Second home revival residential research - Knight Frank
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residential research
second home
revival
New-build second homes report 2010New-build second home
revival 2010
Growing demand for new-build holiday homes in the UK
Second home developments have been one of the brightest spots in the UK
new-build market through the recession and now into the recovery. Liam Bailey,
head of residential research at Knight Frank, examines the reasons behind the
health of this sector.
The second home market was one of the most along with cleaning and maintenance.
resilient sectors of the housing market Several weeks’ a year of personal use is
throughout the recent recession surprisingly often included in these arrangements. Such
Liam Bailey so, perhaps. In the property slump of the early developments continued to sell throughout
Head of Residential Research 1990s second homes value were hit hard as the recession, some of this demand coming
high interest rates forced owners to sell. from buyers who would have, until recently,
This time around there has been no big sell-off bought a property overseas.
of second homes. After a slight decline of 0.4%
One holiday development in Dorset proved
in 2008, the number of second homes in
popular with parents of pupils at Sherborne
Britain rose by 2.6% during 2009 to reach a
School; they could use the properties when
record high of 245,384, we expect to see a
visiting their children, and rent it out during
further 2% rise in the total to more than
the holidays.
250,000 in 2010 (see figure 1).
Two main types of managed holiday home
There are several reasons for the faster
investment have emerged in recent years.
rebound in demand for second homes this
Holiday lodges are an upmarket reinvention
time around. Interest rates are much lower
of the traditional caravan or chalet park, with
than they were in the early 1990s, which has lodges built in contemporary design and with
reduced both the cost of acquiring property high quality fittings. Buyers usually purchase
and the attraction of keeping money in cash. their homes, but not the land. Included in the
While credit has been severely constrained for price is a licence to occupy the site for a certain
homebuyers requiring high loan-to-value number of years. Unlike traditional caravan
ratios, wealthy investors with large amounts parks where buyers can find themselves
of equity have been able to take advantage of obliged to buy a new caravan after as little as
low financing costs. 12 years, holiday lodges typically come with a
The recovery from the recession has coincided 125-year licence.
with a trend for taking holidays in the UK – in The other type of managed holiday home
spite of a succession of three damp summers investment is the leasehold apartment, set in
between 2007 and 2009. The fashion for the context of a managed holiday complex or,
‘staycations’, as holidaying in the UK has been as is increasingly popular, adjoining a hotel.
dubbed, has been inspired partly by a weak Residents often enjoy full use of the hotel’s
pound and partly out of environmental facilities, yet have the privacy of a self-
concerns. Holidaying in the UK is now widely contained apartment.
Figure 1 considered a ‘green’ option, especially when
compared with long-haul destinations. The market for both types of development
Second home growth
Number of second homes, England (000’s)
is likely to grow. The supply of cottages in
Equally important for buyers seeking an popular second home locations remains
255 investment return on second homes, has been highly constrained. In the popular second
250
the development of a market for year-round home hotspots of the south west, the supply
holiday-lets. It used to be the case that holiday of property in July 2010 was running at 20%
245 homes spent much of the off-season lying below its long-term average.
240
empty. They were a luxury from which it was
Meanwhile, the demand for quality holiday
hard to derive a significant income. That has
235 accommodation continues to grow. Between
changed. Increased demand for self-catering
now and 2020, the amount of money spent by
230 accommodation throughout the year has
Britons holidaying in Britain is predicted to
enabled buyers to look upon a second home
225 grow by 2.6% a year in real terms. The amount
as an investment rather than a luxury.
of money spent by foreigners holidaying in
220 Investing in second homes has been made Britain is predicted to grow even faster, by
215 easier and more attractive by the emergence 4.4% a year. For developers selling holiday
2005 2006 2007 2008 2009 2010* of managed holiday home developments. homes, and for investors looking to buy and
Source: Knight Frank Residential Research, DCLG Owners do not have to manage lettings rent out those properties, business is likely to
*Estimate personally; this can be organised for them be brisk.
2 Knight FrankNew-build second home revival 2010
Second home investment economics
Self-catering holiday lets are the fastest-growing sector of an expanding UK
tourist industry with a rapid growth in demand for apartments in particular. Second homes
Changing demographic demand is also a factor shaping demand and influencing and tax liability
where developers should concentrate their efforts.
The tax arrangements for holiday homes
are in some ways more advantageous than
According to the ONS, in the three years up Changes in holiday patterns have helped those for other investment properties, and
to the beginning of 2010, the number of make investing in holiday accommodation in some ways less so. New holiday homes
nights spent by tourists in catered holiday much more attractive. Growing demand are liable to VAT in cases where planning
accommodation in the UK grew by a modest throughout the year is reducing void periods restrictions exist to prevent them being
1.3% from 309m to 313m. However, the and boosting yields, with the result that used as main homes. From the taxman’s
growth in nights spent in self-catering good quality holiday lets in the right point of view a property which is restricted
apartments rose by 67% to 9.2m and the locations can now achieve higher yields to holiday use is potentially a business
number of nights in self-catering houses, than properties let on shorthold tenancies. asset. Sell the property after three
cottages and lodges grew 20% to 20.8m years of ownership, however, and VAT
As might be suspected, for anyone booking
(see figure 3 for a regional split). The amount is not chargeable.
a two-bedroom apartment in Cornwall for
of money spent in self-catering apartments
£1,200 at the height of the summer season, The owner of a furnished holiday let is
also grew by 67% to £528m and that spent
holiday homes can offer enticing rental treated as a trader, with several
on self-catering houses, cottages and
yields. While few ordinary buy-to-let advantages. Capital expenditure on
lodges grew 22% to £1.13bn.
properties currently offer gross rental yields property qualifies for capital allowances
In terms of age groups, the greatest growth in excess of 5%, a holiday apartment in the which currently include Annual Investment
in the tourist industry at present is West Country rented out for 32 weeks a year Allowances (AIAs), although the level of
accounted for by mature people in typically offers between 6% and 7% gross expenditure which qualifies for AIAs is
higher social groups. Spending by 55-64 rental yield. being reduced in the latest budget from
year olds rose by 17.2% to £2.9bn and that by £100,000 to £25,000 from 1 April 2012.
On the negative side are higher management
the over-65s by 26.4% to £2.2bn, in the three If a property earns less in rent than it costs
charges. While an ordinary rental property
years to January 2010. As for social groups, to run, the deficit can be counted as a
might change tenants once a year, a holiday
spending by C2s, Ds and Es was fairly flat. trading loss. In order to qualify for these
home will change occupier every week or
Growth in spending by social group C1, on tax advantages a property must be
two. Each time the property will need to be
the other hand, rose 8.7% to £5.64bn and available for commercial letting for at least
cleaned, the sheets replaced and any
spending by groups A and B grew by 7.5% to 140 days a year and must actually be let
maintenance quickly undertaken before the
£6.67bn. for 70 days. The property must not
next tenants arrive. Even so, the figures can
normally be occupied for more than 31
be attractive to investors. The developers of days in any seven-month period by the
In other words, the trend towards
St Moritz, a hotel with private apartments at same occupant.
staycations is becoming increasingly
Daymer Bay in Cornwall, have been able to
concentrated at the upper end of the
guarantee investors a net return of 5% per In his 2009 budget the then chancellor
market. Much of the existing UK tourist
annum for the first two years. Alistair Darling proposed to do away with
infrastructure, however, is concentrated
these advantages and treat furnished
at the lower end of the market. This is Rental yields on holiday lodges can be even holiday lets as any other rented properties.
especially true in coastal resorts, whose higher than leasehold apartments. At one But the change was later postponed.
seafronts are still largely dominated by development, Indio Lake near Bovey Tracey,
funfairs, chip shops and budget hotels, Devon, where holiday lodges sold for The new coalition government has said
which are often busy during the summer between £165,000 and £210,000, one lodge that they will keep the tax advantages of
season but lie vacant for much of the rest brought in £25,000 in rent in one year. Once furnished holiday lettings, though
of the year. management costs have been deducted, investors must not assume that this will
investors can expect a net yield of nearly 8%. last forever. Indeed, the Treasury has
One of the features of the growth in quality recently proposed in its Furnished Holiday
tourism is that it is spread much more evenly There is a key reason why returns for holiday Lettings consultation document that the
throughout the year. The biggest growth in lodges are higher than for holiday rules should be changed. It is proposing
tourism over the past three years has apartments or houses. Lodges are not that properties should be available for let
occurred in the late spring and early normally mortgageable, but can be financed 210 days a year and actually let for a
summer, between April and June. Strong through a bank loan as you would get for a minimum of 105 days. The final decision is
growth has also been seen in September car, and so command lower selling prices expected after the 22nd October 2010
and October, as well as over Christmas and than alternative properties of a similar size when the consultation period ends.
New Year. and quality.
Knight Frank 3New-build second home revival 2010
Development economics and planning insight
67%
The most successful developments are those that manage to maximise year-
round letting, with occupancies of 30 weeks or more per year. Rental yields need
to be sufficiently high in order to offer the investor an attractive yield after
management charges – which can account for a third of gross rental income –
have been subtracted.
The growth in nights spent in self-catering
apartments in the UK between 2007 and Several coastal locations have become accommodation and a reduction in demand
2010. year-round attractions, especially where for traditional hotel rooms.
there are good quality restaurants, coastal
In some cases hotels have been entirely
walks and scope for watersports with an
replaced with apartments, and in others a
extended season, such as surfing. Inland
hotel-style operation continues but on a
locations can attract visitors throughout the
reduced scale. The combination of hotel
year where there is good quality countryside
and apartment development can help
and towns with good cultural life nearby.
promote year-round occupancy. In some
In both cases, flexible letting out-of-season
cases the two types of accommodation
is essential to maximise occupancy. A
have been combined in a flexible format.
favourite tactic is to divide the week into
At St Moritz, Daymer Bay in Cornwall, for
two: a long weekend, Friday to Sunday, and
example, investors buy a three bedroom
a short midweek break Sunday to Thursday.
self-contained apartment. But when they
A popular route taken by developers is are not using it, two of the rooms can be
to buy up and transform faded and under- closed off and used instead as hotel rooms,
performing hotels. Such hotels are maximising rental potential.
typically housed in grand Victorian
buildings occupying prime seafront sites, There is no shortage of faded hotels
for example the development ‘At The Beach’, around the coast. Upmarket developments
which is featured on the front over of this are more likely to work, however, in
report. Changing fashions are leading to an locations that are not compromised by the
increase in demand for self-contained infrastructure of the traditional ‘kiss-me-
quick’ holiday resort. Newquay is typical
of the smaller resorts that have achieved
a more upmarket image in recent years.
Figure 2
There are lots of other small scale,
Second home hotspots relatively unsullied resorts around the
Top 10 rural and coastal second home locations, by local authority
coast that have the potential for
% Number of second homes
5,000
development of upmarket holiday
10
apartments. Among them are Southwold
and Aldeburgh in Suffolk, Broadstairs in
8 4,000
Kent and Tenby in Pembrokeshire.
6 3,000 Holiday lodge developments tend to be
located away from towns, in locations
where a large part of the attraction is
4 2,000
relative tranquility. These areas by
definition lie in open countryside, often in
2 1,000 National Parks or Areas of Outstanding
Natural Beauty, where planning rules are
0 0 extremely tight. Realistically, development
Hams
Lakeland
Great
West
Somerset
Cornwall
Scarborough
South
North
Berwick-
upon-Tweed
Penwith
South
Yarmouth
Norfolk
Purbeck
is only possible on sites that are already
North
developed. Former industrial sites such as
quarries and gravel pits can provide an
opportunity for offering planners the
Second homes as a % of all homes 2010 (LHS) No. of second homes in 2010 (RHS)
promise of environmental improvement –
as well as providing ready-made lakes for
Source: Knight Frank Residential Research, DCLG amenity use. The site of the highly-
4 Knight FrankNew-build second home revival 2010
successful Cotswold Water Park was viewed by the taxman as business assets – cottage for a stylish well-built lodge or
previously used for gravel extraction. and therefore liable for VAT. Where apartment with a regular income stream
restrictions are in place it becomes much (see figure 2).
Another approach is to find an under- harder for potential purchasers to obtain
performing caravan park and to turn it In addition to the already popular west
mortgages. In 2008 there were a dozen
into a holiday lodge development. The country, which has become more accessible
lenders prepared to advance loans on such
attraction of seeking existing caravan as a result of flights to Plymouth and
properties. By the spring of 2010 that had
parks is that they have established holiday Newquay and the upgrade of the A30,
fallen to just one lender. other locations which fall into this bracket
use. Although the planning designations
for caravans and lodges are different, With few buyers able to obtain finance include north Norfolk, the east Suffolk
and prepared to spend the extra 17.5% coast, Pembrokeshire, North Yorkshire,
many authorities are willing to consider
which must be added to the purchase the Northumbrian coast, Cumbria,
conversion, even though lodges are a more
prices, developers have been struggling Herefordshire and Shropshire. The success
permanent form of structure than caravans
of the Cotswold Water Park has shown that
and mobile homes. to get the figures to add up. In Newquay
schemes can work away from the coast.
alone there are 20 sites lying vacant
Not every caravan park is suitable for because the planning rules have made Obtaining planning permission in attractive
conversion, traditional caravan parks that development unattractive. countryside and coastal locations is not
occupy prime seafront locations are often going to get easier, but dedicated holiday
highly profitable, meaning that conversion In cases where developers have managed home developments can be popular with
to lower-density lodge developments does to obtain planning permission without the planners where they bring environmental
not make financial sense. There tends to be restrictions, the situation is very different. improvements at the same time as
more potential for conversion for sites that At Bredon Court in Newquay, where the maintaining employment. Worked-out
lie a little inland, where demand for caravan developer managed to obtain planning quarries and gravel pits are particularly
holidays is lower. Indio Lake, a successful permission without holiday home enticing opportunities. Existing but
development of lodges near Bovey Tracey, restrictions, all 33 apartments sold quickly under-performing caravan and chalet parks
Devon, for example, used to be run as a in 2009. At a similar development in the also provide potential for development, so
fishing business with just three caravan town, but with holiday home restrictions, long as developers can make the case for
holiday lets. The developer won permission few were sold. Yet the absence of holiday replacing temporary structures with more
to increase this to a total of 12 lodges. home restrictions at Bredon Court made permanent dwellings.
little difference to the local tourist economy.
In spite of evidence of a growing market The vast majority were in any case bought in
for high-quality dedicated holiday home order to be rented out. Figure 3
developments, it is not straightforward at
In Newquay, several developers are Accomodation in demand
present for developers to take advantage of Growth in self-catering accommodation demand, by
it. Planning rules, and the implications they negotiating with planners in order to try to
region, 2006 to 2009 (m)
have for VAT, at present make it difficult for get holiday restrictions lifted. This involves
agreeing to fund off-site affordable homes 4.0
many schemes to work financially.
in return for redesignating homes for 3.5
Planners in one of the hottest markets, year-round use. The holiday properties
Cornwall, have been reluctant to grant 3.0
would then no longer be liable for VAT and
permission for old hotels and caravan sites investors would find mortgage finance 2.5
to be converted into houses and apartments more readily available.
2.0
unless the properties are subject to
restrictions preventing them from being At present, high-quality holiday home 1.5
used as main homes. In many cases there developments are concentrated in the south
west. We believe that this trend is likely to 1.0
are also restrictions preventing any one
person from occupying them for more than spread. Developments are more likely to 0.5
six months at a time. The reasoning behind succeed if they offer year round
0
accessibility. Sites within 90 minutes of
South west
the rules is to protect the tourist industry,
East Midlands
West Midlands
North east
South east
Yorkshire
East of England
North west
on the presumption that holidaymakers large cities are most popular and have an
tend to spend more money in local advantage in this respect. The locations
restaurants and tourist attractions than where developments are likely to succeed
do permanent residents. are those that already have high numbers of
second homes – places where existing Number of nights
Properties subject to restrictions limiting second homeowners might be tempted to Source: Knight Frank Residential Research,
them to being used as second homes are swap a drafty and expensive-to-maintain Visit England
Knight Frank 5New-build second home revival 2010
Case Studies
Pearl The Village St Moritz
Newquay, Cornwall Watergate Bay, Cornwall Daymer Bay, Cornwall
2 bed apartment 2 bed villa 3 bed apartment
£385,000-£455,000 £465,000-£520,000 £499,000
3 bed apartment
£725,000 The Hotel, Watergate Bay, is an Edwardian
hotel that has been transformed in recent
St Moritz is a newly built hotel at Daymer Bay
on the very popular westward-facing coast
years. Once only open seven months of the between Rock and Polzeath in Cornwall.
year, it now opens year-round and runs The area has become well-known for its
The newly built Pearl development
in tandem with the Extreme Academy, which beaches and its surfing, and also lies a short
comprises 14 two and three-bedroom
offers surfing, kite-surfing and a variety of ferry ride from Padstow, with its famous
apartments and penthouses in an enviable
other beach sports. The Hotel has sought to restaurants. The hotel incorporates 31
position on Headland Road in Newquay with
widen the range of accommodation three-bedroom apartments that are being
views across the Atlantic. The development
available by obtaining planning permission sold on 999-year leases for £499,000 –
was completed in 2009 and has attracted
to build 24 self-contained two storey houses including a furniture package. The hotel
considerable interest with only five
on the site of an old sports hall to the rear of offers a full lettings service, which for the
apartments now remaining. Key to this
the hotel. Each will have two bedrooms and first two years offers investors a guaranteed
demand has been both the scheme’s
two bathrooms. The Hotel plans to retain net rental return of 5% a year. This includes
contemporary design and its views across
14 of the units and to sell the other 10 on eight weeks’ personal use. In 16 of the
Fistral Beach, widely considered the best
999-year leases for prices between apartments, two of the bedrooms can be
beach for surfing and watersport
£465,000 and £520,000 plus VAT. parted off and let as individual hotel rooms.
enthusiasts in the UK.
The proximity to Newquay Airport has Part of the success of the scheme has been
As a second home investment the down to marrying the extensive facilities of
been a factor in the scheme’s success.
apartments attract rental interest from a the hotel with the privacy offered by private
By the spring of 2010 four had already been
wide range of holidaymakers. Not only is apartments. The facilities, which occupants
sold. Buyers have the choice of letting their
Newquay widely considered a playground of the apartments are free to use, include
properties through the Hotel’s own agency.
for all ages and a superb base for keen two swimming pools, health club and have
For the first three years investors will be
surfers, but it boasts 11 magnificent access to the famous Cowshed Spa.
guaranteed a gross rental return of around
beaches, stretching from Watergate Bay
£35,000. After the service charges and
to Crantock Beach. Newquay has also
lettings fees have been taken into account
undergone a gourmet revival in recent years.
this equates to a net yield of around 4.5%
Jamie Oliver’s Fifteen Cornwall at Watergate
per annum. The scheme’s position as
Bay and Rick Stein’s celebrated restaurants
part of a successful hotel and sporting
in nearby Padstow are driving visitor
complex enables it to command high prices.
numbers upwards.
Planners were co-operative given the
Year-round demand is also being boosted extensive efforts made to blend the
by the trend for out-of-season ‘staycations’. properties into the landscape in what is
The nearby Gannel Estuary is perfect for a a sensitive clifftop location.
whole range of outdoor activities from
The properties may only be used as second
canoeing, walking, fishing and bird
homes. Buyers must have a primary
watching to horse riding.
residence elsewhere in the UK, a restriction
that makes the properties liable for VAT.
6 Knight FrankNew-build second home revival 2010
Indio Lake Staverton Mill The Bay
Bovey Tracey, Devon Totnes, Devon Talland, near Polperro, Cornwall
Lodges 2 bed home 3 bed home
£165,000-£210,000 £299,000 £370,000-£385,000
Cottages 3 bed penthouse
£225,000-£250,000 £359,000 The Bay was an old caravan site, granted
planning permission for a gated
development of 43 three-bedroom holiday
homes, subject to a restriction that they may
Indio Lake was dug in order to supply fish Staverton Mill, built around 1790, was
not be used as main homes. The properties
for an 11th century monastery, which was originally a water-driven corn mill and
are being sold for prices between £370,000
dissolved by Henry VIII. The three-acre stands on the north bank of the River Dart,
and £385,000, on 999- year leases. There is
wooded site stands on the edge of Dartmoor, south west of the village of Staverton. Grade
a full letting service available that, taking all
but is also close to the coast at Torbay, and II listed, the mill has recently been converted
is easily accessible from the A38. More costs into account, should provide investors
into eight dwellings that overlook the River
recently, it was run as a fishing business. with a yield of around 5%. There is no hotel
Dart and Staverton Bridge, providing an
In 2008 developer Charteroak Estates won on site, but there is a concierge. The
alternative waterfront location to the more
planning permission to upgrade three development includes an indoor and
established holiday destinations in the
existing cottages and build a further nine outdoor swimming pool and a health club,
popular South Hams.
lodges. All are subject to a planning use of which is included within the £1,750 a
restriction preventing them from being used Its location suggests Staverton Mill will year service charge.
as main homes and restricting occupation to appeal to a wide range of second home
Many existing caravan parks are too
a maximum of six months in a year for any one owners and holidaymakers alike. The South
profitable for it to make financial sense
occupant. The lodges are sold with a 125-year Devon Railway runs through Staverton
to convert them into holiday home
licence to occupy the site and the cottages Railway station offering an ideal location for
developments. What made the difference in
have been sold on 125-year leases. train enthusiasts and an unusual holiday
this case was that the existing caravan park
In spite of a sluggish housing market at the rental angle, along with fishing there are
was relatively small and the caravans were
time of their launch in the autumn of 2008, also canoeing and water pursuits available
nearing the end of their lives, so major
the lodges all sold within 18 months at on the river. The nearby Dartington Hall and
investment would have been required in
prices between £165,000 and £210,000. Arts Centre will also appeal to those with a
any case.
The three cottages have also sold, for prices literal and cultural interest.
between £225,000 and £250,000. Part of the Obtaining planning permission was not
Converted into only eight homes laid
attraction for buyers is being able to combine easy; it took the developer three and a half
out over two or three storeys, the
personal use with a high investment yield. years to win consent.
accommodation is adaptable with a utility
The lodges must be let through the
and versatile studio room on the ground
developer, which offers a full rental service.
floor, ideal for storing sports equipment,
For the first two years buyers are guaranteed
bikes, dog/boot room. This storage space is
a 6% net yield – a deal that allows buyers five
weeks’ personal occupancy a year. a particularly welcome asset for owners who
want to store personal belongings for their
Part of the success of the scheme has been its own use while letting the property to obtain
appeal to buyers put off by the terms and income from short hold or holiday lettings.
conditions on other lodge developments. Prices range from £325,000 for a two-
In contrast to many lodge and caravan parks, bedroom property laid out over four levels,
owners of the lodges can re-sell the to £370,000 for a three-bedroom penthouse.
properties on the open market without
paying any commission to the site-owner.
Knight Frank 7Residential
Research
Residential Research Second Homes Recent research reports
Liam Bailey Miles Kevin
Head of Residential Research T: +44 (0)1392 848844
+44 (0)20 7861 5133 miles.kevin@knightfrank.com
liam.bailey@knightfrank.com
Residential Development
Stephan Miles-Brown
Head of Residential Development
+44 (0)20 7861 5403
stephan.miles-brown@knightfrank.com
International Project The Rural Report 2010
Marketing 2010
London Review Residential Monthly
Summer 2010 Market Update
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Front Cover: ‘At The Beach’, Torcross, Devon
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