What the race for space means for property investors

In what has been dubbed the “race for space”, home-movers are searching at record levels for larger houses during what is on course to be the UK housing market’s busiest year since prior to the global financial crisis.

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An estimated 1.5 million homes are expected to change hands in 2021 – a 45% increase on 2020 and the most since 2007 – totalling circa £461 billion in house sales, with houses suitable for families that are able to accommodate home offices and boasting outdoor space the most in-demand. 

This rise in demand for more spacious houses spurred from an increased number of people working from home during the various Coronavirus-related lockdowns – with 46.6% of those employed doing some degree of home working in April 2020 alone. During this time, people began to re-evaluate what is needed from their homes.

In a list showing the most popular properties amongst renters in September 2020 published by Rightmove, two-bedroom houses were in first place, with two-bedroom bungalows and three-bedroom houses sitting in second and third place respectively. 

This was a stark contrast to the results for September 2019, where studio flats took the top spot before falling to a staggering eighth place in 2020 – showcasing this desire for larger living spaces.

And in 2021, this demand for bigger homes has accelerated. In keeping with the above, the race for space has been a factor in driving price growth for houses up 7.3% in the last 12 months whilst price growth for flats has been weaker at just 1.4%.

At the same time, according to the latest Zoopla House Price Index, the number of people looking to purchase family homes has increased 114% compared to levels witnessed during the same period between 2017 and 2019. 

But this demand is still undersupplied to a significant degree, presenting opportunities for experienced investors to capitalise on the booming housing market and aid in closing the gap. 


Opportunities for experienced investors 

The volume of homes for sale at present is not keeping pace with the level of demand from prospective buyers. Annual Government housebuilding targets are not being met – with the NHBC registering just 123,151 new homes in 2020 – and there is a backlog of existing need for suitable housing alongside the heightened demand now present. 

The number of larger, three and four-bedroom homes for sale in particular have dropped, with the latter seeing more than a 20% decrease in all UK regions year-on-year. In addition, the number of houses in general now account for just 59% of all listings, in comparison to 76% in 2017. 

It is clear that tackling this shortage is imperative, and as the Government emphasised in their white paper “Planning for the Future” published in August 2020, small and medium-sized housebuilders must work alongside their national counterparts to deliver the right homes in the right locations at a time they’re needed most. 

But the number of regional, SME housebuilders began to dwindle from the market post-financial crash, with decreasing financial support from mainstream banks seeing small and medium-sized housebuilders go from being responsible for circa 40% of all new-build homes to just 12% in recent times. 

Because of this – and their evidenced importance in addressing the UK’s housing crisis – alternative finance from private investors has become crucial in reversing the decline of SME housebuilders.

Through investment vehicles such as property bonds, investors are able to support experienced small and medium-sized housebuilders with proven track records to deliver much-needed, mixed-tenure residential housing developments. The focus on mixed-tenure is critical, as it allows for the varying needs of homebuyers to be met – from first-time buyers searching for two-bedroom houses boasting incentives such as shared ownership and rent-to-buy, to growing families looking for spacious five-bedroom homes. 

And the benefits of doing so for experienced investors have the potential to be extremely lucrative. Often targeting rates of between 4% and 8%, many property bonds can also be held in an Innovative Finance ISA (IFISA), resulting in all returns being tax-free. 

The evident high demand for such products and the proven resilience of the housing sector through the Coronavirus pandemic could also be drivers of confidence for experienced investors, as whilst most sectors faltered in the face of uncertainty over the last 18 months, property and the housing market in particular bounced-back stronger than ever. 


Investing into property bonds

Already a potentially valuable investment option, the pandemic-led race for space has made the need for property bonds even more critical as the number of prospective home-movers far outweighs the amount of suitable homes on the market. 

And for experienced investors, supporting small and medium-sized housebuilders in delivering the homes needed the most is not just an investment with the potential to generate attractive returns, but also one that can be both impact-driven and tax-efficient.