If V is for victory, what does L stand for? Or W?

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29 May 2009

While the MP gravy train continues to derail and Cameron and Clegg attempt to hijack public disillusionment, thoughts have drifted to a less cynical and depressing place: Recovery. Whilst it may seem premature for such thoughts the question that has been increasingly preoccupying commentators in the past couple of weeks seems not to be when the recovery will come, but rather what shape it will be?

This has lead to a veritable alphabet of recovery; from the Government's golden child, 'V shape recovery', to the Soros' troublemaker 'Inverted Square Root Recovery' by way of the black sheep twins of the recovery family  'L and W' , completely avoiding the Japanese cousins who emigrated in the 1990s. Setting aside a selection of letters that would confound all but the most battle hardened scrabble players; does the current market sentiment reflect this forward looking optimism? 

New Build Sentiment Improving

Announcements by both Kier and Redrow this week have given hope that the slight improvements being experienced in the market are here to stay. In an interim management statement the Kier Group said that "the challenging market conditions experienced over the last 12 months are beginning to ease" and they are well positioned to 'take advantage' of the subsequent recovery.

Redrow in a recent trading statement reaffirmed the perception that the worst of the market was behind us by commenting, "With sales volumes in the housing market seeming to have stabilised, we are recommencing construction on certain developments and starting new sites from our existing landbank." The recommencing of development sites is a strong hint that the national builder feel that the demand that has been missing in the past year is returning and will remain moving forward.

Taylor Wimpey has also stated that "In the first few months of 2009, the UK housing market has performed at the upper end of our expectations, with higher than expected visitor levels and sales rates."

This said, the recent rights issue by Taylor Wimpey to raise circa £510m in capital has seen 22% of the offered shares failing to find takers and therefore remaining with the underwritten institutional investors. 

The NHBC have added further weight to a positive view. In their rolling quarterly review, New Home applications to build for the three months to the end of April, were up 10% on the first three months of the year. This prompted NHBC chief executive Imtiaz Farookhi to comment that: "While it is still too early to assume that these are definite signs of a recovery, some positive indicators are emerging which suggest that the severe downturn in house-building activity may be beginning to turn a corner.

Rettie & Co. New Build Property Tracking System

Part of this improving new build sentiment must lie in the combination of increasing buyer demand, decreasing levels of traditional stock and the deals offered by house builders which are able to overcome the increased capital requirement. At Rettie & Co. we closely track the new build market and our analysis of sales over the course of 2009 show some interesting trends that suggest that bridging the increased equity requirements is a key factor for the new build sector in the current market. Of the sales recorded in the Lothians area;

Over 60% of sales have required a cash discounts from headline price
The average discount is approx 15% (£37k) from headline price
Almost 55% of sales have used incentives and schemes to bridge affordability
These schemes include PX / Shared / Fees / Stamp Duty paid
48% of sales have used either Shared Equity (28%) or Part Exchange (20%)
Traditional Incentives - turf, furniture, flooring etc included as well
Only 5% of sales state that no discount was used.

These statistics are illustrative that it is not only headline discounts that are motivating buyers but also their ability to overcome the short fall in lending currently being experienced. This means that for those who are keen to move but are struggling to get their financial ducks in a row, new build deals could offer them a potential solution. It has also shown that with improving conditions and sentiment, the availability of highly discounted units are diminishing as we move through the period of supply overhang and weak demand into one of market stabilisation.

With Mortgage Lending so crucial to activity...

British Bankers Association (BBA) figures released for April show that while the 'Amount Outstanding' has declined, reflecting previous months' weak lending, the value of loans approved has remained fairly constant with a very slight up tick in April. BBA statistics director, David Dooks stated that, "The house purchase part of the mortgage market appears to have stabilised, with slightly more approvals coming through."

The CML Figures for Scotland in April are slightly more downbeat identifying that lending North of the Border has continued to slow in advance of the wider UK market; down 34% on the previous quarter compared to 25% across the UK.

The National Association of Estate Agents (NAEA) have reported a rise in First Time Buyers (FTB) activity year-on -year in April with FTBs accounting for 23% of market activity, up 15.3% on the same time last year. However, the CML have stated that for the Scottish market FTBs are down 33% on the previous quarter, with Loan to Income (LTI) ratios tightening from 2.8 to 2.74.

Commentary from the likes of the CML and John Charcoal Mortgage Brokers suggest that the market is currently nearing the statistical bottom in the SE England with the Scottish market expected to trail behind by up to 6 months.

Against this backdrop of mortgage lending statistics, both RICS and Goldman Sachs have announced their predictions that the market still has a further 5-10% to fall before staging a modest recovery next year.

So what do these figures mean for buyers now? Simply put, if you can afford the higher LTV required to secure a competitive rate of borrowing, especially if you are a first time buyer, then you are in the minority and at an advantage. If the market does begin to recover next year and mortgage lending improves over the course of this year then the current window to purchase property, within sight of the market bottom, while some quality property is still available (although diminishing) and without the same degree of competition has to be seen as a sensible opportunity.

Scottish Developments

Invest in Art.  In Glasgow a shortlist of architects has been announced for the £50m Glasgow School of Art Building. Glasgow has been redefining its urban landscape in recent years with some bold architectural statements so it will be with interest that we wait to see what is next to grace city.

Haymarket Tiger. Architect Richard Murphy has been defending his design for the redevelopment of the Morrison Street hotel and mixed use development at a public enquiry into the development.

Contact Us

If you have any questions, would like any further information regarding the above content or would like to discuss how the Rettie & Co. Consultancy & Research Team can help your business, please do not hesitate to contact:

Andrew Meehan
Researcher
t: 0131 624 9051
e: andrew@rettie.co.uk

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