The evolving valuation landscape
Confronting challenges and discovering opportunities
Challenges in a turbulent market
Over the course of the last five years, valuers of all asset classes have had to juggle with macro-economic factors impacting markets. The optimism of the Johnson government’s promise of ‘getting Brexit done’ was soon blown off course by Covid, the impossibility of finding a resolution between all parties and EU rules in Northern Ireland, and the Russian invasion of Ukraine. All this was followed by the bond market disenchantment with the Truss/Kwarteng mini-budget of September 2022. Currently, we are confronted with the Sunak/Hunt strategy, which aspires to bid farewell to quantitative easing and trying to contain cost-push inflation.
The continuing instability caused by these political and economic pressures has hampered investment causing uncertainty in property markets resulting in fewer transactions.
Valuers’ analysis of current demand, pricing, and analysis of the few comparables available has become that much harder especially as data has often been inconsistent.
The hoped-for stability that may be offered by lower inflation is overshadowed by the cost of debt to businesses and continued lack of investment and poor output. We have seen yield softening in the traditional commercial asset classes in particular, where market sentiment has been most impacted as deals have stalled or terminated completely.
After encouraging levels of industrial investment in 2021, the end of 2022 saw considerable yield softening as investors retreated from the market with the rising cost of debt, shaking what we thought were ‘safe’ markets, resulting in the number of transactions being reduced significantly.
According to Nationwide, the 3.4% y/y decline in house prices in the year to May was the sharpest since July 2009. Halifax reported a more modest 1.0% decline.
It is now a warning, that mortgage interest rates are impacting the housing markets. Certainly, the Buy-to-Let boom appears to be over as policies directed at producing a fairer deal for tenants are posing worrying challenges for investors. Certainly, there is evidence that many investors are quitting the market, particularly those who are highly geared or amateur investors with smaller portfolios.
The number of residential sales transactions in April was 82,120, down 24 per cent from the same point in 2022. As at the end of May 2023, it was reported by Moneyfacts that the number of residential mortgage deals offered fell by almost seven per cent in a week, with over 800 offers being withdrawn in the same period for home buyers and buy-to-let investors.
Opportunities amidst the challenges
Amidst the backdrop of challenging markets, promising opportunities emerge. With house prices falling, and increased availability, first-time buyers are now able to find homes denied to them a year ago via new mortgage products entering the market.
In May 2023, Skipton Building Society launched the UK’s first 100 per cent no-deposit mortgage since 2008 for first-time buyers. The product is available to those who have been renting for at least 12 consecutive months, and are up to date on all rental payments, household bills and any other repayment commitments. The amount which can be borrowed depends upon the rent currently being paid, but this could provide an opportunity for many to escape paying high rent to purchase homes albeit in perhaps fewer central locations.
Whilst this no-deposit mortgage might not suit everyone, it is a sign of changing times and possibly an acknowledgement from lenders that change is on the horizon as they seek to become more flexible in providing new mortgage products.
As warnings come regarding a likely recession on the horizon for major Western economies, it is worth considering what this means for alternative asset classes. As has been seen from higher education student enrolment figures during periods of recession, when difficulty hits the economic market, enrolment figures increase. School leavers take the opportunity to invest in their learning rather than heading straight out to work. As such, student accommodation in the form of HMOs and Purpose Built (PBSA) is worth considering as an investment opportunity area.
Oversees student figures have also increased, primarily from emerging economies such as India and Nigeria. The desire for British education is still high on the agenda for many middle-class families from these countries, who find themselves in a position to be able to afford to send their children abroad to undertake degree courses. Coupled with expected domestic student numbers increasing, PSBA accommodation in particular is already benefiting from greater occupation figures.
The increased cost of utilities especially has impacted greatly on net operating incomes for this sector but with the expectation of continued easing in energy pricing the outlook is encouraging and long-term sustainability is more assured. Thus, as investors ride out this current wave of uncertainty, the sector is attracting renewed interest.
University towns, such as Falmouth in the south west, provide good investment opportunities where representation from more than one higher education institution (HEI) is present, in the form of Falmouth University and campuses of the University of Exeter providing medical and environmental courses. With a shortage of PBSA stock, Falmouth and Truro are locations where speculative PBSA investment through new build schemes could result in prudent investment opportunities.
Embracing the changing valuation landscape
Whilst the property market as a whole is undergoing a turbulent time with rising interest rates and the threat of a recession, valuers must navigate the challenges of market uncertainty to produce evidence-based advice upon which lenders and investors can assess the dangers of increased risk.
Once the volatility caused by these macro-economic factors begins to subside, we naturally anticipate more transactions will occur which will allow valuers to analyse income growth, capital values and yields will then become more optimistic.
The increased risk now may well produce increased rewards in the long term.
As lenders change products and work with borrowers and their existing portfolios, more options and opportunity become apparent, even during these uncertain times.
Deborah Bryant-Pearson is a director in our Valuation & Advisory Services team and undertakes a range of valuation work from secured lending and accounts valuations, to providing local authority annual asset valuations and valuing assets on a cash flow basis. Whilst she undertakes valuation of core commercial assets, she has a particular interest in residential investment asset valuation, be it PBSA, HMOs, PRS or BTR.