What is in a headline? Defined as “a heading at the top of an article”. Or to look at it another way, to be the “headline act” is to appear as the star performer. Quite often I find myself only reading the headline – a guilty trait that nonetheless does make sense, considering the latter use of the term. Still, if one were only paying attention to the more dominant headlines, one would be forgiven for feeling a little down about the residential market in the UK.
It is widely agreed that London is currently going through a price adjustment. This market trend has led to a number of relatively negative headlines: one suggesting that UK homeowners are “desperately” cutting prices; another that a recent dip could result in a market “slump”. Unfortunately, the residential property market as a whole can often be defined by general sentiment and those headlines.
It is not until you scratch beneath the surface that you get a greater feel for the actual stories.
Sitting in the regional Residential Investment and Development team at Allsop, the headline we consistently hear from investors, concerns the increased competition they are experiencing. But what’s behind that headline?
Allsop Residential Auctioneer, Gary Murphy‘s article, Smart Residential Property Buyers go Regional, highlighted this increase in competition – particularly from those who had exclusively invested in London in the past. Considering the bread and butter opportunity for our team, the freehold unbroken block of flats, investors typically require either an attractive yield or a discount from the aggregate vacant possession values – or both.
We are finding that yield is of greater importance to larger property companies and funds, whilst our experience is that the smaller Propcos and local property traders look for discount for a short-term gain.
The discount to vacant possession approach can be explained by considering the wholesale / retail approach in the corner shop market. In purchasing stock from the local cash and carry, the shop owner makes bulk purchases, allowing discounts from the total recommended retail price (RRP), in order to then make a profit in store when selling to the public. If they were to purchase and sell at RRP, there would be no profit. This would be an especially poor practice as there is no ongoing income from, say, a box of Kit Kats.
Fortunately, there is an income available from owning a block of flats. More recently, amongst the increased interest from London, we are seeing an increase in competition from large Propcos and funds. This appears to be driving discounts and yields down. The unfortunate consequence is that the smaller Propco struggles to compete.
Only 18-24 months ago we were selling blocks of flats to property traders and smaller Propcos with discounts in the region of 15% to 25%. More recent sales however are to larger Propcos and funds, showing discounts in the region of nil to 7.5%.
Analysing the yields achieved in these same block sales, 18-24 months ago we were consistently achieving gross yields of 7.75% to 8.5%. The majority of recent sales are in the range of 6.75% to 7.5%.
Of course, investors would prefer to buy with both a good discount and attractive yield. However, the current market trend is seeing the larger Propcos and funds come out on top time and time again as they appear happier to overlook the short-term exit (discount), relying on the longer-term return (yield). Simon Rubinsohn, RICS Chief Economist, recently said that “the latest RICS data continues to highlight the importance of disaggregating the headline numbers when talking about the market.” I would urge you to do the same because the headlines do not always tell the full story. For sure, maybe competition may not be good for buyers in certain sectors of the market but, if you own a block of flats, it might be the time to consider a sale.
Notes to editor
Jack Robson is a Senior Surveyor working in the Leeds office of the Residential Investment and Development team at Allsop. The team of five in Leeds, supported by the London office, covers the northern regions acting on behalf of a varied client base from local to institutional investors. The team buys and sells residential property including; development land, blocks of flats and portfolios.
If you would like to get in touch with Jack, please contact him:
T: +44 (0)113 243 7952