April 2013

Perhaps it is a little too early in the year for the mainstream agencies, who all predicted a year of stagnation for Prime Central London (PCL) property prices in 2013, to revise up their forecasts. But given the continued strength of international demand, boosted by the recent weakness of sterling, those forecasts are now looking overly conservative.

There have been several major international events in the past month with implications for PCL prices. In particular, the rescue of Cyprus, partly financed through the seizure of some E5.8bn from Cypriot bank deposits, demonstrates with stark clarity the on-going financial and geopolitical risks to the capital of the international wealthy. If government bonds and now even bank deposits pose risks to capital, where can the wealthy put their money? We believe that many will continue to seek a degree of safety in the bricks and mortar of London’s most sought after postcodes – and that demand for prime Central London property as a portfolio diversifier and safe-haven asset will remain strong.

Growing pool of UHNW

Meanwhile, one of the principal drivers of international interest in PCL property over the past decade has been wealth creation in developing countries. Demand from this growing pool of international wealthy remains robust and increasingly broad. Recent research estimates that 95,000 individuals globally will see their personal wealth rise above the $30m barrier (the widely accepted definition of Ultra High Net Worth) in the next decade; a rise of 50%. According to the report, Asia and Latin America will see the largest growth in the number of ultra-wealthy individuals. This analysis further underpins our long-held belief that emerging market wealth creation is both a long-term trend and a secular support to Prime Central London property prices.

The most recent industry news reinforces these points. In the last few weeks residential property developer Finchatton has bought 20 Grosvenor Square, W1 Mayfair for £250m backed by the Abu Dhabi Investment Council. The 178,000 square foot property, which has been recently used as office space, has current planning for development into 41 luxury apartments. The price paid demonstrates the on-going international interest in prime Central London property and the confidence of major overseas investors in longer-term market prospects. We estimate that these units will need to be sold at an exit price of around £5,000/sq. ft in order for the development parties to make an acceptable return on capital. With a lack of genuinely high quality and portered properties with concierge services in Mayfair, we have every confidence that the development will achieve these prices, a record for Grosvenor Square.

UK Attractions to international business elite

Meanwhile, the recent UK Budget announcement contained little at the micro level to impact the PCL market materially. However, the cut in corporation tax to just 20% from April 2015 reinforces the UK’s many attractions as a location to establish and conduct business. The UK now has the one of the lowest corporate tax rates amongst developed countries globally. The widely-publicised decision of Idan Ofer, Israel’s richest man with an estimated net worth of $6.5bn, to relocate to London is just one example of how the UK capital’s established position as a global business centre is proving attractive to those with international commercial interests.

Black Brick activity shows strength of demand…

Activity at Black Brick has remained brisk and we have secured a number of interesting deals for our clients in recent weeks. These include a £8m home on Chester Terrace overlooking Regents Park for a Middle-Eastern client relocating to London. We were able to secure the property, which needs work, at a very attractive price of £1800/sq. ft for our client from a motivated vendor. Other deals in the area, including the sale of the 21,500 sq. ft 1 Cornwall Terrace for £80m – have been completed at significantly higher prices on a price per square foot basis.

We have also recently acquired a flat for a West African client in Hampstead for just under £2m in a small and exclusive development. We were able to view the apartments before they hit the open market and our client was able select the very best apartment as a result.

Further afield we have also recently agreed terms on a significant property in the popular Home Counties, outside of London. Our client had viewed a number of properties over a period of time in the exclusive enclaves of St George’s Hill and the Wentworth Estate, both in Surrey, but had been unable to find a property that met his family’s exacting requirements. We were able to secure an extremely rare plot of land for our client on St George’s Hill and introduced him to a luxury property developer who will now build a bespoke property for our client, meeting every one of his requirements.

…and benefits of expert advice

At Black Brick we also provide clients with a managed sale service to simplify the sales process and ensure clients get the best possible price when selling their home or investment property. We recently assisted a long-standing client with the sale of his apartment in Stafford Terrace in Kensington. We originally acquired the property for him back in 2009 for £1.8m. Before the selling agent had even produced a brochure or completed floor plans, the apartment went to sealed bids and was subsequently sold to a Russian cash buyer for £2.75m – a return of over 50% in fewer than four years. We believe this sale demonstrates both the enduringly competitive nature of the market, particularly at the lower end of prime, and the benefits of expert advice when buying. This apartment has significantly outperformed the wider PCL market over the four years of our client’s ownership.

… PCL prices rise again in March

The strength we have seen in our own business in recent weeks is reflected once again in broader industry data. The Knight Frank Prime Central London Index rose 0.9% in March for a 2.2% rise in calendar Q1 and an 8.1% gain over the past 12 months to end-March. According to Knight Frank, homes at the bottom end of the prime market continue to outperform, with the £1m to £2.5m bracket up 3.4% in the first three months of 2013.

The wider UK residential property market continues to show signs of gradual improvement with the number of homes sold in March reaching a three-year high, according to the Royal Institute of Chartered Surveyors (RICS). The RICS monthly survey also revealed that 21% of surveyors recorded rising prices, the highest proportion since June 2010. According to the two major UK house price surveys, the value of a typical home is edging higher. The Halifax House Price Index posted a 1.2% gain for the first three months of 2013 while the Nationwide Index rose 0.8% over the same period.

Finally, the lower end of the prime London rental market remains the focus of the bulk of activity. Meanwhile, Knight Frank and Savills paint rather differing pictures of the overall market backdrop with the former saying rents fell 0.3% in Q1 in PCL while Savills data shows a rise of 1.3% over the same period. However, a small revival in the capital’s employment backdrop should provide a welcome boost to rental values. Morgan McKinley’s latest London Employment Monitor registered an 11% month-on-month increase in job availability in February.