                                                    • Bank of Ireland
                                                                                                                                                                    • Birmingham Midshires
                                                                                                                                                                    • Bradford & Bingley plc
                                                                                                                                                                    • British Bankers' Association (BBA)
                                                                                                                                                                    • British Chamber of Commerce
                                                                                                                                                                    • Capital Home Loans
                                                                                                                                                                    • Cheltenham & Gloucester plc
                                                                                                                                                                    • Clydesdale Bank
                                                                                                                                                                    • Co-operative Group
                                                                                                                                                                    • Council of Mortgage Lenders
                                                                                                                                                                    • Derwent London
                                                                                                                                                                    • Financial Services Authority (The)
                                                                                                                                                                    • Friends Provident plc
                                                                                                                                                                    • HBOS plc (Halifax Bank of Scotland)
                                                                                                                                                                    • HSBC Private Bank (UK) Limited
                                                                                                                                                                    • Investment Management Association
                                                                                                                                                                    • J. Sainsbury
                                                                                                                                                                    • Liberty International
                                                                                                                                                                    • Lidl (UK)
                                                                                                                                                                    • Lloyds Banking Group
                                                                                                                                                                    • Marks & Spencer
                                                                                                                                                                    • McKay Securities Group
                                                                                                                                                                    • Mortgage Express
                                                                                                                                                                    • National Savings & Investments
                                                                                                                                                                    • Nationwide Building Society
                                                                                                                                                                    • Northern Rock plc
                                                                                                                                                                    • Norwich Union
                                                                                                                                                                    • Office for National Statistics
                                                                                                                                                                    • Rugby Estates Investment Trust
                                                                                                                                                                    • Scottish Equitable
                                                                                                                                                                    • Slough Estates Group
                                                                                                                                                                    • Tesco Plc
                                                                                                                                                                    • The Mortgage Business
                                                                                                                                                                    • The Royal Institution of Chartered Surveyors
                                                                                                                                                                    • Town Centre Securities
                                                                                                                                                                    • UCB Home Loans
                                                                                                                                                                    • Waitrose
                                                                                                                                                                    • Warner Estate Holdings
                                                                                                                                                                    • Wm Morrison Supermarkets
                                                                                                                                                                    • Workspace Group

                                                                                                                                                                    Investing in Property - UK - June 2009

                                                                                                                                                                    US $2,940.64 (Excl.Tax)