Our markets

The housing market and how we are responding to it

In the face of the economic uncertainty surrounding Brexit and a changing lettings landscape, the property market has remained fairly stable with small annual increases in prices for both sales and lettings.

In 2018 the property market followed a similar pattern to 2017 with economic uncertainty resulting in flat transaction rates for sales and only a modest increase in the rental index. The upcoming ban on tenant fees, together with the likelihood of greater regulation within the lettings market, has brought both challenges and opportunities to our industry. Recently reported financial results from the sector suggest that the property franchise networks are proving to be the most resilient in the current market conditions.

The latest English Housing Survey finds that after a period of substantial increase, the proportion of households in the private rented sector (PRS) has not changed for the last five years¹ with the PRS accounting for 4.5 million or 19% of households in 2017–18. While the sector has doubled in size since 2002, the rate has hovered around 19/20% since 2013–14. This stability demonstrates the continued importance of the PRS within the wider housing landscape of the UK. 

2018 saw modest rent rises according to the Office of National Statistics (ONS), up 1% in the twelve months to December², this is largely due to a slowdown in London. Excluding London from the numbers shows that rental prices increased by 1.4%. This is in line with our own Belvoir Rental Index which reports that Belvoir’s own rents have gone up 1% YOY³. We believe this picture will change in 2019 as a result of the tenant fee ban in June 2019 when rents are expected to rise to mitigate some of the loss for agents. 

 

2018 has seen a small decline in landlord instructions, according to a RICS market report⁴. Our own research has shown similar results although this has happened at a rate lower than expected. The main reasons for landlords exiting the market are a less favourable tax regime, increasing regulation and legislation, landlords moving back into the property, and lower investment returns, as well as uncertainty over Brexit, and what this will mean for the market.

1. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/ file/774820/2017-18_EHS_Headline_Report.pdf

2. https://www.ons.gov.uk/economy/ inflationandpriceindices/bulletins/ indexofprivatehousingrentalprices/december2018

3. https://www.belvoir.co.uk/pages/rental-index

4. https://www.rics.org/globalassets/rics-website/media/ knowledge/research/market-surveys/uk-residentialmarket-survey-december-2018-rics2.pdf

 

Our own analysis shows that landlords are still buying, but the numbers of properties are reduced, particularly those landlords buying six or more properties. According to HMRC statistics residential sales transactions were down by 2% in 20185. In the past we have found that when people decide not to commit to property purchases, the demand for rental properties increases, which will typically lead to higher rents and higher yields for landlords.

Whilst landlords are operating in an environment that is slightly more expensive and more tightly regulated, with over 10 million renters in the UK we predict that property will remain the tenure of choice for many millions of people in the UK for a very long time.

5. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/ file/774820/2017-18_EHS_Headline_Report.pdf

trends-in-tenure.svg

average-rent-by-quarter.svg

The Government recently announced its plan to ensure all tenants had access to a redress scheme, regardless of whether their property was managed by an agent or what we might call a DIY landlord6. Currently, a lettings agent must belong to a redress scheme but a landlord does not. Landlords are required to comply with over 160 laws and over 400 rules and regulations7 in order to let a property legally but often this is not enforced and many DIY landlords are probably not even aware of their legal responsibilities. 

6. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/773161/ Strengthening_Consumer_Redress_in_the_Housing_Market_Response.pdf

7. http://tdsfoundation.org.uk/wp-content/ uploads/2017/12/TDSCF-report-3-Enforcement.pdf

 

A redress scheme makes it more likely that landlords who do not comply will be held to account and the fine for each breach is £5,000. We expect that this change will motivate more landlords to instruct a professional lettings agent, such as Belvoir, to gain access to the processes, knowledge and expertise that we provide in order to ensure they are letting property legally. The recent Private Landlords Survey8 found that 52% of landlords do not use an agent so the size of the opportunity for the Belvoir Group could be significant.

8. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/ file/775002/EPLS_main_report.pdf

The long anticipated tenant fee ban, originally announced in the autumn 2016 budget statement, has now been confirmed as coming into force from 1 June 2019. We have assessed that the financial impact from the tenant fee ban will be less than our original estimate of 8% of the Group’s gross profit. The effect is now believed to be around 6% initially, reducing further to 3% over nine months. This encouraging development is the result of our focus on mitigating the impact for our franchisees through acquisition, diversification into sales and financial services, and adoption of additional revenue streams.

2018 saw our franchisees review their business operations in order to find efficiencies and maximise income streams. A series of Growth Workshops held across the Group helped to facilitate this, as has a more targeted approach by our Franchise Support function. The entrepreneurial mindset of a franchisee has an additional edge over a corporate business model and we are confident that our franchisees will have the skill set to recover this lost revenue in time.

As a business we have diversified our offering even further to include more of a focus on financial services and property sales to spread our risk and reduce the potential impact of the tenant fee ban.

Whilst we are confident in our own ability to mitigate the impact of the tenant fee ban, we predict that the ban will have a much greater effect on the landscape of lettings agents as a whole. We have previously predicted a 20% reduction in the number of lettings agents in the UK as smaller independent agents, who rely on tenant fees as a significant element of their income and have no external support, will struggle to remain profitable. This was increasingly apparent by the number, and indeed the size, of agencies being offered for sale in 2018 with many citing that their decision was driven by the impending changes in the sector. Our franchisees are already feeling the benefit of this change with 26 acquiring a local competitor in 2018, with the average size of the business acquired up 85% to £266,000 (2017: £144,000) which reflects a contraction of the number of agents in the sector not only amongst the smaller but also many of the larger independent agents. 

Several large corporate companies have had to take drastic action including large scale branch closures in order to prepare for the upcoming loss in revenue. Their high overheads and large corporate structure make them much less agile when it comes to such changes in the market.

All of this change in the sector will present a wealth of opportunities for our franchisees to continue to acquire property portfolios to add to their own businesses but also in respect of a potentially large number of landlords who will find themselves without an agent. The Group’s brands remain in the perfect position to take advantage of this consolidation. While we anticipate a dip in franchisees’ income over 2019 as a result of the fee ban, we believe that many of our franchisees will find themselves in a stronger position with a larger market share moving into 2020.

 

Tenant fee ban in numbers

 

1 June

tenant fee ban comes

into force

6%

tenant fees as a percentage

of gross profit

20%

percentage of letting agents

we predicted will close

£7m

2019 target for acquired

turnover under our assisted

acquisitions programme

Residential property transactions for 2018 were down 2%9, although the annual house price change for a property was 2.5%10. This demonstrates a fairly flat but also resilient sales market given the political and economic uncertainty of 2018. 

The cause of the reasonable stability in the property market currently is likely to come down to supply and demand. Taking migration as an example, net migration stands for the twelve months ended June 2018 at 273,00011 yet annual new build starts for the same period were just 160,02012 which was 3% down on the year before. Available housing is still a big issue for the UK whether it is for sale or for rent and until a sustainable housing strategy is actioned by Government, we anticipate that we will not see the dramatic drop in house prices that you might otherwise expect from the level of uncertainty caused by Brexit.

Looking into the 2.5% annual increase in house prices further, the data shows that this is largely due to big increases in Northern Ireland, Wales, East and West Midlands, North West and Yorkshire and The Humber. London and the North East have both seen house prices go down. 

annual-price-change.svg

Comparing this to where our own sales transactions have taken place, the majority of our sales business takes place in the East and West Midlands and the North West. Three areas that are showing healthy annual increases in house prices. Our exposure in London and the North East, where prices have fallen, is very minimal.

group-sales-by-region-01.svg

transactions.svg

Despite national property transactions being 2% down, our franchise networks delivered increased MSF from sales of 8.4% in 2018.

Newton Fallowell, the Group’s main estate agency network, has notably outperformed the sales market in 2018, having completed on the sale of 3,265 residential properties in 2018, up 5% on 2017. The Newton Fallowell franchise network has seen instructions up 10% and completed sales up 5% on 2017 and has finished the year with a pipeline 7% stronger than at the end of 2017. In fact, Newton Fallowell has sold more properties subject to contract than any other estate agent in the areas that it covers.

Furthermore, elsewhere in the Belvoir Group, the predominantly lettings-based networks of Belvoir and Northwood have seen revenue from property sales increase by 9% as a greater number of franchisees start to offer property sales as an additional service to their core lettings business.

9. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/ file/771859/UK_Tables_Jan_2019__cir_.pdf

10. https://www.gov.uk/government/publications/ uk-house-price-index-summary-december-2018/ uk-house-price-index-summary-december-2018

11. https://www.ons.gov.uk/ peoplepopulationandcommunity/ populationandmigration/internationalmigration/bulletins/ migrationstatisticsquarterlyreport/november2018

12. https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/743650/ House_Building_Release_June_2018.pdf

Although property transactions remained relatively flat, low interest rates and the extension of the Help to Buy scheme have offered new opportunities for first-time buyers and those looking to remortgage.

2018 was a relatively flat year for the housing and mortgage markets. Consumer confidence was hit by the uncertainty of the Brexit negotiations, house prices plateaued in some parts of the UK, and the Bank of England Base rate increased to 0.75%. Meanwhile the number of mortgage holders remortgaging hit new heights and the Government extended the Help to Buy scheme to 2023. With interest rates expected to remain low, the number of people remortgaging looks set to remain high for another year.

The buy-to-let market has been less active over the past year due to the implementation of Government regulation, including changes to stamp duty and the withdrawal of mortgage tax relief for landlords. This slowdown in the market is expected to continue in 2019. First-time buyers have been reaping the benefits of landlord restrictions as we are seeing amateur landlords with one or two properties sell up, and it is these types of homes that are attractive to first-time buyers.

The Help to Buy scheme has also been instrumental in getting first-time buyers into the marketplace, with 81% of first-time buyers getting on the property ladder through this scheme. With falling house prices in London and the South East, the extension of the Help to Buy scheme and availability of low interest rate mortgages, there is greater opportunity for first-time buyers who have managed to get a deposit together to be able to afford their first home.

 

In 2017 the Belvoir Group took the strategic decision to extend its property-related services to include financial services through the acquisition of Brook. This both added a healthy additional income stream to the Group and expanded on the services that our franchisees are able to offer their customers.

During 2018 several Group offices became introducers to Brook enabling those franchisees to take advantage of this valuable source of revenue. This contributed to Brook arranging on 2,393 mortgages representing £353m worth of lending in 2018. 

In November Belvoir acquired MAB Glos, a network of financial services advisers operating in Wales, the South West and the Midlands. The combination of Brook and MAB Glos makes Belvoir the largest distributor of mortgage business within the Mortgage Advice Bureau network. Our aim is for every Belvoir Group branch to have the ability to introduce customers to a local adviser within the next five years. MAB Glos arranged 409 mortgages in the five weeks post completion.

Our network of mortgage advisers now stands at 127. The target is to grow this by around 30 in 2019 and to complete on over 6,000 mortgages.