Download rising to the challenge

RISING TO THE
CHALLENGE
Scotland faces an enormous challenge to build the
quantum of homes the growing population needs.
Government support is needed, including new creative,
innovative and more direct initiatives.
UK Research, February 2016
March 2014
Scotland
Residential Forecasts
jll.co.uk/residential
jll.co.uk/residential
SCOTLAND RESIDENTIAL FORECASTS
2
OUR VIEW
RISING TO THE CHALLENGE
Scotland is not building enough homes and latest figures suggest development
volumes are plateauing at best. Private Rented Community (PRC) development
is beginning to gain traction in Scotland’s main cities but any meaningful
contribution to greater supply is some way off.
Supply slowdown worries
The economic backdrop and mediumterm outlook for Scotland is looking
far more positive than in recent years.
But with this expansion come issues
which will need to be addressed if
Scotland is to reach its full potential.
A significant concern for Scotland
is that annual housing starts and
completions have not increased
sufficiently in recent years, raising
questions about whether the Scottish
Government’s recommended housing
delivery target can be met.
In the year to Q2 2015 a total of
15,260 homes were completed, 11,550
of which were private. More worrying
is that both totals were marginally
below the figures from a year earlier.
Funding issues
The funding associated with the Help
to Buy scheme has been useful, but the
fact that funds ran out very quickly
and have been insufficient to elevate
the aggregate development numbers
tell their own story. Both homebuyers
and housebuilders responded positively
to the Help to Buy scheme, but the
mechanics have left a market vacuum
post-event.
How greater housebuilding will be
attained is a central issue for the
Scottish Government in the
medium-term.
JLL RESIDENTIAL RESEARCH
NEIL CHEGWIDDEN
The new funding arrangement,
announced in January 2016, has a
ceiling price per property of £230,000
with the overall budget set at £80m
for 2016/17. These decrease over the
next three years to £175,000 and £50m
respectively. Notably, the Scottish
Government is trying to encourage
smaller builders by incrementally
increasing their share of the budget
allocation. However, given recent
experience, there must be a question
mark over whether they will utilise the
entirety of this additional funding.
Overall, the Government has pumped
£500m of support into Scottish
housebuilding (all tenures) but the
latest housebuilding totals are notably
below the five year average to 2007/8 of
21,170 homes a year, the Government’s
current recommended target of 23,000
a year and the previous target of
36,000 homes a year.
Positive outlook
The Land and Buildings Transaction
Tax (LBTT) reforms over the past
couple of years, including the 3%
additional homes transaction tax,
coupled with the loss of higher rate tax
relief on buy to let mortgage payments,
will impact the private investor market
over the next couple of years.
The extent of the impact on rental
markets is uncertain but the next
few years are almost certain to
witness the embryonic start of PRC
development in Scotland’s key cities.
Development activity will begin to
rise, albeit modestly and tentatively,
but this will lead to even greater
competition and pressure between
demand and available supply in both
the sales and the lettings markets in
Edinburgh and Glasgow, as well as
throughout national housing markets.
SCOTLAND RESIDENTIAL FORECASTS
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Join the discussion on twitter @NeilChegwidden / @Adam_Challis / @JLLUKResi / @JLLScotland
3
IN THIS ISSUE
PAGE NO.
04
STABLE ECONOMIC BASE
The Scottish economy looks set for a steady but
unspectacular expansion in the medium-term.
2.0%pa
PAGE NO.
06
PAGE NO.
10
PAGE NO.
14
GDP growth
2015-2020
EDINBURGH PROSPERING
The PRC sector will get underway in 2016,
but more development is needed of all tenures.
5.0%
rent uplift
forecast for 2016
4.5%
rent increase
predicted in 2016
GLASGOW’S RAISED PROFILE
Competition in Glasgow’s residential land
market bodes well for the future and reaffirms
the city’s appeal.
UK ECONOMY & HOUSING
BACKDROP
Several factors will positively impact
national housing markets, but constantly
changing Government regulation is
presenting challenges for many in the
residential world.
THE FINAL WORD
Jason Hogg, JLL Residential, Scotland
ruminates
”2016 will be a year of challenging
questions rather than unbridled
forward momentum.”
PAGE NO.
27
SCOTLAND RESIDENTIAL FORECASTS
4
STEADY SCOTTISH
ECONOMIC GROWTH AHEAD
The Scottish economy is set for a prosperous and steady five years. GDP
growth is forecast to expand by 2.0% pa while employment gains will be led
by the financial & business services sectors and the transport, communications
and construction sectors. The number of households is also projected to rise
and this will present issues for Government in terms of housing.
Steady expansion predicted
Employment gains
More households in cities
Scotland’s economy is expected to
expand strongly over the next five
years, led admirably by the financial
& business services sector. However,
the oil and gas sectors are presently
facing strong headwinds from
international markets and global
political influences and are therefore
a risk to the otherwise stable outlook.
Scottish employment is forecast to
increase by 0.7% or 18,000 people
during the 2016-2020 period.
The number of households in Scotland
is forecast to rise by approximately
74,000 in the five years to 2020, almost
15,000 extra households each year.
The economy in Scotland is forecast
to increase by 2.0% pa during the
next five years with the financial &
business services sector projected to
grow by 2.8% pa during this time.
The economy in Edinburgh will
grow more strongly compared with
the rest of the country, expanding by
2.4% pa during the five years to 2020
while Glasgow is also set to outpace
Scotland, increasing by 2.2% pa during
the same period.
There are expected to be 30,000 jobs
created in the financial & business
services sector, a 6.2% increase
during this time and a further 18,000
new jobs, a 5.8% rise, in the transport,
communications and construction
sectors.
However, these job gains are forecast
to be off-set to some extent by
contractions of 3.4% and 6.3% in the
public sector and the manufacturing &
utility sectors respectively.
In Edinburgh, total employment is
forecast to increase by 3.6% during the
next five years while the number of jobs
in Glasgow is expected to rise by 2.4%,
both well above the Scotland average.
There are projected to be an additional
15,100 households in Edinburgh by
2020 and a further 10,400 in Glasgow.
Together, these two cities account for a
highly significant 34.4% of the increase
in Scotland.
Given the household expansion
projections, for Edinburgh and
Glasgow in particular, but also for
Scotland as a whole, a real challenge
for the country is how to deliver the
additional housing required.
Although household projections
predict the need for an additional
15,000 homes a year across Scotland
as a whole, the Commission on
Housing & Wellbeing recommend
that 23,000 homes a year are built
until 2020. Their estimate takes into
account demolitions and catering
for the backlog from recent years.
Presently, only around 15,000 homes
are being completed each year.
EMPLOYMENT PROSPECTS
Scotland total employment
2016
TOTAL
(000s)
1
19%
6
30%
13%
22%
4%
3
4
Financial &
1
business services
477
Transport, communications
2
& construction
308
3
Retail & accommodation
546
+7
4 Other
107
+7
5 Manufacturing
298
6 Public sector
736
+30
+18
2
12%
5
2016-2020
CHANGE
(000s)
TOTAL
Source: JLL, Oxford Economics
-19
-25
+18
2,473
ECONOMIC OUTLOOK PROMISING
HOUSEHOLD EXPANSION
GDP growth Scotland (% pa)
Expected change in number of households pa 2016-2020
74,000
2.1%
2.0%
2.0%
1.9%
3,000
2,100
LAST 20
YEARS
LAST 5
YEARS
Source: JLL, Oxford Economics
2016
2017
2020
SCOTLAND
Source: JLL, NRS
EDINBURGH
GLASGOW
SCOTLAND RESIDENTIAL FORECASTS
CITY CENTRE DEVELOPMENT
EDINBURGH
6
Where and how to build enough homes to house the Scottish capital’s
growing population is the key challenge for the city. The short-term
development pipeline is looking worryingly sparse and with a number of
developments now being earmarked for the PRC sector, Edinburgh is in
danger of missing out on its increasingly international appeal.
Development market
The development pipeline in Edinburgh
continues to be influenced by planning
policy as well as market forces. The
City of Edinburgh Council retains its
support for the redevelopment of the
city’s Waterfront area in Leith and
Granton as the solution to providing
an effective housing land supply in
preference to opening up greenfield
locations around Edinburgh’s bypass.
This strategy continues to come under
threat as developers have successfully
challenged the effectiveness of the
land supply at the Waterfront which
has seen less than 200 new build
apartments completed since 2008.
However, in certain locations within
Leith, we can see the tide turning as
Cala Homes have demonstrated with
the successful sale of their townhouse
development at Ocean Drive.
However, overall, and despite the
aforementioned residential schemes
there has been very limited new
development activity within Edinburgh
in recent years. There are various
reasons behind this.
The first is competition from alternative
uses, particularly the student
accommodation sector. Student schemes
can often offer a greater land value as
they are able to deliver a higher-density
development. They also do not have
to comply with more rigid design and
size guidelines, do not have to provide
car parking or affordable housing
nor do they have the same section 75
requirements in terms of education.
The other key reason is that residential
developers are generally reluctant to
get involved in complex or bespoke
schemes, especially those with long
construction periods.
The net effect of this lack of activity
is that the city centre pipeline for the
next few years is very sparse. The
current six year pipeline contains
1,400 units (not including smaller
townhouse conversions) of which only
approximately 500 are projected to be
for private sale, with the remainder
being for affordable or Private Rented
Community (PRC) use.
Out of this supply approximately half of
the private new build accommodation
for sale is made up of the St James’s
Quarter project which is a large retailled mixed use scheme which is not due
for completion until 2020.
The other large city centre development
site is Fountainbridge, to the south of
Haymarket, which was identified by
the Council for residential development
with capacity for around 800
residential units. The two landowners
involved in this location, EDI (the
Council Development Company) and
Grosvenor Developments, have taken
the decision to pursue PRC rather than
private sale on these sites.
EDI are close to concluding a deal
with a PRC developer/operator while
Grosvenor has recently secured
planning consent for a purpose built
PRC development.
However, the impact of this overall lack
of supply is clearly putting pressure on
pricing. The last phase of Quartermile
was sold off-plan at an average price of
£475 psf.
Other peripheral city sites, such as
Annandale Street and Brunswick
Road, are now comfortably achieving
pricing around £350 psf with pricing
throughout the city ranging between
£270 and £500 psf.
EDINBURGH CITY CENTRE
SALES MARKET
RENTAL MARKET
£157k
£257k
1 bed
2 bed
£650
£855
pcm
1 bed
pcm
2 bed
AVERAGE
AVERAGE
PRIME
PRIME
£227k
£332k
1 bed
2 bed
PRICE GROWTH
£1,025
£1,425
pcm
1 bed
pcm
2 bed
RENTAL GROWTH
2013
4.4%
2013
6.5%
2014
6.1%
2014
8.1%
2015
3.5%
2015
6.3%
Source: JLL
SCOTLAND RESIDENTIAL FORECASTS
SALES, LETTINGS & OUTLOOK
EDINBURGH
8
Sales market
Rental market
The city centre residential sales
market is extremely buoyant at present
with demand outstripping available
supply on new build developments
released to the market in the past year.
The Edinburgh lettings market
continues to be active. Increased
tenant demand has forced rental
values notably higher during 2015.
The new build sales market is still
being dominated by Quartermile,
which is situated on the site of
the former Royal Infirmary. It has
traded successfully throughout the
recession over the past few years
and is now nearly complete. Once
finished it will have delivered
approximately 850 units and has,
by scale and value, been the most
successful residential development
in Scotland in recent years.
The development regularly sells offplan when phases are released, and
is a perfect example of how the supply
and demand characteristics within
the city are putting upward pressure
on values.
With the exception of prime
developments such as Quartermile, one
bedroom apartments typically sell for
around £157,000 while two bedroom
flats command circa £257,000.
On average, new build sales prices in
Edinburgh have increased by 3.5%
during 2015, having already risen
strongly in the previous few years.
Typical one bedroom flats are renting
for around £650 pcm with two bedroom
apartments averaging £855 pcm. Rents
have risen by 6.3% on average during
2015 having also increased considerably
over the preceding three years.
The rental sector is entering a new
phase with the PRC sector beginning
to make its mark while private
landlords will have to adapt to the
Private Housing (Tenancies) Bill which
will come into force in April 2016.
The legislation will rebalance the
relationship between landlord and
tenant and will hand local authorities
such as the City of Edinburgh Council
the power to control rental inflation
through rent caps. Whether local
authorities choose to exercise their new
powers remains to be seen.
Importantly, however, private investors
continue to be active purchasers,
despite the legislative changes.
Outlook
The outlook for the Edinburgh
residential market is one of strong
demand versus limited available
supply in both the sales and the rental
markets. The development market
also looks set to be quite constrained
although a number of schemes will be
on site over the next few years.
Increased housing demand will be
supported by a strong and expanding
economy. Employment growth, in the
financial and business services sector
in particular, is set to rise notably.
So the pressures within the housing
market look likely to intensify in the
medium-term.
The city will also have to adapt to the
changing residential landscape. This
principally concerns coping with the
evolution of the PRC sector and the
spectre of rent controls.
How, for example, will the city embrace
this new “consumer-led” tenure? How
will the second-hand rental market
react to the volume of new, purposebuilt PRC stock coming to market?
And will values on private for sale
units increase as a result of even more
constrained new supply of units for sale?
The next couple of years are therefore
likely to be a time of change,
acclimatisation and challenges, but we
expect greater residential development
activity as a result.
SCOTLAND RESIDENTIAL FORECASTS
EDINBURGH HOUSE PRICE FORECASTS
9
% change pa
2016 - 2020
22.2%
4%
41/2%
41/2%
4%
31/2%
2016
2017
2018
2019
2020
Source: JLL
EDINBURGH RENTAL GROWTH FORECASTS
% change pa
2016 - 2020
5%
1/
2
4 %
4%
4%
3 %
2016
2017
2018-
2019
2020
1/
2
22.8%
Source: JLL
“Residential development activity in Edinburgh is dealing with some challenging issues
which will significantly impact on the ‘private homes for sale’ section of the housing
market in the short to medium term. The shift in focus to PRC has seen some 600 units in
the city centre switch to this emerging tenure. While the demand for this accommodation
is unquestionable, the real issue is that this isn’t being delivered at the same pace as other
tenures. However, a constrained city centre land supply and the competitiveness of other
land uses could mean the future of peripheral locations with good transportation links
such as Leith and West Edinburgh could come into play, strongly.”
Cameron McCallum
JLL Residential, Edinburgh
SCOTLAND RESIDENTIAL FORECASTS
DEVELOPMENT MARKET
GLASGOW
10
A lack of housing is the overriding feature of the Glasgow residential
market. A little more development activity is now taking place while
the potential pipeline is also looking fuller. The city’s rental sector is
undergoing significant change and with the prospect of large-scale
investors introducing the PRC model to the city, the next few years are
set to be both interesting and challenging.
Development market
In 2015 Glasgow City Council
launched an initiative to deliver
25,000 new homes by 2025.
One of the first schemes to contribute
towards this target is the former NS&I
and Cowglen Hospital site. The site,
adjacent to Silverburn Shopping Centre,
was purchased by Persimmon Homes
and will provide in excess of 500 new
homes to the south of the city centre.
Construction on this 30 acre site is
expected to commence in early-2016.
In the city centre there has been
very little new activity in 2015. The
Candleriggs Ltd redevelopment of
the former Selfridges site within
the Merchant City is the largest
residential development in the city
centre since 2007. The scheme, which
is scheduled to complete in late-2017,
will contain 132 units for private sale,
372 units for PRC, a 124 bedroom
boutique hotel and 582 bed space
student accommodation.
There has, however, been significant
activity in the West End with
David Wilson Homes commencing
development of the former BBC site
at Queen Margaret Drive and the
University of Strathclyde finally
releasing the former Jordanhill
Campus development opportunity onto
the market.
The Jordanhill Campus site attracted
considerable interest from developers
and investors throughout the UK
as well as several international
enquiries, reaffirming both the appeal
of the development opportunity and
the allure of Glasgow as a rejuvenated
city in which to invest. The bidding
process also established a new
benchmark for land values in this part
of Glasgow. Development is likely to
commence in 2017.
Pricing at the David Wilson Homes’
Botanics development suggest that
a new high watermark for a large
development will be established
in the city. This is likely to break
through the £400 psf level given the
quality of the location and the lack of
competition.
In addition to the Jordanhill Campus
sale, NHS Greater Glasgow and Clyde
released a number of assets as part
of their rationalisation programme
following the opening of the new
Queen Elizabeth University Hospital
Campus. The first of these sites was
the Mansionhouse Unit and Victoria
Hospital in the south of the city. There
are no timescales for the release of
Yorkhill but, given its location and
development potential, competition
and bidding is likely to be fierce.
Private Rented Communities
Discussion of PRC schemes in Glasgow
are set to escalate in 2016. There
has already been some interest from
developers and investors in the PRC
sector and it is evident that there are
a number of opportunities around the
city centre where the PRC model could
be delivered both from an occupational
perspective but also in terms of
delivering a competitive land value.
For some, the ability to fund PRC
developments could prove more simple
and more attractive than complex city
centre developments involving multiple
private sale completions.
SALES MARKET
RENTAL MARKET
£145k
£215k
1 bed
2 bed
£580
£750
pcm
1 bed
pcm
2 bed
AVERAGE
AVERAGE
PRIME
PRIME
£170k
£265k
1 bed
2 bed
PRICE GROWTH
£830
£1,200
pcm
1 bed
pcm
2 bed
RENTAL GROWTH
2013
5.7%
2013
7.7%
2014
4.1%
2014
7.3%
2015
4.1%
2015
5.6%
Source: JLL
SCOTLAND RESIDENTIAL FORECASTS
GLASGOW CITY CENTRE
11
SCOTLAND RESIDENTIAL FORECASTS
SALES, LETTINGS & OUTLOOK
GLASGOW
12
Sales market
Rental market
Outlook
Prices have increased by an average
of 4.1% during 2015 in Glasgow.
The sales market is suffering under
a lack of stock and new residential
schemes, although in popular
residential districts such as the West
End, developments of the scale and
prestige of the Botanics development
at the former BBC site will help
market dynamics.
Rental demand in Glasgow has been
strong during 2015 and has led to
upward pressure on rents. Available
supply remains tight meaning a
competitive marketplace for tenants.
2016 will see a return to residential
development in Glasgow following
years of muted activity. A few large
sites are likely to be progressed
during the year while the new
schemes are also likely to set new
high watermarks in terms of pricing.
City centre living is not as popular in
Glasgow relative to some other key
Scottish cities which deters widespread
developer interest. However, the
development of schemes like the
Botanics site and the former Selfridges
site in the Merchant City should only
serve to add a new dimension and a
greater attraction to would-be city
centre residents.
One bedroom flats are currently
commanding in the region of £145,000
while two bedroom apartments are
closer to £215,000.
Rental levels in Glasgow are typically
£580 pcm for a one bedroom apartment
and circa £750 pcm for two bedroom
flats. Average rents have risen by
5.6% off the back of these demand and
available supply dynamics.
Demand has been particularly strong
in the Park District and in the West
End and with little new stock to ease
market pressures, rents are likely to
increase further in 2016.
The Private Housing (Tenancies)
Bill will give Glasgow City Council
the authority to control rental
growth through capping, although
the argument for actioning this in
Glasgow is less convincing compared
with the likes of Edinburgh.
A lack of stock, and new product in
particular, is a feature of both the
sales and letting markets and this is
likely to intensify during 2016 given
the subdued development market.
The Private Housing (Tenancies) Bill
will encroach on the rental market
as too will more fervent interest
from developers and operators in the
PRC sector.
We forecast that sales prices will rise in
the order of 3.5% pa in 2016 with rental
values moving around 4.5% higher.
SCOTLAND RESIDENTIAL FORECASTS
GLASGOW HOUSE PRICE FORECASTS
13
% change pa
2016 - 2020
31/2%
4%
4%
31/2%
3%
2016
2017
2018
2019
2020
19.3%
Source: JLL
GLASGOW RENTAL GROWTH FORECASTS
% change pa
2016 - 2020
41/2%
4%
31/2%
31/2%
3%
2016
2017
2018
2019
2020
19.9%
Source: JLL
“The land markets in Glasgow are in good health with activity across all sectors. The
marketing of high quality development assets such as Jordonhill demonstrated the
attractiveness of the city and we are now seeing the investor market starting to
home-in on city centre development opportunities in the PRC sector. The volume
housebuilders are competing fiercely around the greenfields of the city, which
is putting an upward pressure on land values despite the uncertainty around the
Government’s Help to Buy initiative. However, despite all this activity, Glasgow City
Council’s target of 25,000 new homes by 2025 remains ambitious given current
building completion rates.”
Nina Stobie
JLL Residential, Glasgow
SCOTLAND RESIDENTIAL FORECASTS
14
SCOTTISH HOUSING
Help to Buy shared equity
Funding of £195m has been announced for the
next tranche of Help to Buy. Given the success
of previous tranches this will provide a fillip to
buyers and housebuilders when funds are
Private Housing (Tenancies) Bill
accessible. However, it is still questionable
whether the new tiered approach will last
This legislation will give local authorities
throughout the financial year.
power to introduce rent caps to control
rental growth and could mark a shift in
Economy
power between landlord and tenant.
Strong and robust UK economy will
boost housing demand. International
Additional home LBTT
factors present the greatest risk.
The additional 3% LBTT will have little influence on
most mainstream housing markets but will impact the
markets where investors play a greater role such as in
city centres.
International factors
Economic slowdowns in countries such as
China, as well as currency devaluations
and stock market falls, pose a risk to
global and UK economic growth.
Buy to let tax relief
The loss of higher rate tax relief on buy to
let mortgage payments will reduce the
profitability of this investment medium for
many. It will dampen private investor
demand to some extent.
Buying costs
Deposits, LBTT and other fees will
continue to be burdensome and will
restrict buying and selling activity.
Renovations will remain popular.
Affordability
Affordability constraints will remain the most pressing
challenge for many house purchasers, especially
younger generations with no family financial support.
Interest rates
The steady rise in mortgage servicing costs will impact
new home buyers and existing home owners but we
expect at least some of the detrimental influence will be
outweighed by the stronger economy.
G MARKET DRIVERS
Bank of Mum & Dad
House prices and transaction activity
will be supported by parental and
family financial support.
Restricted choice
Low housing turnover will result in
restricted choice for prospective home
buyers, ultimately leading to higher
house prices.
Borrowing constraints
More stringent and prudent lending
practices are now in place, but increased
competition is putting pressure on
mortgage rates and increasing mortgage
choice. The lending environment will apply
only a minor brake on the housing market.
Housing supply
The undersupply of housing
will underpin prices.
Scottish Parliament Elections
The elections in May 2016 will
see continued transfer of powers
to the Scottish Parliament but
these are unlikely to divert the
residential market from it's
existing course.
Lower LBTT
2020 general election
Reduced LBTT costs for most properties
will have minimal positive market impact
although it might encourage a small
release of pent up demand from people
moving up the housing ladder.
The general election in May 2020 will
probably cause a dip in transactions in the
months preceding the election, but should
recover afterwards.
Higher LBTT
EU referendum
Increased LBTT costs for higher value
properties is stifling activity and
constraining price growth, but the
market will eventually adjust.
Uncertainty surrounding the vote
could knock activity and price growth,
but markets outside of London and
the South East will be less affected.
SCOTLAND RESIDENTIAL FORECASTS
16
UK ECONOMIC FORCES
The outlook for the UK economy is fundamentally sound but will not be
as exuberant as usual at this point in the cycle. The risks mainly derive
from overseas although higher interest rates and the EU referendum
pose domestically sourced concerns.
2016 consolidation
2016 should be a year of both
consolidation and progression for the
UK in political and economic terms.
With the general election behind us
and a Conservative Government with
a full term in sole power, the next
five years are a real opportunity for
it to make its mark and to take some
significant steps forward in terms of
addressing the UK’s housing problems.
In economic terms, the UK has
shifted from recovery to cruising
mode. The next few years should be
a period of strong but not exuberant
economic expansion.
GDP growth is expected to be 2.6% in
2017 while earnings growth will be
far more positive than in recent years
(see charts). There will be more jobs
created and people will start to feel
more secure in their jobs and with
their household finances. All of these
factors will be highly supportive of the
UK housing market.
Interest rate rise
It is likely that the base rate will be
raised in 2016. However, we do not
anticipate much of an impact on the
housing market as the hike will have
been well flagged and will initially
be minimal.
The main risk to this positive 2016
outlook comes from overseas. Events
in China and some other emerging
economies, oil prices, unrest in Syria,
the refugee crisis and ongoing issues
for Greece and the Eurozone all
pose threats. The UK’s safe haven
credentials will be tested.
2017-2020
The medium-term UK economic
outlook looks remarkably steady and
stable. Typically during this phase of
the economic cycle GDP growth is up
at circa 3% pa but austerity measures
as well as business investment caution
this time around will dampen the pace
of economic expansion.
Interest rates are set to rise steadily
through this period but Mark Carney
has stated that he believes the base rate
will rise towards 3% rather than 5%.
Assuming this is the case, the impact
on household finances and the housing
market will be reasonably muted partly
because the effect will be offset to some
degree by the stronger economy.
EU referendum
The UK’s referendum on EU
membership looks most likely to take
place during the latter part of
2017. Although it is likely that the
UK will remain in the EU, especially
if David Cameron secures some
notable concessions prior to the
vote, the uncertainty caused by the
referendum could prove to be a more
significant headwind than the result
of the vote itself.
There may be some domestically
driven easing in UK housing
transaction activity as the
referendum approaches but the
uncertainty is more likely to cause
concern amongst overseas owners
and investors creating additional
concerns in London.
UK BASE RATE TO RISE STEADILY
% end year
2016
2017
2018
2019
2020
1.0%
1.5%
2.0%
2.5%
3.0%
Source: JLL, Oxford Economics
UK POPULATION EXPANSION
ECONOMIC EXPANSION MORE SECURE
Average annual population growth 2016-2026
UK GDP growth % pa
2.6%
2.4%
2.2%
18,000
1.2%
Scotland
10,000
North
East
26,000
32,000
26,000
Yorkshire
& Humber
57,000
North
West
LAST 10
YEARS
LAST 5
YEARS
Source: JLL, Oxford Economics
UK AVERAGE EARNINGS ENTER NEW PHASE
3.6%
West
Midlands
East of
England
Wales
2017
2020
Average earnings growth % pa
East
Midlands
13,000
2016
3.5%
2.5%
South
East
1.8%
South West
London
127,000
34,000
42,000
75,000
Source: JLL, Oxford Economics
LAST 10
YEARS
LAST 5
YEARS
Source: JLL, Oxford Economics
2016
2017
2020
SCOTLAND RESIDENTIAL FORECASTS
INTERNATIONAL
DIMENSIONS
18
Issues overseas pose the greatest threat to the UK economy and housing
markets. But how worried should we be about the potential risks and how
important will they ultimately be for our otherwise robust domestic markets?
JLL HEAD OF UK RESEARCH
JON NEALE
About turn
Six years ago, in the depths of the
‘Great Recession’, it would have been
laughable to argue that by 2015
the UK would be one of the best
performing economies in the Western
World, and that China and the
emerging economies would be facing
their own set of severe problems. Yet
that is precisely what has happened.
There are now some very obvious risks
in the world economy which could have
implications for the UK and London
housing markets.
Principally, the recent collapse in
oil and commodity prices may have
given us low inflation, but they have
undermined resource-exporting
economies from Brazil to Russia.
China crisis
China does not fall into this category,
but is facing its own problems. The
recent collapse of its stock market
bubble highlighted the instabilities
within the world’s most populous
nation, but this is only a symptom of a
deeper malaise.
For a generation, China has been
investing intensely in itself, in
its infrastructure, its housing,
its factories, its machinery. The
population has become richer, and
wages have risen, along with costs.
Countries such as Indonesia and
Vietnam now seem more attractive
locations for manufacturing.
The country’s potential, given its
population, remains immense, and
in the long-term its central position
within the world’s economy seems
certain. That does not mean that there
will not be setbacks along the way, and
in the meantime, investors may look to
export capital. Overall, UK property
markets remain an attractive option.
China now has to make the transition
to being a more consumption-driven
economy. Its shoppers would spend
more and the level of imports from the
rest of the world would rise. This is
clearly a difficult change, particularly
when share and property prices are
under duress, with the level of debt a
rising concern.
Indian middle class expansion
Interestingly, India, which now
appears to be making some
headway after years of relative
underperformance, looks set to outpace
China over the next few years.
Its GDP is likely to grow by 6.6% this
year. This may seem high compared
to the western economies, but this is
in a country that has become used to
double-digit growth. Even last year’s
7.4% seems low in that context, and
with the economy likely to struggle
more in 2016, the stresses in the
country’s economy and political system
could become more visible.
China’s importance is
undeniable, it is now the
world’s second largest
economy, and it is hard to
imagine that there will not
at least be some knock on
impacts elsewhere.
Investment could accelerate over the
coming years as the middle-class
continues to grow, although capital
controls are still an issue.
Eurozone problems fade
Concerns over China and the other
BRICs have taken over from a
second phase of the Greek crisis.
The brinkmanship of Alexis Tsipras
and German insistence on austerity
combined to raise the spectre of a
disorderly exit from the Eurozone.
For the time being, that problem has
been avoided, but the underlying issues
remain: the sheer size of Greek debt
compared to its ability to raise taxes
from a weakened economy.
SCOTLAND RESIDENTIAL FORECASTS
19
SCOTLAND RESIDENTIAL FORECASTS
20
Elsewhere in the Eurozone and, indeed,
in the developed world, the situation
looks brighter, and stronger growth
here should ensure that the world
economy continues to grow despite the
risks in the emerging world.
Germany remains robust; France is
returning to stronger growth; and
Spain has emerged from its crisis
period to become the strongest growing
major economy in Western Europe
after Britain, although admittedly this
is from a base that was rather more
eroded by the recession.
All this is a boost for the UK too, given
that the Eurozone remains the UK’s
biggest trading partner. This should
help consolidate recent improvements
on this side of the Channel, helping
to ensure consumer confidence and
mortgage volumes remain buoyant.
Interest rate policy is key
However, the main counterbalance to
China’s temporary weaknesses will be
the US, which is back in its historic
position as the main driver of the world
economy. This year, it is set to match
the UK’s growth rate, albeit in an
economy some four times larger, with
2016 likely to be stronger still.
Of course, there are risks to this
forecast. The most significant of these
is the timing and impact of the Fed’s
decision to raise interest rates. Most
commentators are expecting a rise later
this year, although the chances of this
moving into 2016 are increasing.
Clearly, a spike in lending costs could
be very damaging, although the
implications might be most pronounced
in some emerging countries with high
debt levels.
Japanese recovery
Japan, still the world’s third largest
economy, will provide an even greater
offset to the problems in its larger
neighbour. Despite its demographic
issues (a shrinking population), it looks
set to deliver 0.8% growth this year and
1.8% in 2016, a radical shift upwards
after years of stagnation.
Equally, in the UK, the timing and
trajectory of interest rate rises will be
crucial. However, ultra-low inflation
and the strong pound provide yet more
reasons for Governor Carney to delay
beyond early 2016, implying that UK
homeowners and buyers will continue
to benefit from some of the lowest
mortgage rates ever seen.
It is no coincidence, of course, that most
of these countries are energy importers,
meaning both their industry and their
consumers are benefiting strongly from
recent price falls.
It is possible too that the weaknesses in
the world economy could prompt central
banks to move the goalposts yet again.
Indeed, the risks in the developing
world, and recent stock market
corrections in the US, are forcing
more capital into ‘safe’ assets such
as gilts, pushing down yields and
indirectly putting downward pressure
on lending costs.
Low borrowing costs
should ensure that
domestic demand for
UK residential remains
strong, particularly given
that real wages are
rising relatively strongly.
The resulting buoyant
market should also help
convince overseas buyers
that the UK housing
market remains a strong
proposition.
Safe haven enhancement
The economic problems in the BRIC
economies, and elsewhere in the
emerging world, may additionally
lead the UK to regain some of its
safe haven status, meaning overseas
buyers, perhaps dismayed by the
performance of some domestic
developments, may look to invest more
in locations such as London.
SCOTLAND RESIDENTIAL FORECASTS
21
GLOBAL GROWTH OUTLOOK REMAINS SOLID
GDP growth forecasts (% pa), selected regions
8
7
Assuming the UK’s reputation
for stability is not tarnished, the
only potential barrier here is the
strength of the pound compared
with most other currencies (with the
notable exception of the dollar, see
chart). While this helps to ensure
that base rates remain low, it also
complicates investment decisions
from overseas.
6
5
4
3
2
1
0
International risks
Overall, therefore, there are
risks for the UK and London
housing markets from overseas.
UK economic growth could be
lower as a result of the problems
in China and other emerging
countries with broader global
contagion also a threat.
However, although the UK will
not be totally immune from any
fallout, it is better placed than most
countries to weather a storm. So the
risks to the UK economy, and hence
the UK housing market, are real,
but on balance we remain confident
about a positive market backdrop
for the next few years.
For now the UK housing
market should press
ahead with confidence,
while keeping a beady
eye on global influences.
-1
China
London
UK
US
Germany
Source: JLL, Oxford Economics
France
Japan
2014
World
2015
2016
STERLING APPRECIATING, BUT NOT AGAINST USD
Sterling appreciation against selected currencies, Q2 2014 to Q3 2015
25
20
15
10
5
0
-5
-10
-15
sia
lay
Ma
a
n
lia
ay
ad
de
ra
rw
st
an
we
u
C
S
A
No
Source: JLL, xe.com
ro
Eu
n
pa
Ja
a
re
re
po
Ko
ga
n
Si
a
in
Ch
US
E
UA
SCOTLAND RESIDENTIAL FORECASTS
22
UK HOUSING MARKET
FORECASTS
A strong and stable domestic economy will underpin the UK housing
market over the next five years. We expect house price growth nationally
to be in the order of 3-6% pa during this time with transaction activity
improving steadily before the 2020 election year.
2016 springboard
2016 should provide a sounder base for
British businesses, consumers, home
owners, home buyers, renters and
landlords following 2015, which was
disrupted by the general election.
Assuming international factors do
not dent the UK’s positive and robust
outlook, many people in the UK will
feel more comfortable about making
important lifetime decisions; including
buying a first home or moving up the
housing ladder.
Many owner-occupiers have deferred
moving home over the past 7-8 years
following the global financial crisis,
but with the outlook more positive
and stable we expect at least some to
seize the opportunity to move home,
releasing pent-up demand, as well as
more stock, onto the market.
Improved employment and wage
conditions, together with a more
prosperous and secure outlook, will also
encourage people to find their own place
to live, to move out from under their
parents’ feet and to buy instead of rent.
Potentially, the whole housing market,
be it rental or ownership, could
be notably more active. However,
continued high moving costs, despite
lower LBTT burdens for most, will
provide some brake on transactions, as
too will the lack of choice for buyers.
The main domestic housing market risk
in 2016 will come from base rate rises
but we do not expect the UK housing
market to be too adversely affected.
2017-2020 prospects
Despite the EU referendum and the
likelihood of further interest rate rises,
2017 should be a further year of positive
economic expansion and improved
household finances and confidence.
This backdrop should lead to
greater UK housing market activity,
reasonably strong house price growth
and a continuation of development
volume growth in 2017.
Forecasting models suggest that house
price growth will ease gradually over
the next five years, in part at least due
to growing affordability issues.
Whilst this is broadly our base
case forecast, it is totally plausible
that as UK housing demand and
household confidence improve, the
lack of housing and the sparse choice
for buyers could become even more
apparent and acute. This could then
lead to greater urgency amongst
buyers and result in a spike in
house prices at some point during
this period.
Overall, however, the underlying
conditions for a strong and active
UK housing market should hold firm
despite some affordability drag.
Development volumes are likely to rise
marginally, assisted to some extent by
government initiatives, but we are not
anticipating a meaningful step change,
especially given resource constraints.
Perhaps the only obvious choppy
waters to negotiate will be in 2020
when the next general election is due.
UK HOUSE PRICE GROWTH FORECASTS
% change pa
NEXT 5 YEARS
4.2%
LAST 5 YEARS
5%
4.5%
4.5%
4%
3%
2016
2017
2018
2019
2020
3.1%
LAST 10 YEARS
1.8%
Source: JLL
UK HOUSING TRANSACTIONS
Number pa
2019
2018
2020
2017
2016
1.25m
1.28m 1.30m
1.31m
1.30m
NEXT 5 YEARS
1.29m
LAST 5 YEARS
1.07m
LAST 10 YEARS
1.13m
Source: JLL
SCOTLAND PRIVATE HOUSING COMPLETIONS
Number pa
NEXT 5 YEARS
13.7k
14k
13.5k
14k
14k
13k
2016
Source: JLL
LAST 5 YEARS
10.8k
LAST 10 YEARS
2017
2018
2019
2020
15.1k
SCOTLAND RESIDENTIAL FORECASTS
24
UK RENTAL MARKET
FORECASTS
Demand for rental accommodation has accelerated quickly over the past
decade and there is little to suggest this trend will run out of steam anytime
soon. With supply constraints possible in the medium-term, we believe there
will be additional upward pressures on rents over the next five years.
Expanding sector
Both the UK and Scotland private
rented sectors continue to expand.
Figures from the latest Scottish
Housing Survey suggest that 330,000
of the 2.42m households in Scotland,
14%, are privately rented.
Significantly, the number of rented
households has escalated from just
160,000, or 7% of all households, ten
years ago.
The situation is even more acute
amongst younger age groups. It is
astounding to think that over 40% of all
households run by 16-34 year olds are
privately rented. This has risen from
just over 20% ten years ago (see chart).
Current trends also suggest that the
number and proportion of private
renters are set to rise further in
the medium-term, despite political
rhetoric in support of more owneroccupation.
Housing unaffordability and onerous
deposits are the main drivers of this
trend. Government initiatives such
as Help to Buy offer some hope for
would-be young homebuyers, but this
is unlikely to reverse, or even notably
alter the strong upward march of the
private rental sector.
Active PRS
Unsurprisingly, given both the high
moving and buying costs in the owneroccupier market and the greater
number of renters, the most active
part of the national housing market is
households moving within the private
rented sector.
Although there are no figures for
Scotland, of the 2m or so household
moves in England in 2013-14, as
estimated by the English Housing
Survey, around half were moves
within the private rented sector. If
households new to the sector are added
in, 65% of all house moves were to the
private rented accommodation.
Tenant demand to rise
We are also expecting economic
influences as well as demographic
and social trends to lead to greater
private rented demand over the next
five years.
Strong UK and Scottish economies
including higher employment and
salaries, are anticipated in the
medium-term, albeit with some
international risks. These conditions
will undoubtedly lead to greater
demand for rental accommodation
from young people starting work or
wanting to move out of the parental
home to name but two.
An increasingly pertinent point
is whether there will be enough
rental accommodation to house this
considerable demand, especially given
the recent tax relief changes for buyto-let investors.
Rental ownership changes
The vast majority of private rented
properties across Scotland are owned
by private landlords, but many of
these have been dealt a blow in the
Chancellor’s budget in July 2015.
In an initiative that was aimed at
levelling the playing field with owneroccupiers, it was announced that
higher rate mortgage tax relief on
private rental income was going to be
phased out by 2020.
As the vast majority of private
landlords are higher rate tax payers,
the impact could be significant.
However, it should also be noted that
approximately 65% of rental properties
are owned outright, rather than being
reliant on a buy-to-let mortgage,
meaning that the Budget changes
make no difference to them.
Private investors were dealt a further
blow when an additional 3% LBTT
was announced on all buy to let or
second home purchases. This is likely
to dampen new private investor
demand to some extent.
However, there is unlikely to be any
meaningful sell-off of private landlord
rental property over the next few
years, especially as we see both prices
and rents rising steadily. However,
there may be slightly less exuberant
enthusiasm from new investors, which
may have a longer-term impact on
rental supply.
OVER 40% 16-34 YEAR OLD HOUSEHOLDS PRIVATELY RENTED
% of households in Scotland
Private renters
Owner-occupiers
Social renters
50
40
30
20
10
0
2004
2006
2008
2010
2012
2014
Source: JLL, Scottish Housing Survey
There are also changes afoot in the
institutional investment market.
For the past few years there has
been notably greater and more
serious interest in the private
rented sector. It has taken time for
this to come to fruition, but genuine
enthusiasm and action is now
happening in London and in several
towns and cities across Britain.
And whilst institutional investors
will always be dwarfed in volume
terms by private landlords they
could make a notable contribution
to raising standards and
competition within the sector,
especially at a local level.
Forecasts
Overall, despite believing that
demand will increase and available
supply will remain constrained, we
anticipate only moderate positive
rental growth on a national basis
over the next five years.
The main limiters are that tenants
will move to smaller properties
or to cheaper areas in order to
ensure their rental costs suit
their financial aspirations which
frequently will include setting
aside sufficient funds to save for a
housing deposit.
Notably, compared to our forecasts
from last year, we see slightly
greater upward pressure on rents
throughout our forecast period.
PRS IS THE MOST ACTIVE HOUSING MARKET
Number of household moves (m pa)
2008-2009
2013-2014
1.2
1.0
0.8
0.6
0.4
0.2
0.0
New to owneroccupation
PRS to owneroccupation
Within owneroccupation
New to PRS
Within PRS
Source: JLL, English Housing Survey
UK RENTAL GROWTH FORECASTS
% change pa
4.5%
4%
3.5%
3.5%
3%
2016
2017
2018
2019
2020
Source: JLL
SCOTLAND RESIDENTIAL FORECASTS
OUR FORECASTS
26
HOUSE PRICE GROWTH (% pa)
2016
2017
2018
2019
2020
2016-2020*
Edinburgh
4.0
4.5
4.5
4.0
3.5
22.2
Glasgow
3.5
4.0
4.0
3.5
3.0
19.3
UK
5.0
4.5
4.5
4.0
3.0
22.8
2016
2017
2018
2019
2020
2016-2020*
Edinburgh
5.0
4.5
4.0
4.0
3.5
22.8
Glasgow
4.5
4.0
3.5
3.5
3.0
19.9
UK
4.5
4.0
3.5
3.5
3.0
19.9
2016
2017
2018
2019
2020
2016-2020*
Greater London
5.5
5.0
4.5
4.0
3.0
24.0
South East
5.5
5.0
5.0
4.5
4.0
26.4
Eastern
5.5
5.0
5.0
4.5
3.5
25.8
South West
4.5
4.5
4.0
3.5
3.0
21.1
East Midlands
4.5
4.5
4.0
3.5
2.5
20.5
West Midlands
4.0
4.5
4.5
3.5
3.0
21.1
Yorkshire & the Humber
4.0
4.5
4.0
3.5
3.0
20.5
North West
5.0
4.5
4.0
3.5
3.0
21.7
North East
4.0
4.0
3.5
3.0
2.0
17.6
Wales
4.0
4.0
4.0
3.5
2.0
18.8
Scotland
3.5
4.0
4.0
3.5
3.0
19.3
UK
5.0
4.5
4.5
4.0
3.0
22.8
ACTIVITY AND DEVELOPMENT (000s)
2016
2017
2018
2019
2020
2016-2020*
UK transactions
1,250
1,280
1,300
1,310
1,300
1,288
13
13.5
14
14
14
13.7
RENTAL GROWTH (% pa)
HOUSE PRICE GROWTH (% pa)
Scotland private completions
* 2016-2020 cumulative figures
THE FINAL WORD
“2016 will be a year of challenging questions rather than unbridled forward
momentum. And there are several questions on a variety of residential
issues which need addressing.
The greatest challenge is how the housebuilding industry and the Scottish
Government will move towards building the greater volume of homes the
country needs. Development activity is better than 3-4 years ago but still
nowhere near the 23,000 homes a year target. The Scottish Government
is allocating funds to assist, but we believe closer collaboration with the
industry, more innovative and more directly beneficial initiatives as well as
higher funding need to be considered if the housing shortfall is to be tackled.
The £195m Help to Buy scheme will help both buyers and housebuilders of
“affordable” homes but the stop start nature of the funding and uncertainty
of eligible criteria has created uncertainty and weakened some peripheral
locations. However, although welcome, it is unlikely that the new tiered
funding arrangement will last throughout each financial year and even less
likely that the funding will be sufficient in value or longevity to create the
sea change in supply required.
2016 will also bring into play legislation that will rebalance the private
landlord and tenant relationship. However, we will have to wait and see
whether there are any wider market implications or whether any local
authorities will use their rent cap powers.
And with some PRC schemes set to get underway in Edinburgh and
Glasgow in 2016 and with more sites being considered for the private rental
model, the shift in development bias towards PRC rather than private sale
will be an interesting change to monitor.
The development and private sale markets in Scotland’s larger cities will
also have to adapt to the less favourable private investor environment
following tax relief and LBTT changes.
So, more questions than answers, but undoubtedly an interesting year ahead.”
Jason Hogg
JLL Residential, Scotland
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RESEARCH
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NEIL CHEGWIDDEN
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[email protected]
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