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Reports of death of London housing market greatly exaggerated, UBS says

Prices are holding up, build-to-rent is proving a larger driver of demand than Help to Buy, new data shows

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New ‘bottom up’ data on the London housing market suggests there has been a strong release of pent-up demand in recent weeks that will have come as a boost to the housebuilders focused on the capital like Berkeley Group PLC (LON:BKG) and Bellway PLC (LON:BWY), UBS said on Friday. 

Working with data from residential development specialist Molior London, analysts at the Swiss bank suggested there were several supportive factors for the housing sector.

READ: Redrow pulls out of London as coronavirus changes homebuyer demands

Overall, housing sales had been up 20% compared to the same period last year in London and were down 14% in the second quarter.

While sales had been materially disrupted during the lock down in April and May, around 70% below normal, Molior calculated that sales in June rebounded up to 150% of normal. 

“While affordability is stretched on price/income basis, affordability calculations have essentially moved to comparing rental yields to the cost of financing,” the UBS number crunchers said. “This is true for both individual buyers as well as institutional buyers.” 

A reasonably wide spread of around 2-3% is holding up price levels, the analysts said. 

Build-to-rent has gone from nearly zero 10 years ago to become a major driver of demand, now accounting for around 33% of all sales, it was also noted, eclipsing the 23% from Help to Buy. 

With tensions around Hong Kong heating up, UBS highlighted the potential for a number of BNO passport holders (British national from overseas) to be “a significant positive” at the high end of the market.

While the prime London market is small and looks more oversupplied, Molior data shows the mid-market is little changed from the past five years in terms of how much stock and unsold units are under construction, while in the outer London market stands at 1.7 years of unsold houses, which is relatively high compared to the last few years. 

“Overall this suggests that the market is still somewhat oversupplied but with similar conditions to the last few years.”

Some of the major listed UK homebuilders have announced withdrawals from London, such as Redrow PLC (LON:RDW), Crest Nicholson Holdings PLC (LON:CRST) and Vistry Group PLC’s (LON:VTY) Linden Homes some time ago, but UBS noted that others are stepping up, namely Berkeley and Bellway, with the former the most exposed to the capital. 

“The SME homebuilder has essentially exited the market, concentrating development on larger developments. Foreign investment in sites peaked four to five years ago.”

Quick facts: Berkeley Group

Price: 4210 GBX

LSE:BKG
Market: LSE
Market Cap: £5.29 billion
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