Micro-homes may suffer poor capital growth

New research from Which? suggests that micro-homes may be the runt of the property market, failing to grow in value alongside their roomier relatives.

Since the government introduced Permitted Development Rights (PDR) in 2013, the number of so-called micro-properties has rocketed. Almost 8,000 new micro-homes were built in 2016, the highest number on record, according to a Which? analysis of Land Registry data.

However, the new research suggests micro-homes don’t necessarily grow in value like their larger counterparts, while some mortgage lenders won’t lend on them at all.

A ‘micro-property’ has no strict definition, but typically, the term refers to properties with a floor area below 37sqm – which is the minimum size for a studio under the government’s national Technical Housing Standards.

Micro-homes aren’t restricted to the crowded London market. Which? research showed high numbers of micro-properties are being built in urban areas like Leicester, Liverpool, Cambridge and Bristol.

Which? notes that many of the new properties produced under Permitted Development Rights use space in an intelligent way.

Gwyn Roberts, of housing charity BRE, says size is less important than innovative and practical design. “Small homes that are not well-located, have poor indoor environment and are generally designed and constructed poorly would not reach [our standards],” Roberts said.

“[However], many micro-flats are well located, have communal space inside and out and are well designed to have property ventilation, sound insulation and more.”

Martin Skinner, chief executive of Inspired Homes, suggests younger buyers in particular tend to have lifestyles that suit smaller apartments, citing the ‘growth of the sharing economy and more possessions like music and film collections stored in the Cloud.’

He said that many of their PDR properties have opted for ‘flexible furniture solutions’ – including desks that transform into dining tables.

In 2016, properties in London smaller than 37 sqm cost just £279,000, according to Land Registry data. Though not exactly cheap, it’s less than half the average price of a London home sold in the same period (£580,000).

Which? combined information on property sizes from the Department for Energy with house price data from HM Land Registry, covering nearly 3m properties. It then compared the average price of properties sold in 2016 with those sold between 2013 and 2015 to measure the price growth of different-sized homes.

The analysis showed properties with floorspace of between 50 and 120 sqm had the best price growth in the period. However, homes smaller than the national minimum space standards did not perform as well; price growth for properties smaller than 37 sqm was 6.9%, compared with 8.7% for homes larger. This is despite almost two-thirds of these smaller properties being located in London and the South East, which have seen massive rises in house prices in recent years.

That trend continues for even tinier homes: properties smaller than 30 sqm grew just 5.4% in value between 2013-15 and 2016. In London, micro-homes did slightly better: properties smaller than 37 sqm grew 11.8% between 2013-15 and 2016. However, this was still much less than the 14.5% growth for all other properties in the capital.

While micro properties ought to be the preserve of the first time buyer, it’s investors who get the first dibs, with many reserving early to benefit from capital growth, according to Skinner. In fact, plenty of micro-properties are listed on property portals as ‘Investor Opportunities’, offering ‘guaranteed’ gross rental yields

A simple reason why micro properties don’t grow in value might be that many buyers aren’t eager to sacrifice space for convenience. Another reason, however, could be the ability to borrow to buy them. If most buyers cannot easily get a mortgage on the property, this may limit price growth over the long-term.

Which? asked six major mortgage providers whether they had special criteria on lending for smaller homes. While HSBC didn’t comment, Lloyds Bank, Barclays and Santander all said they didn’t have a specific size limit, but that they lend on the basis of a professional valuation.

For example, Barclays said it requires flat conversions to have been developed with ‘reasonably sized rooms’, but said that this is ‘down to the valuer’s professional opinion.’

However, Nationwide and RBS wouldn’t lend on properties with floor areas smaller than 30 sqm. RBS added that smaller properties run the risk of ‘restricted demand’ and ‘volatile pricing on resale’.

David Blake, Principal Mortgage Adviser, Which? Mortgage Advisers said, “With the average London micro-property selling for £279,000, smaller homes can represent a more realistic opportunity for many but can also be harder to mortgage.

“Smaller properties can put lenders off due to concerns around the future value of the investment. However, there are mortgage lenders who are receptive to properties of this nature, if demand is high enough and sustainable.”

With modern facilities and intelligent space solutions, the micro-homes of today are a far cry from the inner-city studios of old where you could touch the toilet from your bed. Demand for cheap, inner-city housing, coupled with rising prices, have driven up the supply of this type of property. But it remains to be seen whether they offer viable returns to owners – or prove to be homes that people actually aspire to live in.

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