March 2013

Restrictions on banker bonuses, a UK debt downgrade, the weakening pound, the threat of further euro instability – the last few weeks have hardly been short of major news with possible implications for prime Central London (PCL) property.

As we write, UK media headlines are dominated by the EU’s decision to enshrine in law a strict pay ratio for member nations’ bankers. Whether the policy will achieve its intended aim of greater stability in the banking sector or not is open to debate. However, assuming that the definition of ‘banker’ is ‘someone who works for a deposit taking bank’ then our initial view is that the impact on PCL property will be limited.

Banks have been forced to exit almost entirely the hedge funds and proprietary trading operations that once drove large bonuses. As a consequence, banker bonuses have not been a significant force in our market since 2007 and PCL prices have clearly been rising despite their absence. Whether the legislation is intended to include the broader asset management industry including stand-alone hedge funds and private equity is unclear. However, if prices do fall, international buyers may become even more prevalent, seeing the combination of falling prices and a weak sterling as a big buying opportunity.

At Black Brick we have seen a notable increase in new client sign up from the Middle East in recent weeks. While this is partly a result of our own marketing efforts in the region, our conversations with clients reveal continued nervousness about the sustainability of the ‘recovery’ in Dubai property prices. Other developments of note include a number of new investment buyers with £20m to £30m budgets looking to acquire whole apartment blocks in London.

Weak pound boosts overseas demand

In tandem with quantitative easing a weak pound is clearly being used as a policy tool to boost the UK’s struggling economy. Against this backdrop and with the latest UK economic data significantly worse than forecast, a sharp reversal of the pound’s recent weakness looks unlikely.

Indeed, the weak pound has proven a significant factor in a fresh pick-up in international interest in prime Central London property in recent weeks. While prices remain buoyant in sterling terms, overseas buyers are almost all seeing a materially more attractive picture when sterling prices are translated into their domestic currency.

Asian buyers in particular have been to the fore with developers including Berkeley Group and SP Setia, who are behind Battersea Power Station citing currency swings as a cause of further strengthening of international interest in London property. The Chinese renminbi has appreciated by nearly 40% against the pound since late 2007, more than entirely offsetting the gains we have seen in sterling terms over that period.

Hong Kong and Singapore tax measures tip balance further in London’s favour

While the currency differential over similar periods has been less marked in other Asian currencies it still represents a massive discount in comparison to sterling buyers.

Against this backdrop, it isn’t hard to understand both the opportunistic and more secular attraction of our capital’s bricks and mortar to a diverse international group of potential investors and occupiers. The introduction of higher taxes to rein in property prices in both Hong Kong and Singapore only serves to increase the attractions of London from a relative international perspective at a time when the Singapore dollar has appreciated by some 6% since the start of the year.

Meanwhile, conditions in the wider UK residential property market continue to show at least tentative signs of improvement. Nationwide Building Society cited “encouraging signs of an improvement in credit availability” in its latest report as the Bank of England’s Funding for Lending scheme helps to lower mortgage rates. Nationwide’s house price index rose 0.2% in February from January. Within the latest monthly survey of members of the Royal Institute of Chartered Surveyors the most notable change was the sharp improvement in 12-month price expectations – with a new balance of 18% of surveyors expecting price rises a year down the line from just 5% a month earlier.

Italian elections: geopolitical risks remain

Looking forward, the inconclusive result to the recent Italian general election served as a salutary reminder that Europe’s debt troubles are far from over. Put alongside continued unrest in the Middle East and the failure of the US to agree budget changes ahead of the sequestration deadline and it is clear that the global geopolitical risks that have supported investment in tangible assets including prime property remain present.

Spring is also traditionally the busiest time for moving home in the UK, and in the coming weeks we expect to see an increase in new stock coming to market and the supply shortage to ease a little. However, given the breadth of international demand we do not see this translating into any particular price weakness. We have recently been overseeing the sale of a client’s property in Stafford Terrace, Kensington that we sourced for him a few years ago. The property is not yet formally on the market and no brochure has been produced and yet there are multiple buyers interested, so the property will be going to a “sealed bid”. Sealed bids are still not uncommon showing there is significant demand for the best properties.

Longer-term the supply situation looks structurally imbalanced. A recent research report asserted that London developers need to build 50,000 more homes a year than they are currently building to meet expected demand based on employment growth rates forecast by Oxford Economics. Given the massive funding required at a time when banks are mostly shrinking their property loan books, there appears to be little chance that the London supply gap will be closed. All of which is good news for long-term prices in London.