Snakes and ladders

Rising property values in the residential and commercial markets have provided a major boost to both the viability and deliverability of regeneration schemes across the country. However, following a prolonged bull run for property values, future regeneration projects are faced with new challenges brought about by a combination of rising interest rates and tighter credit constraints.

Falling interest rates have been the greatest driver of higher property values in both the residential and commercial property markets over recent years. Moreover, residential values have been given an extra boost by rising incomes, which have enhanced the buying power of households and provided a further impetus for price rises.

After hitting an all-time low of 3.5% in 2003, interest rates have now risen to 5.75%, a six-year high. Much of this increase has been seen over the past 12 months, but it is only now that we’re beginning to see the results feeding through to the market with the softening of property prices.

While commercial property values are particularly sensitive to the cost of finance, for most regeneration schemes it is the value of residential property that provides the greatest driver of economic viability. The increases in interest rates over the past 12 months have now pushed housing affordability to a 15-year high and this is putting a major squeeze on levels of demand. The net result is that the UK residential market is entering what is likely to be a prolonged period of low, single-digit house price growth.

Increases in interest rates over the last 12 months have pushed housing affordability to a 15-year high

That said, so long as the economy continues to grow, we believe major house price falls are unlikely. However, the current change in market conditions, with buyers becoming far more price-sensitive, is likely to put downward pressure on achievable prices. Faced with the prospect of interest rates remaining at or around current levels for the foreseeable future, the prospects for house price inflation remain poor.

Transaction volumes are a further consideration to factor into these sites, and we expect these to fall back as fewer aspirational buyers enter the market. The key to achieving sales targets is to ensure an attractive product that meets the requirements of the core target markets – in terms of both price and specification. The danger is that the schemes designed over the past few years may well have a proposed mix of housing that does not match the requirements of the local market today.

And while it is unrealistic to keep adjusting the mix of housing every time market conditions change, it is vital that there is a reasonable balance in the proposed supply.

On a scheme-by-scheme level, it will be the local market dynamics that dictate how successful a development will be at adapting to changing market conditions. The adaptability of a scheme will depend largely on the amount of slack built into the land value as changes to the mix of housing have a high chance of affecting financial performance. The higher the land value requirements, the greater the risks posed by the current change in the dynamics of the UK property market.