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