January 2013

While it is certainly early days in 2013, there is already plenty of recent evidence that Central London’s prime property market remains in rude health. 2012 was, in many respects, a disjointed year for our market. For all the positive sentiment it engendered, the London Olympics was a major distraction to normal business practices, prompting a hiatus in London property transactions that lasted nearly three months. Further uncertainty was created by the tax measures first announced in the March 2012 budget and only clarified in mid-December.

We believe 2013 will be different. Relatively free from such distractions, both buyers and sellers can proceed with a greater sense of confidence than has not been the case for the past twelve months. Against this backdrop transaction levels in the prime Central London property market are likely to pick up steadily in the coming months.

We recently sent out a summary of the Finance Bill update announced on December 11th. However, it’s worth reiterating that we see the announcement as positive on a number of levels. First, the announcement provides clarity on potential tax liabilities where previously there had been uncertainty and crucially makes a clear distinction between owner occupiers and investors. The news is unequivocally positive for buy-to-let investors and developers, both of whom have been granted effective exemptions from the annual charge, capital gains tax and the higher rate of stamp duty, subject to certain conditions and whom may continue to utilise off-shore vehicles to structure their London property transactions.

Strong end to the calendar year at Black Brick

Recent weeks at Black Brick have been extremely busy and we remain on course for another record year of completed sales. In particular, we have been able to assist a number of clients keen to complete before the calendar year-end. These completed transactions include a £4m property in Portland Place in Marylebone W1. With the open spaces of Regents Park a short walk to the north and the attractions of Selfridges, Bond Street and Oxford Street immediately to the south, this highly desirable lateral flat is ideally located.

Although still clearly early days, new client sign up has also been strong in the first week or so of 2013 with a mix of both domestic and international buying interest. So far all our new clients have been potential owner-occupiers rather than investors.

One trend worthy of note in recent weeks has been the increase in high value rental instructions. These have all originated from owners who would otherwise be liable for the new Annual Residential Property Tax (ARPT) if they continued to occupy the property, but who are eligible for relief from the annual tax if the property is run as a genuine rental or commercial business. In the main these owners are simply renting smaller properties themselves rather than paying the ARPT or changing the ownership structure of their property. We expect this trend to continue in the run up to April when the changes finalised in December become law. The result may mean that rental supply at the very top end of the market increases, and yields come down.

Of our recently completed deals we would also highlight the stunning £8.4m penthouse in Knightsbridge we secured for a long-standing client with very specific requirements. These included requirements that the property be located within walking distance of Harrods, a building with a porter, a lateral layout, high ceilings and period features. The deal was not without its complications. Having accepted our client’s offer the vendor was presented with a significantly higher bid of £8.7m from a competing party with the offer of an attended exchange. However, due to our long-standing relationship with the vendor’s agent – and in particular due to the vendor’s laudable sense of honour – the deal was completed with our client at the offer price of £8.4m that had originally been accepted.

Price growth slowing but still positive

Broader industry data reveals a PCL market which continues to be well supported by international interest – but also that price growth has unquestionably slowed after more than three years of strong and consistent price rises. We believe the uncertainty created by the Finance Bill in the run up to December’s update has been a major contributor to this slowdown. Evidence of the slowdown in prices can be seen in the annual gain of 8.7% for PCL prices to the end of December, the lowest since June 2011, and in December’s 0.2% monthly rise, the smallest in over two years.

That said, it is important to remember that prices have continued to rise. December’s gain may be meagre but it completes a second successive calendar year of uninterrupted monthly gains for prime Central London property. Free from the higher stamp duty rates and excluded from the ARPT, the lower end of prime continues to be the focus for international investors building buy-to-let portfolios. As a consequence, the sub £2m continues to be the best performing segment of PCL property.

To give these figures some wider context it is worth noting how other asset classes performed in 2012. Gold rose 6.3% in dollar terms in 2012 while UK 10 year government bonds returned 4.0%. A late surge in global equity prices saw the FTSE UK Index post a 10.6% gain for the year.

In the broader UK residential housing market there has been further evidence of gently improving sales conditions supported by what the Royal Institute of Chartered Surveyors described as “a slight thaw in mortgage markets”. The Halifax House Price Index rose 1.3% in December.

Against a backdrop of anaemic domestic economic growth counter-balanced by the maintenance of low interest rates, the outlook for the wider UK homes market remains broadly balanced. The outlook for the wider UK property rental market is, however, notably rosier. According to RICS new rental demand continues to outstrip new supply in every one of the UK regions it covers.

Key demand drivers to PCL still in place

Looking forward, we believe that the key pillars to international demand for PCL property remain in place. While the risk of financial contagion within the Eurozone has dissipated in the short-term, geopolitical risks remain prevalent in many countries. We believe London’s safe-haven status and diverse international business community will continue to attract overseas families and investors. Moreover, wealth creation across the emerging markets remains strong, supported by secular demographic change and by economic growth rates that western economies are simply incapable of delivering.

Meanwhile, sterling weakness certainly played its part in attracting overseas investors to London property in 2010 and 2011. However, the UK’s position outside of the Eurozone saw the pound enjoy a period of safe-haven demand in 2012. With the improving situation in the Eurozone, sterling’s strength may now reverse. Indeed, several influential banks are predicting a torrid outlook for sterling as the UK’s coalition government struggles to deal with the public sector deficit and return the country to growth. Any such weakness is only likely to act as an additional incentive to those international buyers enjoying a currency advantage.