From housing starts to rental surges: A comprehensive look at the UK property market

The economic backdrop has continued to throw challenges which have been well documented. The UK major housebuilders have scaled back their new build programmes and SME developers also facing their own challenges. However, faced with a shortage of an estimated 4.3 million homes (Centre for Cities), the bourgeoning demand for housing in the UK continues to provide opportunities both geographically and by sectors such as emerging build-to-rent. Let’s take a closer look...

Housing starts continue despite rising interest rates: What's driving growth?

In Q3 the successive interest rate rises have dampened affordability when considering the knock-on effect of mortgage offers. The number of housing starts during the 3 months up to July at £1,989m, slipped nationally but still remained 15% up on the same time a year ago. Both London and the North West showed some increase in their housing starts, whilst the South East remained stable.

Planning approvals in London and the East of England also weakened from the previous 3 months but the number of detailed consents in the North West, South East and the South West actually increased. The number of new planning consents in Scotland remained stable.

Significantly, we have seen the national housebuilders such as Taylor Wimpey, Barratt Developments and Berkeley, scale back on housing output following a perceived increase in risk due to a combination of factors including concerns surrounding economic uncertainty, economic stagflation and a significant increase in the cost of building, which heavily impacted back in 2022. Understandably, for these players very significant investment is required to pull together the generally large sites that require substantial infrastructure and planning costs.

However, the landscape may be different for SME developers who can often act more dynamically by firstly quickly identifying and acquiring sites and then instigating the development process.

Building cost inflation in 2023: Surprising trends and relief for developers

Building materials prices fell in July by 1.1% according to the ONS Building Materials and Components Statistics, which shows consecutive months of declining prices. This decline was driven by a sharp decline in key products such as structural steel, concrete bars and timber costs. This will have been a welcome relief to contractors and developers. Nevertheless, there was also a widespread decline in sales of key materials across the sector. Despite this, there was a 1.6% increase in the volume of output. Overall, many in the industry expect materials inflation to be around 4% for 2023, a far cry from 2022.

Residential market rollercoaster: Falling prices in the South, growth in the North

The UK residential market weakened in August with prices falling by 0.8% representing an annual fall of 5.3%, which means that prices on average are around December 2021 levels according to Nationwide. However, it’s worth looking in further detail at what belies the headline numbers. The economic uncertainty, increase in base rate and respective impact of mortgage rates and mortgage affordability has undoubtably cooled the market for 2023. This at least, is likely to remain the theme with economic forecasters still predicting a further interest rate rise to 5.5% base rate, albeit at a lower base rate than previously forecast in Q2.

Geographically, the reduction in values is clearly defined regionally with the southern regions showing the largest falls in value. Conversely, in the northern regions of the UK are posting single-digit growth, with Scotland registering growth of 1.7%. A contributing factor could be that the higher-value properties in the South require larger mortgages, bigger deposits, and higher incomes to buy. This effectively prices more buyers out of the market, weakening demand and pushing prices down in the south. Conversely, in more affordable markets in the North and Scotland, prices are holding up.

Recovery may appear slow in the face of higher interest rates and will likely be uneven with a divergence of secondary and prime quality assets, as we move into the last quarter of the year.

Record-breaking rent hikes: Why UK landlords are charging more

Residential rents in the UK jumped by 12% in August according to Hamptons, which represents the largest annual increase on record! In complete contrast to capital values, rents in London led the way with a 17% year-on-year rise.

However, most regions across the UK also showed strong rental growth in August. So, why are we seeing such a contrast in the growth of rents and capital values?

The increase in rental values is being driven by not only a tempering in the supply of privately rented accommodation but also by the passing on of landlord's increased costs through mortgage cost increases from progressive interest rate hikes, regulatory costs (such as certification, testing etc.) but also, more significantly, from the effect of the introduction of S.24 of the Finance Act 2015, which removed landlords' ability to offset the majority of their finance costs and arrangement fees from rental income for tax.

As an aside, the Renters Reform Bill which has been created to stop “no fault” evictions have been delayed this month going through parliament. The Scottish government meanwhile have limited rental increases on existing lettings to 3% but landlords are maximising rental increases between tenancies in an attempt to cover their spiraling costs. Rent increases are still permitted on new lettings, however on newly let properties in Scotland, rents have increased by 13%. This pressure on the rental market does not look set to relent anytime soon, with RICS recently citing that the dwindling private rental property supply and increased demand will only serve to increase rents further over the next three months to end Q4 2023.

Skilled labour shortage in UK construction: Challenges and solutions

According to the latest government’s ONS stats, the construction job vacancies have fallen from 40,000 nationally in June to 37,000, which tallies with some of our SME clients’ feedback on site which have cited a slight improvement in labour availability during September for some trades but there still remains an industry shortage for skilled trades.

The challenges faced by the wider construction industry are not just confined to quantity but also quality. The retirement of the older experienced trades workers in the sector cannot be immediately replaced by new entrants immediately. Hence, the sequencing of trades and planning of the programme remains critical to SME housebuilders in order to avoid the obvious impact on programmes and in turn, on finance costs and ultimately on profitability.

Part L Building Regulations: The roadmap to a sustainable future

Part L Recap

Last year, there were changes that are important on any new scheme. The adjustments to Part L are viewed as a stepping stone towards the 75% to 80% reduction in carbon, which will be required by the government’s Future Homes standard in 2025. The regulations have been introduced to help create greater energy efficiency and savings on energy costs, as well as better environmental sustainability and stronger compliance. Part L contains four documents, each of which focuses on different aspects of construction.

Why are they important?

- The adjustments to Part L are viewed as a stepping stone towards the 75% to 80% reduction in carbon, which will be required by the Future Homes Standard in 2025.
- The regulations have been introduced to help create greater energy efficiency and savings on energy costs, as well as better environmental sustainability and stronger compliance.
- If companies do not adhere to Part L regulations they face possible consequences, which can include stop work orders, fines, legal action and potentially damage to reputation.

Part L key takeaways:

Reducing carbon and ensuring energy efficiency over the entire lifespan of a building features significantly as part of the new building regulations in the UK. This can be achieved in several ways, such as maximising airtightness, optimising insulation and eliminating thermal bridging.

With a grace period that ended in June this year, it's worth highlighting some key takeaways in Part L to ensure compliance:

• New carbon emission target - All new homes must produce at least 31% less carbon emissions. New non-domestic builds need to produce at least 27% less.
• New energy efficiency standard - U-values need to be improved in walls and replacement thermal elements from 0.28W/m2K to 0.18W/m2K, and the minimum values for doors, windows and roof windows have improved from 1.6 to 1.4.
• SAP10 replaces SAP 2012 - SAP10 is responsible for setting and calculating the metrics and targets detailed above as well as other standards in building work.
• Geotagged photos - Builders and developers are required to take photographs of the installation to confirm the design details have been followed. Not only that, but photos should also have geo-location information available to verify they are of the correct plot.

Building Safety Act 2022: How new regulations impact residential buildings

Finally, some topical but nevertheless important aspects of building regulations relate, post Grenfell, to certain residential buildings detailed in the Building Safety Act 2022 (BSA 2022) which introduces a rigorous safety regime imposing more onerous requirements on those buildings identified as “Higher-risk buildings”. These relate not just to cladding but fire resistance, sprinkler systems among others. In addition to the changes in the Building Regulations, these will come into force on the 1st of October 2023. We have already seen aspects of new design changes at Assetz Capital being implemented in current schemes with clients. These changes are real and present and do have financial implications which need to be properly costed at the outset on new schemes.