Newsletter « Property News from Saint Property

For an insight into the Scottish Property Market in 2010 and our views on 2011
Friday, December 17th, 2010

Following the uncertainty of what the General Election in May 2010 would bring to the property market, the new coalition government has had a stabilising effect resulting from the various political concessions that were made. The abolition of stamp duty up to £250k for first-time buyers and the gradual raising of the starting point for income tax liability to £10,000pa have been well received. One of the Liberal Democrat concessions was to drop their plans for a 1% “Mansion Tax” on properties worth over £2 million, paid on the value of the property above that level.

The inherited Government Deficit meant that the Emergency Budget on 22 June 2010 increased VAT to 20pc from 17.5pc to take effect from 4th January 2011 and increased Capital Gains Tax (CGT) for higher-rate taxpayers to 28pc (to remain at 18pc for basic-rate taxpayers). The CGT exempt amount remained the same at £10,100 for this year, higher rate income tax rate was frozen until 2013/14 and personal income tax allowance increased by £1,000 in April to £7,475.

Inflation in the UK has been running well above comparable rates in the United States and Europe over the past year. Official figures released in December 2010, by the Bank of England, however, showed annual consumer price inflation (CPI) rose to 3.3pc in November, more than a percentage point above the 2pc target in November. Analysts had expected it to hold steady at 3.1pc.

According to the Department for Communities and Local Government’s (DCLG) monthly index house prices in the UK fell by 0.7% in the three months to September 2010, compared to a rise of 1.6% during the preceding three months of the year. A 0.8% drop in September alone pushed the average cost of a UK home down to £211,815, just 6.1% up on a year ago. In August, prices had been rising at an annual rate of 8.1%.

The DCLG figures support the picture of the UK property market gained from other surveys from lenders such as the Halifax and the Nationwide, and from the Royal Institute of Chartered Surveyors.

The Royal Institute of Chartered Surveyors (RICS) recorded a net balance of-4% in October 2010 compared with +22% in September 2010 reflecting the lack of mortgage finance available and cautious buyers indicating they may wait until the spring to make a decision. The RICS had seen a rise previously, almost consistently, since July 2009, in the number of new instructions to the market in the UK. In November 2010, 20% of (RICS) members reported prices fell rather than rose however the pace of decline was slower in Scotland than the rest of the UK.

A gradual drying up of properties coming to the market should however limit any dramatic falls in house prices in the short term.

In East Central Scotland house prices continued to rise in Q3 of 2010, according to figures from the ESPC, this was the fourth consecutive quarter in which house prices had risen. The type of property does however have an influence on this. Our experience shows that the majority of transactions have been seen in the £500,000 to £1m price bracket, effectively pushing the average house price figures up. In comparison there has been subdued activity in the first time buyer market and also at the top end.

2010 has been a strong year for buyers with a reasonable supply of properties coming to the market. Although purchase activity in most regions in the UK is higher than a year ago Scotland has seen a 0.6% fall in the purchase rate from 30 September 2009 to 30 September 2010, according to the Nationwide UK House Price Index. With supply and demand falling, transactional activity is likely to remain relatively flat until early 2011.

Scottish Property Market 2010

Research conducted by Saint Property in September 2010, revealed that there was an abundance of prime properties with an asking price of £1.5million or more in the Rural Market. Asking prices totalled over £300 million, based on properties on the open market.

This was comprised of Houses 43%, Estates 39%, Farms 14%, Forest 2% and Rural Business 2%.

Analysis showed that the average asking price of property was £2.86m and the average time these properties had been on the market was 8 months.

Price amendments have been seen on some of these through the last Quarter of this year and these have been generally well received by the market with an increase in transactions.

In October 2010 the Bank of Scotland released the Million Pound Home Sales Report. This looked at the Scottish Property Market for the first half of 2010 and specifically at property of £1m plus. The headline was a 36% rise in Million Pound Home Sales in the first 6 months.

Put into context this accounted for 72 property sales out of an estimated 3,500 £1m plus properties in Scotland. The same period in 2009 saw 53 sales. However the 2010 figure was 20% down on the 2008 figure, following a 41% decline between the first halves of 2008 and 2009.

40% of these Scottish Sales were in Edinburgh. The Million Pound Sales continue to represent a tiny proportion of the total Market, accounting for 0.2% of all Scottish Sales.

The P:E ratio hovered around the 5.7 -6.5 mark however there were various reports putting it both significantly higher and lower than this spread. The long term average P:E ratio sits around 3.5.

Rural Residential

As noted above the residential sector in Rural Scotland has accounted for the highest percentage of available property. This sector has been very slow for the first three Quarters.

There have and remain buyers in this market but often these buyers are of a more discretionary nature and the decision to move, for example, from city to country is often being delayed.

It is apparent that the buyers looking at the Country House market are generally not willing to compromise and continue to be price sensitive.

The positive signs in the last Quarter of this year have stemmed from the increasing number of price amendments where a reduction in asking price has been seen. This has generally generated fresh interest in a property and increased transactional activity in this last Quarter. This approach we hope will be carried forward into 2011.

Farms and Estates

As is true in all types of property and land, the right properties in the right areas are still generating good interest and comparatively strong prices, however, as the number of Irish and lifestyle buyers have reduced, small farms with limited commercial interest have proved more difficult to sell.

Supply of farmland has remained limited. Although figures show 28,619 acres of advertised land from August 2009 to August 2010, an increase of 39% from the same period the previous year, this is significantly lower than the historical average which, between 1998 and 2003, was 53,000 acres. (figures provided by Savills, November 2010.)

The Estate Market has had a good run in 2010. There has, as with most sectors of the Property Market, been a general lack of supply but encouragingly those Estates offered to the open market have been met with a favourable response. The key to the successful sale here has been sensible pricing.

Forestry

Although there remains current uncertainty in many industries, confidence in forestry investment is strong with many private investors choosing to add this to their investment portfolio.

Timber prices have seen an increase of more than 20% over the last year. These have however, not yet reached the peak prices of the mid 1990s.

Although fewer properties were sold during the period October 2009 to October 2010, commercial forestry has held its value and indeed analysis shows a 5% increase in per hectare values, resulting in owners generally choosing to hold onto this asset. The total market size this year was 28% less than the same period in 2008/2009 but was 42% up on 2007/2008. (source UPM Tillhill & Savills Forest Market Report 2010)

In Scotland the Forestry Commission (FC) have increased their influence in the market and they accounted for 55% more sales than the private sector, based on an average FC property size of 232 hectares compared to an average size of 149 hectares in the private sector.

Edinburgh

The Bank of Scotland Million Pound Property Report published in October 2010 showed that 29 properties sold for £1m or more in Edinburgh alone, in the first 6 months of 2010. This accounted for 40% of all million pound plus sales in Scotland, and showed an increase, in Edinburgh, of 8% from the same period in 2009.

Similar to large country properties, property over £1.5m in Edinburgh are taking time to sell. It has been and remains a narrow market. In addition there is significant property available privately and the private market is expanding. In Edinburgh alone, in September 2010, research by Saint Property showed there was over £50 million of property on sale openly with a sale price of £1.5m or more, mainly in the desirable areas of Barnton, the Grange, Morningside, the New Town, and the West End.

Edinburgh continues to show good value for money with top end Edinburgh properties reaching an average of £370/sq ft, just under £4,000/m2.

Additional Saint Property research has revealed that 2 out of 3 homes costing over £1.5m in Edinburgh are currently owned by banking/finance professionals, of which a significant proportion it is predicted relocate to the South, or abroad, in response to the changing financial climate in Edinburgh. This would increase the supply of such properties to the market.

Business Analyst with the ESPC, David Marshall stated: “Although sales have been ahead of 2009 levels each month since February these increases should be viewed in context. The number of homes selling is still around 50% below that seen in the period leading up to the ‘credit crunch’. Over the course of the year, the supply of properties to the market has exceeded the number of sales. As a result, there are now considerably more properties available for sale than there were at the start of the year and this will afford buyers more power in negotiations than they had previously.”

Edinburgh, and Scotland in general, remains a desirable place to live with The General Register for Scotland revealing that last year the population in Scotland rose for the eighth consecutive year. In 2009, approximately 10% more people moved to Scotland from other parts of the UK, than left for other parts of the UK, and 47% more moved from overseas, than left to go to live overseas.

This is consistent with the geographical split of buyers and potential buyers that Saint Property Search are seeing with buyers from overseas currently accounting for 30% of our client base.

Looking Forward to 2011

2010 has consistantly seen contradictory statements in the Press and we expect this to continue well into 2011. This only causes confusion and mistrust for both potential buyers and sellers and we aim to provide a balanced prediction for 2011.

In the US, a combination of weak economic recovery, almost 10% unemployment rate, a stock of over a million distressed properties and uncertainty over foreclosures of major mortgage loan servicers causes analysts to predict an 8% drop in the S&P/Case-Shiller Home Price Index from the second Quarter of 2010 to the third Quarter of 2011. The Consumer Price Index (CPI) in the US has however only risen 1.2% in the 12 months to the end of October 2010, currently the lowest since records began in 1957.

In contrast in the UK, the CPI rose to 3.3% in November 2010, following record price rises in food, clothing and furniture. Bank of England Interest Rate Policymaker Andrew Sentance believes the VAT rise to 20% in January 2011 will cause the CPI to reach 4% and that interest rates will need to rise.

A likely interest rate rise in 2011 coupled with continued tight mortgage finance could bring further pressure on property prices although there will still be demand for the best properties, in their price ranges, in the most desirable areas.

There are however, encouraging signs for Scotland. We are seeing a steady increase in enquiries across the board and these enquiries are not only coming from Asia, America, the Middle East and London, but from within Scotland. Whilst buyers will remain cautious there seems to be a move to break out of the holding pattern we have been in for the last two years and move on. If this desire is replicated by the sellers, then we will see market activity pick up and head towards a more sustainable level.

In difficult and unpredictable times with continued conflicting views on the Market it would be all too easy to write off the Property Market for 2011. We are in no doubt that there will require to be price adjustments in some sectors of the Market, and some of these will be sharp reductions.

We fully expect to see an increased supply of property in all sectors and even now there are some very exciting properties being lined up for sale next year. With this expected increase to the open market we predict there will be a resurgence in the private sales market, with much more changing hands privately and thus not competing with the increase supply on the open market.

We look forward to an exciting 2011, one full of opportunities for the committed buyer.
About Saint Property

Saint Property Search represents individual buyers in their property purchase offering impartial and balanced advice.
For further information, please contact us on +44 (131) 478 4533.

Please forward this to anyone who may be interested in the Scottish Property Market.

Saint Property Forecast for 2010
Thursday, February 18th, 2010

Welcome to the inaugural Saint Property newsletter. You already receive our fortnightly dispatches which briefly and succinctly bring the most important headlines in the property market to your attention. With this newsletter, our aim is to provide you with a broader picture of the market that includes our review of the last year as well as our predictions and forecasts for the next financial period. As ever, our focus of expertise is on the key areas of residential and rural properties, farms and estates in Scotland.

As a Property Search Agent, we are here to provide our clients with professional market knowledge, as well as impartial and experienced advice on the ground in your Scottish property search. The trends we are seeing suggest that our services will be indispensable in 2010. We look forward to sharing our knowledge and guidance with you.

Review of 2009

The property market had a very slow start to 2009 with prices at 15 - 20% below their peaks. Consequently, as prices fell within the price bracket of some of our clients, we were able to help them make the most of the opportunity to purchase top end properties in this period. The increased market activity that Saint Property expected for the Spring did eventually arrive in late Spring and early Summer but as anticipated, the main transactions were in the middle market of £400-£800,000 bracket in both Edinburgh and the country. However, special properties at the top end of the market, where correctly priced, continued to attract interest. Nevertheless, activity overall was well down on previous years, which was compounded by no let up by the banks in their restrictions on lending and increased arrangement fees for mortgages. The money markets remained tight and in some cases closed for business. We are encouraged by the reports for the last quarter of 2009 which showed an increase in mortgage lending.

The majority of purchases both in rural Scotland and in Edinburgh were cash based with significantly less leveraging on price than we have previously seen. Sellers, not wanting to sell when prices were as much as 15-20% below peak levels and who were able to ride out the slump in prices given the historically low interest rates, created a lack of supply in the market and many unintended landlords.

After the peaks and troughs of the past 18 months, by the end of 2009 we saw prices stabilise overall, but these figures were based on a small number of transactions. The top end of the market remained fragile and very price sensitive, as did the first time buyers market. In our opinion, the situation hasn’t changed and the underlying pressure means prices continue to be squeezed lower: a trend masked by low interest rates and a current lack of supply.

Forecast for 2010

The key trends:

Ø Expect to see the private sale come to the fore
Ø Markets will continue to feel downward pressure but supply and demand will have a big impact on price movements
Ø Top end property will remain unstable throughout 2010
Ø Expect interest rates and mortgage rates to increase sooner than anticipated
Ø Downsizing will become an increasing trend
Ø All eyes on the election which seems to be set for 6^th May
Ø Opportunities will present themselves - purchasers need to be ready for them!

Buyers with a significant cash element and ready to purchase will continue to find themselves in a strong position in 2010 with, we predict, more choice in the market and the opportunity to negotiate terms of purchase. Off-market property deals (one of the areas we specialise in at Saint Property) will increase as sellers of high-value properties do not wish to be seen as coming under pressure in a continuingly difficult market place, let alone publicly having to reduce the asking price. Off market deals therefore allows sellers privacy. Saint Property is increasingly being approached by both selling agents and private sellers, knowing that we have a client base of ready buyers. Cash investors will particularly benefit, and overseas clients will continue to take full advantage of any weakness in the pound & invest in UK property.

The looming general election is contributing to a slow start to the year for the property market. Election topics will feature the key issues of interest rates, VAT, income tax, financial market & mortgages, pension funds and market regulation. America is leading the way in proposed market regulation, particularly in the financial sector. Unemployment is set to rise in both the public & private sector and pay freezes, particularly in the public sector, while part time work is masking the unemployment figures. Increased taxes will become a reality for many. Individuals are likely to take measures to reduce their debt and protect themselves against tax increases and continued economic uncertainty. This, coupled with increased levels of borrowing, points towards a general trend of downsizing. Pension funds will be affected and consequently many will find they need to release cash from assets in order to cover shortfalls. We expect to see sectors of the market driven by these issues, particularly at the top end.

The UK economy seems to have greater structural problems than the US & Europe. Whenever there is a period of strength this is likely to become an opportunity to deal with one or more of these problems, raising tax or cutting government spending for example. Likewise the banks, as soon as their balance sheets show some strength, can be expected to deal with their problems. These problems seem to come in the form of significant property debt. This may well result in more property being forced onto the market, providing more choice for buyers.

Interest rates remain at historic lowers. However, don’t be surprised to see these increase earlier than predicted. We also expect to see SVRs (Standard Variable Rates) increase independently and we looked with interest at Skipton’s recent announcement to remove the ceiling on SVRs. We do however believe that tracker and SVR mortgages will remain popular.

Remortgaging is likely to remain low as current interest rates don’t favour the increased cost of switching, as lenders pass on their costs through the arrangement fee. Those with 40% deposits will have a larger choice of mortgages & the most competitive rates. For those requiring bigger loans (£500,000 +) private banks will offer more options.

Reform of the UK Mortgage market by the FSA is expected, with regulation (probably via affordability tests for all mortgages making lenders being made responsible for the consumer’s ability to pay). Buy-to-let mortgages are likely to be regulated by the FSA, removing their current ‘business loan’ status. Possible further intervention may follow with caps on loan to value, loan to income or debt to income. Despite this, continued pressure from the government will be urging lenders to increase their flow of mortgage lending to consumers in order to generate credit back in the market. Banks will protect themselves by choosing ’safe’ customers in order to ensure a buffer is in place before negative equity hits in the event of further property price drops.

Property prices should re-adjust further if supply & demand evens out once more. We believe there will be price reductions, particularly at the top end of the market throughout Scotland. Market comment on price varies wildly from predictions of a drop of up to 15% to rises of up to 9%. As supply and demand even out there will be more choice for buyers at competitive prices with ‘one off’ properties coming to market (often off-market as previously explained). Due diligence by purchasers is to be more important and a requirement by banks. This is where our role as your search agent will become a significant benefit in purchase negotiations.

Edinburgh Residential

As we have said, we anticipate that the residential market will be fragile in general but we do expect to see sales activity in certain segments. The early indicators for this suggest the activity will centre around the £400-£800,000 price range. For properties over £800,000, we anticipate that the market will still be extremely price sensitive. The impression we are getting here on the ground, is that more residential property is being lined up to join the market in 2010. This is encouraging as a lack of stock was a difficulty the market suffered from in 2009. We are already seeing the trend of new properties entering the market privately in the first instance and only moving to a more public sale if necessary at a later stage. As an indication, as much as 80% of the property we are seeing is initially being offered privately.

There are also signs that there are new buyers entering the market, predominantly in the middle sector. We hope to see this continue through 2010, though in our experience, we know the market can be spooked easily. As we go through the year, we expect that more property will be actively marketed within the £1 million+ bracket. Many of these are the sellers looking to downsize; a trend that is gathering pace. At present there are not a significant number of purchasers in this bracket and so supply could well outstrip demand. The result would be price reductions and so those with significant cash funds will be in a strong position to benefit.

Confidence, supply and bank lending are again going to be key drivers in 2010. We are optimistic that there will be significant opportunities for our clients both in the private and publicly advertised markets.

Rural Property

At Saint Property we expect to see more large country houses coming onto the market in the coming months. As with the Edinburgh residential properties, many of this will be offered initially via the private market and will not be advertised - a trend that is already evident. Our presence on the ground in Scotland, and our extensive network means that we are able to make sure that you are informed about these properties as they become available.

Farms and Estates

2010 is likely to be another difficult year for agriculture. Banks that have so far been supportive may become less so with cost of credit increasing. Many farmers have underestimated the requirement for working capital. With continued pressure on commodity prices and increasing input costs, in particular fuel prices, coupled with the farming demographics, we are likely to see more land come available in the short term. Cash buyers will be in the best position to make these purchases. When inflation increases, agricultural land has traditionally been a place to invest and with the likelihood of more properties entering this market, there will be greater opportunities for buyers.

Land prices & forestry have been resilient in 2009 and the best land should maintain its price in 2010. The longer term prognosis is looking good, with food security becoming a more prominent factor, likely to provide security. Equipped farm values (those including houses and buildings) have fallen in 2009 by around 10% from £7000 per acre to £6000 per acre. Bare land averages dropped to £4,500 per acre for arable and £3,000 per acre for good pasture. The pressure is to set to continue into 2010. Properties with a high proportion of residential may be at risk; reflecting a fragile residential market.

Highland sporting estates are a fragile market with estates increasingly being a drain on resources. We have already seen a number of estates entering the market in early 2010 and there remain those unsold from 2008 and 2009. Estate and particularly Sporting Estate Purchases have in the past been discretionary purchases. The appetite for such purchases is significantly lower than the peak or the market. However, there do remain serious and committed purchasers in the market place. First rate Estates and Sporting Estates will generate interest, however they will be exceptionally price sensitive and in many cases we expect to see marked discounts in values from the dizzy heights of the markets in 2007.

Energy production and climate change challenges are set to remain high on the Scottish, UK & European political agendas in the wake of Copenhagen. New policies & grants can be expected to impact rural business decisions. Scotland is a leader on sustainable energy with tough targets to meet. Considerable development of renewable energy schemes can be expected to feature strongly in 2010 and following years, and could well be of increasing investment value to land owners. Any estate with the prospect of incorporating some form of renewable programme will, in turn, be attractive to purchasers.

Saint Properties Conclusions for 2010

Ø A positive outlook for 2010 with much more opportunity for our clients
Ø Prices will remain vulnerable and confidence could be easily eroded
Ø A significant increase in supply will apply pressure to reduce prices
Ø Interest rates and lending rates to move upwards sooner than anticipated.
Ø Prime property to increase in availability