Lack of finance, cost, of finance and public spending cuts are seen as the three biggest risks to the residential property market and the businesses that operate in it according to the Savills Sentiment Survey. In the first report of its kind, Savills Research has uncovered the major factors and feelings that will shape the residential property industry next year and beyond.

“The survey starts to reveal a major sea-change in the residential property industry as it moves from a reliance on debt-finance and searches for longer-term equity investors,” says Yolande Barnes, head of residential research at property adviser, Savills. “This is as true of big-hitting development companies as it is of first time buyers looking to the bank of Mum and Dad to provide equity” she adds.

The outlook for activity levels and profitability over the next twelve months remains uncertain at best, particularly in the affordable sector where impending public sector cuts have clearly hit confidence hard. “The sector that managed to buck the trend during the recent recession is now succumbing to a lack of funding that the rest of the industry has been dealing with since 2008,” says Barnes.

Funding scarce

Participants in the survey believed that funding will remain constrained, with only 33% agreeing that more money would be available for housing development in 2011 and only 12% saying that more would be available for affordable housing grant. A reasonably significant minority of developers and agents (36% and 43% respectively) believed that development funding conditions would improve. Tellingly, they were much more optimistic than investors and bankers, of whom only 28% and 27% respectively agreed with them. More positively, half of all investors in the survey (and four out of ten developers) expect more money to become available for housing investment during 2011. Private sector rental investment is certainly a category to watch.

House prices expected to fall

Respondents were near unanimous in their expectations of negative house price growth in the mainstream UK residential market during 2011, with the balance of opinion favouring significant falls. Those in the residential and investment sectors were less pessimistic on this than those in banking and the public sector.

The exception to this gloomy outlook was in London. Survey participants expected significant rental growth in London and a small amount of capital growth. There was also bullishness on UK rents and, not surprisingly, both UK and London yields are expected to move out.

Economy weak

Attitudes to economic growth differed according to industry sector and, seemingly, were related to the outlook in that sector. Those in the finance sector were marginally optimistic on the prospects for economic growth while those in Housing Associations and the public sector were a lot gloomier. This suggests that a dual speed economy will operate over the next few years. City bankers, having felt the brunt of the credit crisis first, are now seeing recovery while Housing Associations are just about to experience their own public sector crisis.

On balance, the industry seems to expect development profits to fall again slightly in 2011 with financiers, agents and developers themselves in seeming agreement on this point. At the same time, there is strong consensus that base rates, costs of finance and mortgage rates will rise. Base rates were forecast to rise by the survey respondents, with opinion averaging 1.25% by the end of 2011. At the same time, mortgage rates are expected to hit 4.25%. The combination of these factors suggests that lenders’ margins will shrink.

More renting

There was real consensus that demand for rented housing will continue to rise, challenging the industry to supply appropriate stock and to work hard to make the case for investment funding. Most respondents felt though that the issue of housing and rental demand has failed to rise up the political agenda, and there is a sense - most notably amongst bankers - that the private rented sector is not currently positioned as an attractive investment sector.

“The growing number of would-be first time buyers and other aspiring home owners currently frozen out of home ownership had led to a significant and growing demand for private rented stock,” says Barnes. “The major challenge for the industry now is to develop, as a matter of urgency, a funding model that attracts investment and allows it to deliver the stock that is now needed.”