London Property

Mortgages, Luxury Living, Rentals, Co-Living, Office Transformations – 27th Jun Property Bulletin

Blog Post No. 170

Mortgages, Luxury Living, Rentals, Co-Living, Office Transformations – 27th Jun Property Bulletin


The UK is facing a looming mortgage crisis that is predicted to have a far greater impact on homeowners than the recent energy bill crisis, according to warnings received by government ministers.

While the skyrocketing costs of energy dominated the concerns of ministers in the past, new analysis indicates that the financial burden placed on middle earners by rising mortgage rates will far exceed the additional costs they faced with energy bills.

The situation is expected to worsen due to the large number of fixed-rate homeowner mortgage deals, totaling over 2.4 million, set to expire by the end of 2024. With average two-year deals now surpassing 6%, many homeowners could see their interest rates triple in the coming months. The recent decision by the Bank of England to raise interest rates to 5% has brought them to their highest level since the 2008 financial crisis, adding to the financial strain faced by mortgage holders.

Analysis conducted by the Public First consultancy for the Observer highlights that the impact of rising mortgage rates could be significantly greater for certain households than the surge in energy bills. This rise will particularly affect individuals under the age of 45, as their interest payments constitute a higher proportion of their mortgage. If mortgage rates were to triple, typical mortgage holders in this age group could face annual costs rising by over £4,000.

Tory MPs are expressing despair and frustration over the mortgage crisis, with some accusing the government of underestimating its severity. Chancellor Jeremy Hunt has already held meetings with major mortgage lenders, who have agreed to grant homeowners a 12-month grace period before initiating repossession proceedings. Nevertheless, MPs anticipate growing discontent among homeowners and criticize the government for being slow to respond to the gravity of the situation.

Lucy Allan, the Telford MP who has been vocal about the mortgage crisis and is not seeking reelection, expressed concern that the government mistakenly perceives mortgage holders as “the comfortable middle classes.” She argued that while some mortgage holders may possess substantial home equity and savings, many are young families who entered the housing market when interest rates were low. Continuously increasing interest rates, without a sufficient number of mortgage holders to mitigate the impact through discretionary spending, will not effectively reduce inflation. Instead, it will disproportionately affect a small group of people and destabilize the property market.

According to an article in The Telegraph, the UK is predicted to experience the longest house price downturn among Western countries as a result of a sudden increase in official interest rates that is impacting the mortgage market.

Oxford Economics forecasts that property values in Britain will continue to decline until the second half of 2025, with prices expected to drop by 11% compared to their peak in 2022. In contrast, other Western countries such as the United States, France, Germany, and Italy are expected to see prices begin to rise again this year and throughout 2024.

The gloomier outlook for interest rates is contributing to forecasts of a decline in the UK housing market. Previously, British house prices were expected to recover in early 2024, but with projected interest rates reaching 6% by the end of 2023, the situation has changed. The recent increase in the Bank Rate from 4.5% to 5% following higher-than-expected inflation data further exacerbates the issue. Rising inflation and wage increases are fueling predictions of higher interest rates, with pay having increased by 7.2% in the past year, providing consumers with more spending power.

The impact of higher interest rates is reflected in both variable and fixed-term mortgage rates, which have significantly increased. Experts suggest that the UK housing market will face a long-term issue as a result. In comparison, the US is expected to see a smaller decline in house prices at 5%, as inflation has dropped more rapidly and currently stands at 4%. This allows interest rates to come down sooner in the US compared to the UK. The UK has the highest inflation rate among the G7 economies, and inflation is projected to remain above the Bank of England’s 2% target for the next three years.

The prolonged period of inflation is expected to reduce the amount of money households have available for property purchases, placing downward pressure on house prices for an extended period. Additionally, the delayed impact of higher rates on house prices is due to the prevalence of two- and five-year fixed mortgages in the UK, shielding homeowners from increased costs until their mortgage deals expire. Over a million households are yet to experience the full impact of mortgage rate increases, prolonging the housing market downturn.

Other countries such as the US, France, and Germany have more favorable mortgage market conditions, with long fixed-rate mortgages and cheaper fixed-rate deals available. The length and severity of the housing market downturn in the UK can be attributed to the substantial increase in house prices during the pandemic, supported by low interest rates and a stamp duty holiday. Stagnant wages in the UK are also expected to have a negative impact on house prices, with poor income growth since 2008 contributing to a drag on house price growth.

According to a report by Julius Baer Group Ltd, Singapore has emerged as the world’s most expensive city for luxury living.

The city-state, which climbed from 5th place last year, has taken the top spot for the first time as it aims to establish itself as a leading global center for the wealthy. Following Singapore, the next two cities on the list are also located in Asia: Shanghai in China and Hong Kong, both renowned financial hubs.

Singapore’s early reopening of its borders during the pandemic has attracted a significant influx of high net worth individuals. The report highlights that the number of family offices in Singapore reached around 1,500 by 2022, marking a twofold increase compared to the previous year. However, the report also emphasizes that the city’s high living standards and growing demands on local infrastructure contribute to its expensive lifestyle.

While Asia has maintained its position as the most expensive region for luxury living for the fourth consecutive year, other cities in the top ten list include London, New York, and Dubai.

The study analyzed various factors such as residential property prices, luxury cars, business class flights, prestigious business schools, and other indicators of a luxurious lifestyle to compile the report. The survey focused on high-net-worth individuals with household assets of $1 million or more and was conducted between February and March 2023.

New York, the financial capital of the United States, climbed to fifth place this year, up from 11th place last year, attributed to a strengthening dollar and a post-pandemic rebound.

London, which held the second spot last year, slipped to fourth place this year. The report attributes this decline to the impact of Brexit and the resulting uncertainty, which has affected the UK’s reputation. The report also notes that European cities, in general, have been dropping in the rankings.

A notable addition to the top ten list is Dubai, which has secured the seventh spot for the first time. The report describes Dubai as a “star performer” in this year’s index, highlighting its growing prominence as a luxury living destination.

Greystar Real Estate Partners, a rental housing group, has acquired the London Olympics site for £20 million ($25 million) to develop a built-to-rent project.

Built-to-rent refers to purpose-built residential properties designed and constructed specifically for rental purposes.

The acquisition of the Stratford Mill site in east London was made from UK-based real estate group Lifestory, as part of Greystar’s ongoing expansion plan in the UK. Located in the central area of the Pudding Mill masterplan, the Stratford Mill site has already been granted planning consent for the development of 245 new residential units. Construction is scheduled to begin in the second quarter of 2024, with the project expected to be completed by 2026.

The market for built-to-rent housing in the UK has been steadily growing in recent years. In the first quarter of 2023 alone, £820 million ($1 billion) was transacted for build-to-rent projects, while single-family housing also saw significant investment of £500 million ($635 million).

The UK government has been supportive of the built-to-rent market’s growth, implementing various policies and initiatives such as planning reforms and tax incentives to encourage the development of more rental properties.

This expansion by Greystar follows its partnership with Airbnb, which involved listing over 100 buildings on the Airbnb platform. The company plans to add more properties to the platform in the future.

The co-living trend is booming in London as a response to the city’s housing crisis,

…but opinions are divided on whether it represents the future of renting or merely an opportunistic cash grab. The co-living sector has experienced significant growth, tripling since 2019, with London dominating the market, currently offering 2,820 operational beds and another 9,000 in the pipeline, according to Savills.

Co-living is positioned as a more flexible and professional alternative to traditional renting, with all-inclusive bills and rent costs. Tenants have their own private studios while enjoying access to shared facilities such as kitchens and living spaces. Unlike dingy student accommodations, co-living brands now cater to young urban professionals, offering aesthetically pleasing interiors, luxury amenities like swimming pools, rooftop bars, and co-working spaces.

However, co-living has its critics. While communal spaces and trendy amenities are provided, the living arrangements are often likened to “dorms for adults.” The studios offered are typically smaller than the minimum space standards, and complaints have been raised about maintenance and rules.

Some argue that co-living addresses the housing crisis by offering a solution that is more affordable and socially engaging. Operators emphasize the competitive pricing compared to renting a standard studio apartment, with amenities like co-working spaces and gym memberships included in the package.

While co-living offers flexibility and a social element, the units’ sizes often resemble hotel rooms and fall short of national space standards for one-person studios. Although newer co-living developments are improving in terms of the size and quality of accommodation, some local authorities remain skeptical. Approaches to co-living planning differ across councils, with concerns raised about room sizes, affordability, and the overall quality of the accommodations.

Supporters argue that co-living provides more choice to those affected by the housing crisis, particularly individuals who earn too much for social housing but struggle to enter the property market. However, critics, including Jonny Anstead, co-founder of developer TOWN, caution that relaxing room size regulations should not compromise residents’ quality of life. Currently, the co-living sector has not done enough to demonstrate that it can meet these standards, according to Anstead.

In conclusion, the co-living boom in London represents both a potential solution to the housing crisis and an opportunity for developers to capitalize on the demand for affordable and socially engaging living arrangements. The future of co-living as the dominant model for renting remains uncertain, as concerns about space standards and residents’ quality of life persist.

Investors have injected £2 billion into repurposing unwanted London offices as the rise of remote work reshapes the market.

Since the beginning of last year, they have acquired £1.3 billion worth of central London offices with plans for conversion into new uses, while an additional £700 million worth of deals are currently in progress. These investments cover 2.2 million square feet, constituting nearly 10% of new investments, as the real estate sector adapts to the evolving landscape of hybrid work.

According to CBRE, the real estate adviser, the level of investment in converting secondary offices to alternative uses is quite unprecedented. While commercial real estate investment has slowed since last autumn, some investors are still banking on projects that involve transforming offices into student accommodations, hotels, and laboratories. In some cases, alternative use investors and developers have outbid traditional office investors by 10% to 20%.

Certain properties, such as the Nobel House on Millbank near the Houses of Parliament, are slated for conversion into hotels and serviced apartments. Demand for laboratories, hotels, and student housing has been bolstered by the lack of research space and the recovery of international students and visitors following the pandemic.

However, the market changes also coincide with rising interest rates aimed at curbing inflation and a “mini” budget in the previous autumn that increased borrowing costs, causing unease among investors. While prime offices still command high rents, the demand for older and less desirable properties has declined as companies reduce their space requirements.

Nevertheless, converting some surplus office buildings in the UK may prove challenging due to physical design limitations, planning regulations, and the significant investment needed, potentially leading to them becoming “stranded assets.” Outdated offices often require substantial financial resources for upgrades to make them appealing to tenants or suitable for new purposes, undermining their attractiveness as investments.

CoStar data indicates that investment in central London offices during the first quarter of the year was approximately half the long-term average, although deal activity had improved compared to the 20-year lows seen in the final quarter of 2022. The hopes of utilizing unused offices for residential purposes have been hindered by planning constraints. The government implemented stricter standards for office-to-residential conversions in 2021, including requirements for light and minimum unit sizes. Many London local authorities further restrict office conversions to safeguard their high streets and preserve employment opportunities in their respective areas.

Landlords in London and the South East would need to raise rents by an average of £614 per month to remortgage

…their properties at current rates without incurring losses, according to Hamptons estate agents. This represents a significant 41% increase from the current average rent of £1,498 to £2,112 per month. Experts warn that many landlords may be unable to raise rents to such an extent and may choose to sell their properties instead.
Zoopla data reveals that half of the rental properties sold by landlords are located in London and the South East. Landlords also face challenges when remortgaging as they no longer meet the stress tests for new mortgage products when their fixed-rate deals expire.

To qualify for a buy-to-let mortgage, landlords need rental income to cover a certain percentage of repayment costs. This requirement, known as the “interest coverage ratio” (ICR), is set at 125% for basic-rate taxpayers and limited companies, and 145% for higher-rate taxpayers. Properties with an ICR below 110% may become unmortgageable and subject to higher standard variable rates.

While landlords can increase rents to meet these criteria, there is a limit to how much tenants can afford to pay. Rents have already risen by 10% in the past year, with London and the South East experiencing even higher increases. This surge in rent prices is surpassing wage rises and worsening rental affordability issues.


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