London Update

September 2007

Greening the Property Market – By Paula Hawkins
Economic Outlook
Market Comment
Young Group's September Highlights
About Young Group

Greening the Property Market – Paula Hawkins

Gordon Brown’s arrival at Number 10 Downing Street has brought housing to the top of the national political agenda. Mr Brown is concerned not just with increasing the UK’s housing stock – he wants the number of homes built each year to rise from the current level of 160,000 to 240,000 by 2016 – the environmental credentials of that housing stock is also an issue. In a paper entitled ‘Building a Greener Future’, the Government stated that all new homes should be zero-carbon by 2016 – an ambitious pledge, but one to which the Home Builders’ Federation (HBF), as well as a number of developers, have signed up – and at this month’s Labour party conference, Gordon Brown pledged to double the number of ‘eco-towns’ to ten.

But while the HBF has expressed enthusiasm for the Government’s plans, it has done so with a couple of important caveats. The first is that, having outlined the framework for green development, the Government should now “stand back, allowing industry the space to do what it does best: change, adapt and innovate.” The second is that without adequate land supply, developers will not be able to meet targets for new homes.

The Government has introduced incentives for builders and home purchasers to go green with the decision to exempt from stamp duty all zero-carbon homes, at least until April 2010. This is a significant tax break: it cuts the cost of a £300,000 home by £9,000. However, this only applies to new build property: those purchasing zero-carbon homes on the re-sale market will still have to pay the stamp duty charge.

A zero-carbon home is one that returns to the National Grid as much power as it uses - in other words, it must have its own power sources, such as wind turbines and solar panels, but no truly carbon-neutral homes have been built in the UK so far, and the general feeling amongst developers is that green technology is not yet sufficiently advanced to be an economically viable proposition.

Some technologies, such as wind power and photovoltaics (which turn the sun’s rays directly into electricity), are generating a great deal of press interest, but is there any substance behind the column inches? This summer saw photovoltaic panels on sale in DIY stores up and down the country, while at the other end of the scale, Castle House Development received planning consent for its Strata Tower (also known as the Electric Razor) at Elephant and Castle, which will include three 9 metre diameter wind turbines housed in a self contained windfarm. The turbines are said to be capable of generating enough power to provide lighting for the 480 foot tower, but given the huge maintenance costs and the lack of sustained strong wind in a city environment, questions remain over whether the turbines will generate anything more than hot air.

Interestingly, the utility companies are backing Combined Heat and Power (CHP) technology which features on-site micro-generation to generate electricity and provide hot water for the entire building, reducing National Grid power consumption. The CHP plant is commonly a clean energy biomass boiler, such as the one to be installed at The Landmark in Canary Wharf – which generates electricity and provides hot water for the building.

How green is green housing?

Advances are being made, but the high cost of implementation of green technologies, low energy yields and lengthy payback periods mean that so far there are relatively few developments which have embraced the zero-carbon ethos. This raises a problem for purchasers who are keen to find a zero-carbon home.

A good place to start is Greenmoves.com, a site dedicated to green property for sale and rental, listing both new build and re-sale property. There is a handful of developments, mostly in London and the Thames Gateway, which offer eco-friendly housing, although even the pioneering BedZED eco-village in South London is suffering from teething troubles and is no longer zero-carbon, thanks to the failure of its on-site CHP plant. It is hoped that the development will eventually return to zero-carbon status.

BioRegional Development Group, the independent sustainability consultant behind BedZED, is currently working with BioRegional Quintain, the developer, to secure a suitable site in the Thames Gateway for its One Planet Living London Project. Also known as Z-squared, One Planet Living will be a large-scale zero-carbon, zero waste community. Similar zero-carbon communities are also being developed in Brighton and Middlesborough.

Meanwhile, the Co-Operative Bank has teamed up with Living Space 21, a new developer, to offer cheap new-build green homes, with studio apartments available from just under £60,000, excluding the cost of land. The developers claim that their apartments are designed to enable them to be tailored to almost any location.

The majority of larger mainstream developers are being more cautious and are yet to join the green revolution. However Barratt, the UK’s largest house builder, has developed the EcoSmart Show Village in Chorley, Lancashire, as a pilot project to evaluate various green technologies. Seven homes have been built, powered by a combination of wind, solar, geothermal and other technologies and while these properties are not for sale, they will be evaluated both by housing experts as well as by prospective homeowners.

While the supply of eco-friendly homes is still limited, demand appears to be growing. A MORI poll commissioned by the Sponge Sustainability Network found that 92% wanted to see sustainability features offered on new homes, and almost two-thirds thought such features should be compulsory. Quite a change from a similar survey carried out in 2005, which found no market demand for sustainable homes. However, research from Royal & Sun Alliance has found that although there is a strong appetite for eco-friendly housing, the majority would not be prepared to pay more for one: just 17% of those polled said they would pay more for a home designed in an eco-friendly way.

BioRegional says that the cost of building an eco home such as those found at BedZED is around 2% higher than the cost of building a property in accordance with 2002 building regulations. This figure is widely disputed by the broader construction industry and Building Magazine reported in July that even the Government itself estimates that the cost of going zero-carbon could add 30% to the average construction cost of a new home.

The cost and economic viability of moving to low and zero-carbon housing continues to be hotly debated and while improving the environmental friendliness of new homes is one aspect of this Government’s approach to greening our housing stock, it has also taken steps to raise awareness of energy consumption levels in existing properties. This is being tackled through the introduction of energy performance certificates (EPCs) for home sellers (as part of the controversial Home Information Packs), and from October 2008, for landlords. The certificates give homes ratings of A to G (similar to those used on white goods), depending on where they rank on an energy performance scale.

Early data from the HIP rollout suggests that most properties would benefit significantly from energy efficiency improvements: the average four bedroom home is receiving an ‘E’ rating. Energy assessors advise homeowners to focus on a number of key areas, but the most important is insulation. 50% of a home’s heat is lost through its walls and loft, with a further 20% through windows and doors, so decent insulation and draught proofing are the best things you can do to improve a property’s energy efficiency. Other recommendations include switching to low energy lighting, putting thermostatic valves on radiators, insulating warm water pipes and boilers and installing A-rated appliances.

Landlords are being urged to consider making ‘green improvements’ before EPCs become compulsory in the rental sector next year. David Mackenzie, accountant and Young Group’s Portfolio Director points out; “There are advantages to going green as a landlord. Not only can you attract a whole new calibre of tenant, but you can also save money. Landlords can use their annual landlord’s energy savings allowance (LESA) to offset the cost of capital expenditure on energy efficiency improvements. Up to £1,500 spent on loft, cavity wall and solid wall insulation can be set against your annual income tax bill.”

So it seems that demand from homeowners for low and zero-carbon property is on the rise, but it is still early days. It remains to be seen whether this is a passing consumer fad and indeed whether there will become an economic imperative for developers to build greener properties. The issue will no doubt be debated for years to come and the jury is currently out on whether there is a sustainable economic future for sustainable homes.

Written by Paula Hawkins – Paula writes on the residential property market for a range of national newspapers including The Times, The Independent, The Sunday Telegraph and the Evening Standard. A former deputy personal finance editor at The Times, Paula has also written a guide to personal finance, published by Penguin Books.

Economic Outlook

As predicted in our August London Update, the Monetary Policy Committee (MPC) held the interest rate steady at 5.75% this month saying that the upside balance of risk to inflation that it identified in August "had probably receded." The liquidity issues, recent high profile difficulties encountered by Northern Rock combined with lower than expected UK inflation data and the US Federal Reserve aggressive trimming of the US key interest rates by 50 basis points, have all but removed the immediate threat of a further rise in UK interest rates. Most analysts expect the base rate to remain steady and some pundits are even suggesting that the next move might be downwards.

News from Europe suggests that the economies of the UK’s main trading partners are weakening. The MPC has been highlighting the strength of global and Eurozone growth as a factor supporting its tightening campaign. This, together with the softer tone of the last set of MPC minutes, has led Nationwide’s Chief Economist, Fionnuala Earley, to believe that rates will now remain at 5.75%. She comments, “The turmoil in credit markets mean the MPC will be reluctant to do anything to add uncertainty while the markets remain volatile.”

Market Comment

	The Council of Mortgage Lenders (CML) does not expect the credit risks associated with sub-prime lending in the US to be replayed in the UK. Mortgage advances totalled £34.1 billion in July, down slightly (2%) on June’s total of £34.8 billion. While new lending for house purchases dipped and remortgaging remained flat, further advances and buy-to-let mortgages increased to £7.8 billion in July. This represented 23% of gross lending, the highest share on record.
	Affordability problems for first time buyers and the move towards young people renting property for longer continues. CML reported that lending to first-time buyers in July was 4% lower than in June, at £4.4 billion. The number of first-time buyer loans was 12% lower than a year ago.
	This trend is reinforced by The Royal Institution of Chartered Surveyors’ (RICS) lettings survey for the 2nd quarter of 2007, which was released this month. It shows that would-be home buyers are staying in the rental sector and not getting a foot onto the property ladder because of the continued high cost of housing and increases in the borrowing rate. RICS spokesperson, Jeremy Leaf, commented, "Current economic uncertainty has created an ideal platform for buy-to-let investors to cash in on rising rental levels. Many would-be buyers have decided to wait and see how the interest rate cycle will affect the market." The RICS Letting Survey found 29% more Chartered Surveyors reported a rise than a fall in tenant lettings during the last three months, compared to 15% during the previous quarter.
	Meanwhile, ARLA (the Association of Residential Lettings Agents) pointed out that buy-to-let is well placed to weather fluctuations in the housing market. “If there is a slowdown in house prices there is an increase in rental demand, and that always means the case of a thriving rental sector,” commented spokesperson Malcolm Harrison.
	The issue of property undersupply remains a talking point this month as Housing Minister Yvette Cooper announced plans to increase the house building target by 40,000 to 240,000 new homes a year. But according to Estates Gazette, this is against a requirement of an additional 300,000 homes per year just to keep up with new household formations. John Gummer, MP, comments, “The new DCLG target is now 240,000 new homes a year - and that only after 2016 – and this still represents a shortfall of 50,000 units. Counting the shortfall since 1997, even if this new target of 3 million new homes by 2020 is reached, there will still be a shortage of 2 million homes.”
	This shortfall is felt most severely in London and is one of the underlying fundamental factors driving the market, which continues to out-perform the UK as a whole. Average UK monthly residential property price inflation for August stands at 0.3% and prices have risen 9.6% since July 2006. London continues to surge ahead seeing a year-on-year increase of 13.4% and monthly price inflation of 0.6%, twice that of the UK average.
	Looking at prime central London, Knight Frank reveals that the uncertainty in the financial markets during August has had limited immediate impact on the market. The monthly rate of growth fell from 3.9% in July to a still respectable 2.1% in August, whilst the annual rate of growth rose again in August to 37.9%, from 36.4% in July. Despite the financial market problems over the summer, Knight Frank remains positive in its outlook and expects to see double digit growth next year in central London. Growth is expected to be led by the super prime market (£5 million+) and by the sub £1 million market. The forecast is that price growth in prime central London will cool from the current 36% annualised rate, to hit 30% by the year end, close to the 29% recorded for the year to December 2006.

Young Group's September Highlights

Young Property

Young Property, our new Development business, is off to a flying start after Neil Young, Iain Macgregor and Tim Collins attended Property Week’s inaugural residential conference, Resi07, at the Celtic Manor Hotel.

Iain, Managing Director of Young Property comments; “There are many interesting and potentially exciting opportunities for development in London. We’re already busy carrying out the necessary valuations and due diligence on a number of sites with a view to purchasing land on an unconditional or with-planning basis. In parallel we have been meeting with banks, lawyers and accountants to work on the structure of the fund that will be used to purchase land as we successfully secure development opportunities.”

Young Lettings

We’re now pleased to confirm that all apartments in our Union Wharf development have been rented to quality tenants; keeping the team’s unbroken record of renting out every investor’s apartment a week before completion! The first apartments completed on 18 September, with the first tenants moving in the following day.

Gerard Earl and Elizabeth Casey one of the young professional couples moving into the apartments overlooking The Regents Canal said: "Union Wharf is particularly appealing, not just because of its very central location, but also its proximity to the canal. Being right on the waterside gives a really relaxing feeling, enabling us to escape the pressures and stress of the city and unwind at the end of the day, while still being in the heart of everything. There’s a great selection of local bars, cafes and restaurants that are just on the doorstep, and of course each Saturday there’s Broadway Market with everything from fresh farmers’ produce and freshly baked breads to art, crafts and ceramics.”

Landmark News

Progress at The Landmark site is well underway with the pilings, foundations and initial work on the basement areas being completed a number of weeks ago and the West Tower is already at first floor level. The Landmark’s developer Chalegrove Properties has just relaunched their website (www.chalegrove.com) where you can view regularly updated site photographs.

New website front page for Chalegrove Properties

When it completes in 2010, The Landmark will be a destination in its own right and a real focus for the locality. There is currently a lack of retail space in the immediate vicinity, but The Landmark’s 20,000 square feet of commercial space will change that. The space, on ground and first floor levels, is arranged around a central landscaped piazza and there will even be a high-profile shop or café/restaurant in the middle of the piazza itself.

Young Group is currently seeking expressions of interest in the commercial space. As freeholder of the entire Landmark site, we can ensure that the retail and restaurant units are let to quality companies and provide amenities that are of real benefit to the Canary Wharf area.

Restaurant and retail space surrounds
The Landmark’s central piazza

About Young Group

Young Group specialises in providing Property Portfolio Management services to private investors, identifying the best off-plan opportunities in London on their behalf and managing the entire investment process - from sourcing the property through to financing, furnishing and letting.

Young Group is a wealth manager with a focus on property as an asset class. Young Group owns all the property it sells, and also retains a number of properties in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion, giving investors 100% confidence that properties will ‘value up’ and that financing will be secured. Young Group has transacted in excess of 1,500 apartments, with a retail value of £630 million. Over 50% of units have been bought by multiple investors. The Group’s lettings division, Young Lettings, has successfully let all investors’ apartments within a week of completion.

For each property exchange, Young Group donates £50 to CHILDREN with LEUKAEMIA, the UK’s leading charity dedicated exclusively to fighting Britain's biggest childhood cancer through pioneering research, new treatment and support of children with Leukaemia and their families, and to Norwood, the Children and Families First charity which provides support to families facing social difficulties.

t:  +44 (0)845 356 1000   e: info@younggroup.co.uk