annington annual rep 2019-web - Page 15



Strategic report | Property market overview
Property market overview
PROPERTY MARKET OVERVIEW
The UK housing market saw subdued,
but still slightly positive, growth in
the year, with Nationwide reporting
an annual House Price Index (“HPI”)
of 0.75% (March 2018: 2.1%), Halifax
showing slightly higher annual growth
of 2.6% (March 2018: 2.7%), whilst
Rightmove recorded an annual fall
in asking prices of 0.8% for the year.
Overall, this was the weakest rate of
growth since 2010, but was broadly in
line with market consensus of c.1% for
the year. The overall subdued growth
during the year demonstrates the same
directional trend as the UK equity
market, supporting the position that
Brexit uncertainty is having an impact on
market sentiment.
Regional variation across the UK
continued as Northern Ireland, Scotland
and Wales all saw some price growth in
March 2019. The Nationwide reported
that England recorded its first annual
price decline since 2012 with prices
down 0.7% compared with March 2018.
This was driven by price declines in the
South East of England, and in particular
London, which showed the greatest
decline, down 3.9% on the same time
last year. Regionally, the most positive
picture was seen in the North and
Midlands, with the North West and East
Midlands showing annual growth of 2.9%
and 2.6% respectively. The Hometrack
UK Cities Index recorded growth of 1.7%
in the year to March, down from 5.5% in
2018, with significantly weaker growth
rates in the southern cities with London
static whilst Oxford experienced the
weakest growth, a decline of 0.6%.
The total value of the UK’s housing
stock peaked at £7.29 trillion during
2018 despite only modest price growth
during the year. The value of property in
London dropped to £1.77 trillion but still
accounts for c.25% of total UK housing
value, up from c.20% ten years ago.
The average price of a house in the UK
increased from £224,144 to £226,798
according to the Office of National
Statistics (“ONS”).
THE RENTAL MARKET
Rental demand remains strong. The ONS
reported that the number of households
in the UK private rented sector has
grown significantly over the past decade,
with an increase of £1.7 million, from
2.8 million in 2007, to 4.5 million
in 2017. According to the Ministry
of Housing, Communities & Local
Government’s Housing Survey 20172018, one in five households in England
are part of the private rental sector,
which makes up 19% of all households
in England, making it the second largest
tenure behind home ownership.
The increase in PRS is also attributable
to the decrease of 120,000 landlords
in the UK since the introduction of
George Osborne’s stamp duty reforms
and the gap between sales of Buy to
Let properties and purchases shows
that many of these houses that were
previously held for rent have been
bought by owner occupiers. Halifax
reported that the gap between
the annual costs of buying a home
compared to renting are the lowest in
almost a decade, although buyers are
still better off than renters across all parts
of the UK when all costs are considered.
14 | Annington Limited Annual Report & Accounts 2019
There is an increase in the recognition
of the need for wider tenure choices in
PRS (the Draft London Plan, the new
National Planning Policy Framework and
Sir Oliver Letwin’s Independent review
of Build Out Rates). It has become clear
that there needs to be diversification in
housing on offer (with the majority of
PRS offerings currently being in blocks of
flats), with more than a quarter of renters
in the UK being families with children.
According to Knight Frank, the
proportion of households in the private
rental sector is expected to rise to 22%
by 2023. A corresponding increase in
the number of build to rent homes under
construction is also being seen with
a year on year increase of nearly 40%
being reported by the British Property
Federation. At quarter 4 2018, there
were 139,508 homes in prospect, of
which 29,416 have been completed,
43,374 are under construction and
66,718 are in the planning stage.
SERVICE FAMILY ACCOMMODATION
The MoD has provided subsidised
accommodation for Armed Forces
service personnel and their families as
a condition of service throughout the
post-war period. A number of factors
influence the future of Service Family
Accommodation (“SFA”) in the United
Kingdom, including basing, the cost
of management and maintenance, the
general condition of the housing stock,
current Government policy with respect
to defence, service personnel terms and
conditions of employment and budgets.
The MoD remains under considerable
pressure to reduce costs and the
financial burden of providing SFA is
under review, leading to proposals for
alternatives to a fully managed and
maintained housing estate.
Under the terms of the contractual
arrangements with the Group, the MoD
has to pay compensation (dilapidations)
if it does not return properties to the
Group in an appropriate condition,
which is defined in the Underlease as
“good tenantable repair and decorative
order”. Poor maintenance of the MQE
has resulted in higher dilapidations
claims in the past, which according to
the MoD, in evidence to the Public
Accounts Committee (PAC) on 14 May
2018, is a factor in the slow release of
properties to the Group as there are
difficulties in repaying these claims.
The PAC hearing was prompted by the
publication of an NAO report entitled
‘The Ministry of Defence’s Arrangement
with Annington Property Limited’. Whilst
reviewing the content of the report, the
PAC also made recommendations on
the future relationship between the MoD
and Annington and on the conduct of
the site review.
prevailing downward adjustment of 58%
from open market levels until the dates
on which the new rents become payable,
which fall between 2021 and 2024. As
part of the Arbitration Agreement the
MoD has been incentivised whereby
dilapidations costs of £7,000 per unit will
be waived for the first 500 units released
each year.
The MoD’s Future Accommodation
Model (“FAM”) remains in development.
This model is a new accommodation
offer to help more service personnel
live in private accommodation and
meet the aspirations that many have
for home ownership. The testing of
FAM in practical terms has been set
out by the MoD, with confirmed pilot
sites at HMNB Clyde (starting from
30 September 2019), Aldershot Garrison
(starting from 31 January 2020) and RAF
Wittering (starting from 31 May 2020).
Subsequently, following a period
of negotiation, Annington and the
MoD announced the signing of an
Arbitration Agreement, which confirms
an expedited Site Review process.
The agreed process is designed to
produce an equivalent result to the
Site Review as set out in the 1996 sale
agreement but in a shorter period
and at a significantly lower cost for
both parties. The original Site Review
agreed between Annington and the
MoD laid out that the leases require the
rents paid by the MoD in respect of the
Service Family Accommodation (SFA) to
be reviewed between 2021 and 2024.
Under the revised agreement, new rental
charges will be produced for the SFA
Estate over approximately the next
24 months. The new rent charged to
the MoD will apply from the same date
as previously envisaged. The MoD
will continue to pay rent at the current
Annington Limited Annual Report & Accounts 2019 | 15

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