Capitalising on the allure of a branded residence
Making sense of the latest trends in property and economics from around the globe.
5 minutes to read
Branded residences
Golf courses designed by Greg Norman. Wellness facilities pioneered by medical centres in Switzerland. Private shopping services by Saks Fifth Avenue. The latest iterations of the world's branded residences bring the most sought after luxury experiences to your front door.
All this helps explain why the sector is growing at a strong clip - equating to annual growth of 12% in new developments each year up to 2026 - according to our new Global Branded Residences Report, out this morning. Our assessment confirms Saudi Arabia and Vietnam as the fastest-growing markets in terms of development numbers, while the US, UAE, Mexico and tin key European markets.
The sector faces challenges. Our market survey and collection of expert interviews suggest there is a potential conflict between purchaser and developer timescales. Brands need to better define and substantiate the added value they bring. The sector must provide clear evidence of its commitment to sustainability.
However, there remains a raft of opportunities in what is now a truly global sector. Our contributors point to growth potential in Asia, particularly in cities such as Hong Kong and Singapore; in Europe, with a focus on the UK, Portugal, Turkey, France, Italy, and Greece; in the Middle East, where Dubai and Saudi Arabia are the standouts; and the Americas, including the US, the Caribbean and Mexico. As the sector matures and competition rises, developers that can deliver best-in-class schemes with a relentless focus on the quality of the real estate, facilities, service, and design will outperform. See the report for more.
The services rotation
During the pandemic, as many spent long periods at home, spending was diverted away from services and towards goods. The result was a global burst of inflation.
Economies reopened and our spending began to revert back to normal patterns. The rotation back to services naturally boosted services price growth, which has historically been much less volatile than that for goods. The result is much more persistent inflation that is more closely tied to wages - the share of labour in total costs in services, for example, is about twice as large as in manufacturing.
All of this comes from the latest Bank for International Settlements annual report, which provides a neat summary of a global problem that appears to be particularly prominent in the UK (graph 2 here). The UK's services CPI accelerated at an annual rate of 7.4% in the year to May, up from 6.9% a month earlier, according to last week's release. Meanwhile a quarter of UK services companies raised prices in June, compared to only 4% that cut them, according to figures published on Friday.
Tight labour markets and the rotation to services are in large part why the BIS says the "last mile" of taming inflation could be the hardest - "there is a material risk that an inflation psychology will take hold, where wage and price increases start to reinforce each other. Interest rates may need to stay higher for longer than the public and investors expect," the group says, adding that governments should tighten budgets and consolidate spending to help curb inflation and ease the pressure on central banks.
Macroeconomic risks
The BIS picks out both residential and commercial property markets as macroeconomic risks (see Box D here). While delinquency rates on residential mortgages are still low, they are expected to rise in some jurisdictions - the group picks the UK FCA's warning that about 9% of UK mortgages are at risk of defaulting in 2023–24 as an example.
It reckons a 10% decline in house prices, which is approximately our forecast, reduces (median) consumption growth in the following year by about 1.8%. The effect is strongest in countries with high home ownership rates, such as the United Kingdom and New Zealand, and is most pronounced where high home ownership is combined with a heavy reliance on adjustable rate mortgages.
Commercial real estate markets also raise "a prominent risk" to financial stability, the BIS says. Spreads on US commercial mortgage-backed securities (CMBS) rose substantially throughout much of 2022, reflecting a growing difficulty in refinancing maturing debt. In Sweden, where CRE firms rely heavily on bank funding and floating rate loans, a number of large property groups suffered from rating downgrades and stock sell-offs. CRE delinquencies started to pick up in some markets and global distressed CRE debt was close to $175 billion in early 2023, vastly more than in other sectors, the report states.
The performance of banks has historically been sensitive to movements in commercial real estate values, which raises the risk of a credit crunch. In addition to direct exposures to CRE, particularly in regional banks, some banks have large indirect exposures through other channels, eg via construction lending. As a result, troubles with CRE lending can have an outsized impact on overall bank lending.
Repossessions
The risk of large-scale repossessions in the UK remains low - the FT had a good piece on this last week. High levels of housing equity, resilience in the jobs market and lending reforms introduced after the financial crisis will all provide a cushion.
Nevertheless, the economic risks of even a modest uptick such as those outlined in the BIS report - to say nothing of the awful implications for the homeowners at risk - have drawn the attention of the government.
Chancellor Jeremy Hunt on Friday announced a deal with lenders on Friday that includes a 12 month grace period that will delay repossessions for borrowers who fall behind on mortgage payments. The deal also includes a commitment to allow borrowers temporarily to lengthen mortgage terms without affecting credit ratings.
In other news...
A reminder that Knight Frank has launched its summer UK Residential Property Sentiment Survey, we'd be grateful if you could take part, and we'll share the results over the coming weeks.
Stephen Springham's new Retail Note focuses on the official retail sales figures for May from the ONS, which surprised on the upside – yet again. Meanwhile Shane O'Neill provides a snapshot of how the Belgium economy and real estate markets are performing that includes expectations for real estate markets in 2023 and beyond.