Savills has released its annual cross-sector investment forecasts, focusing on the residential sector for the years 2024 to 2028. The agency noted that the residential sector faced challenges in 2023, including mortgage market turbulence, an uncertain planning environment, increased build cost inflation, and regulatory changes in the private rented sector, which suppressed transactions and growth.
Looking ahead, Savills anticipates easing financial disturbances as inflation returns towards the Bank of England’s target of 2.0 per cent and mortgage markets stabilize. Despite a tough environment for landlords, Savills projects an 18.1 per cent growth in rents by 2028. This presents significant opportunities, especially for less debt-reliant landlords and those with portfolios in regions like the North West, where returns of 9.2 per cent are forecasted.
The struggles in the private rented sector are expected to boost institutional landlords, with both Build to Rent and Purpose Built Student Accommodation playing a more prominent role moving forward.
Key residential themes and top picks for 2024 include:
- Despite expectations of sustained higher debt costs, progressive cuts in mortgage debt over the next five years should facilitate a resurgence in house price growth and increased activity levels. Savills forecasts mainstream house prices to return to growth by 2025.
- In prime central London, prices are still 19 per cent below their 2014 peak and are overdue for recovery. However, this recovery will occur within a tighter tax and regulatory framework, with non-doms tax status and overseas buyers stamp duty being key factors.
- The housebuilding industry, having endured a challenging year, is poised for recovery. This coincides with the end of Help to Buy, a substantial increase in build costs, and a major shift in planning policy.
- Larger equity-rich landlords, benefiting from strong rental growth, are better positioned to navigate the market changes, including the end of the Assured Shorthold tenancy system.
- Developers selling built-to-order units off-plan post-Help to Buy are finding this approach more conducive to assembling portfolios of energy-efficient, new-build residential homes.
Savills’ top investment picks for 2024 are:
- Best in Class properties, which typically perform strongly during market downturns or early recovery stages, characterized by their location, situation, aesthetics, and quality.
- Retirement for rent, backed by a structural imbalance in demand and supply, has emerged as a key investment opportunity.
- Partnerships with an affordable twist, particularly in light of a potential shift in government focus towards affordable homes, are expected to see increased collaboration between developers and affordable housing providers, especially the new generation of “for profits.”