February 2013

Is 2013 really “the best year to buy London property for a generation”, as one specialist prime London estate agency has boldly claimed. Certainly, news flow in the first month of the year has been unequivocally positive. In recent weeks a single Asian investor exchanged contracts on 60 flats totalling some 1.8m square feet in the Merchant Square development in Paddington Basin for £47m. Several London agencies have also reported their best January sales figures for several years. Meanwhile, all 800 apartments in the first phase of the redevelopment of Battersea Power Station in South West London have been snapped up a matter of days after launch.

Given ‘reservation’ involves no more than a small deposit we take the Battersea Power Station news with a slight pinch of salt, but there is a very clear message from these headlines: despite widespread predictions for a year of flat prices and waning international demand, prices and buyer interest are already exceeding forecasts.

Strong start to the year at Black Brick

At Black Brick new client sign-up, a simple but accurate lead indicator of future completed transactions, has never been stronger. Camilla Dell, Black Brick Managing Partner, says “January was a record month for client sign-up. In the main we put this down to a release of pent-up demand following the government’s clarification on the tax measures impacting £2m+ properties bought by non-UK residents using offshore structures.”

Camilla continues: “Those new clients are diverse in nationality with a roughly even split between investors and potential owner-occupiers. So far this year, 60% of our new clients are international, with the highest number coming from Malaysia, India and France. Their interest also ranges from sub-£1m investment properties to £20m+ family homes. Alongside a supply backdrop that remains constrained despite improving marginally in recent months, we believe it is precisely this breadth and variety of buyer interest that will continue to support PCL property prices in the coming months”.

Meanwhile, for the majority of our customer base, access to finance remains relatively straightforward. The last two years have seen a number of new entrants in the specialist arena of large mortgages for high net worth borrowers. Crucially, those financing rates are still falling – with fixed rates continuing to hit all-time lows.

Completed transactions in recent weeks include an entirely off-market deal for a home in a prestigious gated street in Kensington for £10.75m. Our client had previously lost out in a sealed bid process for a neighbouring property but we made direct approaches to other owners on the street and were able to secure this much better house for our client. He is delighted. Other recent transactions include a £3m Chelsea flat for a UK client and a £2.8m apartment in Notting Hill for a UK expat currently living in the UAE. “

Weakening pound supporting overseas interest

We highlighted last month that a weakening pound could provide a further leg of support to prices in prime Central London property. This is already proving to be true. In its latest update, Knight Frank highlights sterling’s slide as a key factor behind the 0.4% rise in its Prime Central London Index in January. The rise leaves prices 8.1% higher than a year ago. With a 1.5% gain for the month, Knightsbridge was the best performing location, according to the report.

With international investor risk appetite on the rise, evidenced by soaring equity markets in January, sterling’s ‘safe haven’ status has diminished. Weaker-than-expected UK economic data has also curbed demand for the pound. Since the start of the year, sterling has weakened by around 5% against a resurgent euro – and by 10% since July 2012, providing a significant currency benefit to European buyers of PCL property. The pound has also weakened against the US dollar and other global currencies – a welcome boost to potential overseas buyers that are likely to remain the major force in our market. Clearly, rising investor confidence in the global economic backdrop may reduce safe-haven demand for London property and other sterling assets including gilts. However, the corollary of reduced safe-haven demand will almost certainly be a weaker pound. We believe this will continue to spark interest in other overseas buyer groups.

In our December Newsletter, we showed that the majority of forecasts for PCL property values in 2013 were around zero. However, the average of those forecasts is already beginning to creep up with the specialist prime market participants noticeably more upbeat than their larger nationwide peers. We have recently seen forecasts for Central London for the year run as high as 8% due to continued supply shortages and a diverse demand base.

PCL rental market well supported at low end, weak at top

The prime London rental market remains patchy. According to one leading rental agency prime Central London rents fell 3.2% in 2012 with a further 0.1% drop in January. Our anecdotal evidence is that the top end of the capital’s rental market above £1500/week remains weak. The recruitment slowdown in London’s financial services sector and reduced rental budgets across the mainstream corporate world are hardly an ideal backdrop. However, overall demand for one and two bedroom apartments remains strong, supported by domestic tenants who find themselves priced out of the occupier market or simply unable to raise the finance necessary – and by improving business conditions outside of financial services. Increased supply remains a headwind to short-term rental price growth across the capital’s lettings market. However, with the prospect of a more settled financial sector and London’s burgeoning reputation as a global technology and media centre, we expect longer-term rental values to remain well supported. Knight Frank are forecasting growth in prime central London rents of 1% for 2013, 3% for 2014, 5% for 2015, and 3.9% for 2016 and 2017.

US property interest on the rise

Further afield we have noted a significant rise in buyer interest in US prime property in recent months – both from our own UK clients and from the broader international High Net Worth community. More often than not this interest fits alongside existing or planned London investments to form a diversified international prime property portfolio. New York in particular offers many of the same long-term market characteristics as London including constrained supply, a large and diverse international business community and a long-established position as a leading global financial centre. We expect interest in US property to continue to rise in the coming months as long-term portfolio allocations to international prime property gain at the expense of government bonds.
Clients may remember that Black Brick formed a strategic alliance with a New York-based property consultancy in the second half of last year and we are therefore ideally positioned to help you with your US property ambitions. Since that time we are now also able to assist clients looking to purchase in Miami. If you would like more information about our US property search and advice service please call us on 0203 393 6091 or email Camilla.Dell@black-brick.com

Finally, may we take this opportunity to wish a happy and prosperous Year of the Snake to all our clients celebrating Chinese New Year.