What is the outlook for the prime residential markets?

What is the outlook for the prime residential markets? Katy Warrick Market Update Mat Oakley Commercial View Lucian Cook Residential Forecasts Emily Donovan London Development

Living in uncertain times

Stamp duty acts as a drag on the market Other taxes: IHT and Capital Gains Concerns around City employment

2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 Sales over 1m Sales over 1m Source: Savills using HMRC 6,000 5,000 1m - 2m 1m - 2m pre Dec 2014 Over 2m pre Dec 2014 1m - 2m post Dec 2014 Over 2m post Dec 2014 Year to Dec 2014 13,600 2m+ Year to Dec 2014 4,300 4,000 Year to June 2016 15,300 3,000 Year to June 2016 4,200 2,000 Year to June 2017 14,100 1,000 Year to June 2017 3,600 0

2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 million Quarterly stamp duty receipts for residential property Source: Savills using HMRC 3,000 Pre 2014 Underlying SDLT post December 2014 Additional 3% 2,500 2,000 1,500 1,000 500 0

2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 million Quarterly stamp duty receipts for residential property Source: Savills using HMRC 7.63bn Pre 2014 Underlying SDLT post December 8.99bn 2014 Additional 3% 3,000 2,500 2,000 1,500 1,000 500 2014 Year to Q2 2017 0

Price cuts to 1m+ properties H1 2016 5,585 source: TwentyCI

Price cuts to 1m+ properties H1 2017 10,604 source: TwentyCI

1m+ Market Activity Tracker 1 st half 2017 vs 1 st half 2016 Source: Savills using TwentyCi London 122 For every 100 sold -20% -2% -13% Rest of UK 76 For every 100 sold -8% +11% +2%

Q3 2017 Quarterly growth Annual growth Since Sept 2014 Prime Central London -1.0% -5.2% -15.0% Outer Prime London -1.3% -4.3% -4.7% Suburbs -1.0% -1.1% 0.8% Outer London above 2m falls below -12.5% Inner commute -0.2% -0.5% 4.3% Outer commute -0.1% 0.5% 7.2% Remainder of South 0.7% 2.8% 7.5% Midlands and North 0.4% 2.0% 5.0% Scotland 0.4% 1.4% 1.6%

Q3 2017 Quarterly growth Annual growth Since Sept 2014 Prime Central London -1.0% -5.2% -15.0% Outer Prime London -1.3% -4.3% -4.7% Suburbs -1.0% -1.1% -0.4% Inner commute -0.2% -0.5% 3.1% Outer commute -0.1% 0.5% 6.2% Remainder of South 0.7% 2.8% 7.5% Midlands and North 0.4% 2.0% 5.0% Scotland 0.4% 1.4% 1.6%

Q3 2017 Quarterly growth Annual growth Since Sept 2014 Prime Central London -1.0% -5.2% -15.0% Outer Prime London -1.3% -4.3% -4.7% Suburbs -1.0% -1.1% -0.4% Inner commute -0.2% -0.5% 3.1% Outer commute -0.1% 0.5% 6.2% Remainder of South 0.7% 2.8% 8.2% Midlands and North 0.4% 2.0% 3.8% Scotland 0.4% 1.4% 2.0%

1 Sales numbers are robust, but with significant price cutting 2 Leaving no evidence for reversal of stamp duty changes 3 Market remains dependent on outcome of EU negotiations 4 What happens next depends on a number of factors...

Mat London employment & employers

In the Global Financial Crisis London lost 70,000 office-based jobs

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 000 Office-based jobs Total employment 000 These numbers seem unlikely in a historic context, as well as in the context of the relatively low importance of financial services 3,000 2,500 2,000 1,500 1,000 500 0 Early 90s recession 33,700 jobs lost 5 years to recover Greater London Dotcom bust 28,200 jobs lost 3 years to recover GFC 69,100 jobs lost 3 years to recover Public administration and defence Administrative and support Professional, scientific and tech Real estate activities Information and communication Financial and insurance City of London & Tower Hamlets Finance & Insurance Info, comm, professional, science, tech 350 300 250 200 150 100 50 0

Norway Denmark Belgium Sweden Luxembourg France Netherlands Finland Austria Germany Ireland Italy United Kingdom EU 28 Spain Slovenia Cyprus Portugal Malta Estonia Slovakia Czech Republic Croatia Poland Hungary Latvia Lithuania Romania Bulgaria Avg hourly labour costs Furthermore, the cost implications of large moves to the continent are prohibitive 60 50 40 30 20 10 +37% +25% 0

What has changed since last summer? Cycle generally more significant than Brexit Weakened pound Rise in international investment into the UK Rising inflation leading to weaker consumer story Expectation of a weaker occupational outlook, with little sign that it is actually occurring Weakened government (which may not be a bad thing!) The fact is that Brexit is a lose-lose proposition, harmful both to Britain and the EU. It cannot be undone, but people can change their minds (George Soros, June 2017) Weakened Tory mandate probably means a least aggressive stance with the EU over exit (and an acceptance that the EU has the strong hand) Will we even manage to have a transition plan by Spring 2019? Possible to negotiate a delay until end 2019? After that a closed ended transition period with a similar situation to Turkey? Real exit thus delayed to 2021/22?

2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 sq ft sq ft In the City & West End office letting has been strong (up 23% on last year and the 10 year average) City West End 9,000,000 Q1 Q2 Q3 Q4 6,000,000 Q1 Q2 Q3 Q4 8,000,000 7,000,000 5,000,000 6,000,000 4,000,000 5,000,000 4,000,000 3,000,000 3,000,000 2,000,000 2,000,000 1,000,000 1,000,000 0 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 m sq ft m sq ft Pre-letting activity is strong, with some businesses starting to focus on the early 2020s already 6.0 5.0 Complete Pre-Let Speculative City: 38% pre-let 3.0 2.5 Complete Pre-let Speculative West End: 32% pre-let 4.0 2.0 3.0 2.0 1.0 1.5 1.0 0.5 0.0 0.0

Banking & Fin Svcs Tech & Creative Professional Retail & Leisure Public Business & Consumer Charity/Assn Extraction/Utility Manufacturing Property Serviced office provider Requirements sq ft Who is looking for new offices at the moment? 6,000,000 5,000,000 4,000,000 47% 3,000,000 2,000,000 20% 1,000,000 0 9% 8% 7% 4% 2% 2% 1% 1% 0%

Summary Tenant demand has diversified and become more footloose Brexit occupational risks are not just about Finance Brexit will be less of a shock and more of a wet blanket on occupier demand The cost of housing and living in London is a bigger concern to most employers

Lucian Prime Central London

Domestic London Pre 1984

Arriving as a World City 1984 to 2007 Developing as a Global Financial Centre

2008 to 2014 The age of the financial stimulus

Jun-79 Mar-80 Dec-80 Sep-81 Jun-82 Mar-83 Dec-83 Sep-84 Jun-85 Mar-86 Dec-86 Sep-87 Jun-88 Mar-89 Dec-89 Sep-90 Jun-91 Mar-92 Dec-92 Sep-93 Jun-94 Mar-95 Dec-95 Sep-96 Jun-97 Mar-98 Dec-98 Sep-99 Jun-00 Mar-01 Dec-01 Sep-02 Jun-03 Mar-04 Dec-04 Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13 Dec-13 Sep-14 Real (inflation adjusted) Index Prime Central London to September 2014 Source: Savills 800 700 600 Domestic Promotion GFC & QE Real House Price Trend Line = June 79 - Sept 14 Prices 32% above trend line in Q3 2007, having risen by 214% in the preceding 10 years Prices 9% above trend line in Q1 2012 500 400 300 200 Prices peak in Q2 1989 following house price growth of 297% in the preceding 10 years. Prices sit 40% are above trend line in Q1 1998. Prices fall to 34% below their trend line by end of 1992 having fallen by 26% in nominal terms Prices 15% above trend line in Q3 2002 Prices fall to 10% below their trend line having fallen by 22% in nominal terms in just 18 months post credit crunch 100 0

Trend Line House Price Growth 1979-2014 5.7% per annum above the rate of inflation

Returns relative to other assets Source: Savills, Oxford Economics 16.0% PCL Gross Yields 5 year gilts 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

2014 & beyond Where do we go from here?

Past 5 years 2013 2014 2015 2016 2017 +8.3% -0.4% -6.8% -3.3% -4.0% +6.1% inflation adjusted -1.3% inflation adjusted -8.0% inflation adjusted -3.4% inflation adjusted -6.7% inflation adjusted

Real (inflation adjusted) Index Where does that leave us? Source: Savills 800 750 700 650 600 550 GFC & QE Post Stamp Duty Reform Real House Price Trend Line =June 79 - Sept 14 In perspective Early 1990s -26% nominal -39% real -34% below trend line GFC -22% nominal -26% real -10% below trend line 500 450 400 Dec-07 Jun-09 Dec-10 Jun-12 Dec-13 Jun-15 Dec-16 Since Sept 14-15% nominal -18% real -30% below trend line

Assumptions 1 A Conservative minority government to 2022 2 Transition agreements are followed by a Free Trade Agreement 3 No exodus of financial & insurance services from London 4 No further changes to stamp duty

Next 5 years 2018 2019 2020 2021 2022 0.0% +2.0% +8.0% +5.5% +3.5% -1.5% inflation adjusted +0.2% inflation adjusted +6.0% inflation adjusted +3.6% inflation adjusted +1.6% inflation adjusted Brexit uncertainty Post Brexit realisation Bounce in demand Bounce subsides General election

Across a decade 2013-2017 -6.8% 2018-2022 +20.3% 2013-2022 +12.1% -13.1% inflation adjusted +10.2% inflation adjusted -4.3% inflation adjusted

Other Prime Markets

806 1,214 1,451 1,733 1,740 1,797 1,898 1,952 2,054 2,079 2,151 2,187 2,291 2,312 2,321 2,442 2,482 2,490 2,551 2,645 2,709 2,786 2,919 2,926 2,975 3,050 3,071 3,075 How many sq ft does 1,000,000 buy you? Source: Savills, On the Market 3,500 Less than 1,000 sq ft 1,000 to 1,500 sq ft 1,500-2,000 sq ft 2,000-2,500 sq ft 2,500-3,000 sq ft Over 3,000 sq ft 3,000 2,500 2,000 1,500 1,000 500 0

5 year forecasts Central London Inner Commute Midlands & North +20% +15% +13% Other London +10% Suburbs +13% Outer Commute +15% Rest of South +14% Scotland +14%

Emily Prime London Development

Starts Completions Demand

Prime physical completions 2017-2021 8,500 annual average

Double the number of completions over the last year

3x more than the annual average over the last 5 years

Rolling annual market new homes Yet sales hold up in an uncertain market Source: Savills 7,000 Prime new build sales 6,000 5,000 4,000 6,200 Prime new build sales 3,000 2,000 1,000 0 +8% Higher than the peak in 2013

Rolling annual market new homes Yet sales hold up in an uncertain market Source: Savills Prime new build sales 7,000 More homes available for sale at completion 6,000 5,000 4,000 2017 2021 6,200 c.1.3 homes will be completed Prime new build sales for every 1 sold 3,000 2,000 1,000 0 +8% Higher than the peak in 2013

Falling starts will ease pressure on the pipeline 12 months to Q2 2017 8,000-27% 11,000 in 2016

Alternatives to mitigate oversupply? Serviced apartments 65% Growth of over 65 s in London over next 20 yrs 313 Office Retirement 54% over 65 s are underoccupying their London homes by 2+ bedrooms 253bn 2,620

The changing nature of prime demand 2.9 in 2014 1.9 in 2016 1.1 in H1 2017 69% 5m+ sales this year were completed units

Proportion of prime purchasers Owner occupiers feature closer to completion 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Investor Owner Occupier 25% 52% 56% 71% 75% 48% 44% 29% More than 2 years 1-2 years 3 months to 1 year Up to 3 months Length of time purchased off plan

1 London s prime supply pipeline of new homes is unprecedented 2 But prime new build sales have been encouraging 3 Some developers will diversify & deliver different uses 4 Owner occupiers prefer tangible, completed homes

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