Real estate and the risk rotation
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
We'll look back on the beginning of Trump's second term as a turning point, that much is clear. For investors in real estate, the key question is whether we're seeing an enduring shift away from risk, or a short, sharp repricing of assets to account for the fact that Trump's tariffs are more serious, and more unpredictable, than the pre-election consensus suggested.
The S&P 500 fell another 0.8% yesterday, briefly crossing the 10% peak-to-trough decline from recent highs—a threshold commonly regarded as a 'correction'. The VIX index, a measure of market volatility, surged to the highest level since August.
To what extent is Wall Street's appetite for risk diminishing, and how might bearish attitudes spread? If we are witnessing a broad-based flight from risk, the impacts in global property markets will be felt quickly: secondary locations or speculative projects become less attractive and investors will demand higher returns for committing. By the same token, prime assets and development projects will come into focus, as will income producing assets like the living sectors, or defensive sectors like logistics.
It's still too early to say which scenario will prevail, but US inflation data for February, due out later today, will be important. A hot reading, generally regarded as a monthly gain of more than 0.3%, will confirm fears that a period of stagflation beckons. A reading weaker than 0.3% will likely be read as a harbinger of recession. Pick your poison.
Rising output
Sentiment among the larger housebuilders is improving amid a more favourable policy environment. Persimmon full year results, out yesterday, provided more evidence of a recovery in sales rates, and the developer intends to ramp up output this year.
The company built 10,664 homes during the calendar year, up from 9,992 in 2023. Its net private sales per outlet per week climbed to 0.70, from 0.58. It expects to build 11,000 to 11,500 homes this year.
Signs of rising output among the listed developers will come as a relief to the government, which has pledged to lay the groundwork for 1.5 million new homes over the course of this parliament. However, even if other major developers follow Persimmon in increasing production, reaching that target remains unlikely. Residential construction continues to wilt, leading declines in the latest S&P Global PMI index. The index fell for the fifth consecutive month in February—its steepest drop since early 2009, excluding the pandemic.
You can read a more detailed outlook on the residential development sector from Anna Ward here.
First-time buyers
“If [the government] is really serious about this, then they’ve got to look at tackling the demand side of the market as well,” Dean Finch, Persimmon chief executive, told the Times in reference to the government's housing targets. “This is the first time in 60 years that there hasn’t been any help for first-time buyers.”
Finch suggested the banks step in with a “shared equity scheme” — effectively an extra loan to help would-be buyers raise a deposit. The average first-time buyer deposit now stands at an eye-watering £61,090, according to Halifax figures published last month.
Even without help, first-time buyers are accounting for a rising share of housing market activity, which suggests the Bank of Mum and Dad is doing some heavy lifting. The number of buyers stepping onto the property ladder for the first time rose to 341,068 last year, up 19% compared to 2023, according to the Halifax data.
Figures from the Bank of England, published yesterday, showed that first time buyers accounted for 29.6% of all mortgage lending in the final quarter of 2024, the highest proportion since the Bank began collecting the data in 2007. Lenders have been offering longer contracts or easing affordability tests to enable more prospective buyers to get on the property ladder, Simon Gammon of Knight Frank Finance told the FT.
“That’s happened as rates have eased and affordability has improved . . . [and] surging rents have given buyers a real sense of urgency,” he added.
Bulk deals
The Single Family Rental market is among the UK's most attractive real estate sectors. Investors and housebuilders have formed a symbiotic relationship as interest rates have surged - investors have acquired detached homes at attractive prices, while housebuilders have de-risked by selling stock in bulk.
There have been questions as to how long this will continue as the sales market strengthens, but Persimmon views the arrangement as long-term. The company completed 1,456 bulk sales to investors in the period, up from 780 in 2023. It expects this segment of the market to contribute around 10-15% of its future volumes.
"With the institutional investor and BTR markets presenting a large and growing opportunity, we will continue to develop long-term relationships to secure sales that enhance capital returns and accelerate delivery," the company said.
Investors have spent £3.7 billion funding or acquiring Single Family Housing since the start of 2023. Seven in ten respondents to our NextGen Living Survey say they intend to have made investments in the sector by 2029.
In other news...
Dubai’s property market is thriving —and its neighbours are taking notes (FT).