August 2011

As George Bush Snr asked in 1991: “What is it about August?”. In light of recent world events it appears he may have had a point. In the US, a political stand-off brought America to the brink of default and prompted the first debt rating downgrade in its history. In mainland Europe, the escalating financial crisis has seen Italy, Spain and even France caught in the spotlight of bond vigilantes. In the UK, riots and looting in London suburbs and other cities made for some uncomfortable TV images. Amidst growing concerns about the outlook for the broader global economy equity investors took flight, resulting in the sharpest falls in global equity markets since 2008. So much for a quiet UK summer…

Yet in the very week that the FTSE 100 posted its largest fall since November 2008, fresh highs were recorded for properties in a number of London streets on a square foot basis. In Davies Street W1, a fifth floor, two bedroom apartment above noted restaurant Cipriani sold earlier this month for the third time in seven years. Built in 2004 and sold on completion at £2.3m the apartment was sold again in August 2007 for just under £4m. The £5.25m for which the apartment recently changed hands equates to £3,028 per square foot – a 33% increase since the top of the market in 07 and a 130% increase in 7 years. This strength extends across lower down prime London with a two bedroom flat in Harcourt Terrace, Chelsea selling for £1800 per sq foot in early August – a new record in the street.

In fact, despite the many negative headlines of the past month, the period has been one of the busiest in Black Brick’s history, with some £17m in agreed deals. These properties include an 8,000 sq ft new build with swimming pool and underground parking adjoining Hampstead Heath. We have also completed on a luxury apartment at the new landmark W2 Lancasters development overlooking the open spaces of Kensington Gardens and Hyde Park yet just a short walk away from Selfridges and the boutique shops of Bond Street. New client sign up has also been strong since early July, suggesting that overseas demand for prime Central London property remains robust. Recent data from the larger industry players confirm this with Knight Frank’s Prime central London Index rising 0.7% in July to another record high in sterling terms. With the same principal characteristics as its sales counterpart, the prime London rental market is also enjoying buoyant conditions. Savills reports rental growth of 5.3% in the first half of the year as tightening supply and an increase in demand from the financial and business sectors underpin rental values.

In contrast, the wider UK residential property market continues to struggle as domestic unemployment rises and economic growth stagnates. The latest monthly survey from the Royal Institute of Chartered Surveyors (RICS) once again highlights three key trends. First, “prices continue to fall on balance”; second, “activity levels remain flat and depressed”; third, the latest data “reinforces the divergence between London and the rest of the country, with house prices continuing to rise in the capital.”

Safe haven status

So is prime London really immune from recent events and from the forces impacting equity markets? Camilla Dell, Black Brick Managing Partner, says: “It is clearly too soon to judge the wider implications of the recent spike in equity market volatility on property buyer confidence – or on the net assets of the overseas wealthy who represent such a large proportion of our niche market’s owners and new buyers.”

“Our view on the riots is that while it was a particularly unpleasant few days in some peripheral parts of London and other cities in the UK, the actions appeared to be opportunistic. The authorities have responded swiftly and severely – and we do not expect any sustained repetition or expect the events to have any meaningful impact on prices in London’s most sought after post codes. As far as the global debt crisis is concerned – the catch-22 between large fiscal deficits and the need to reinvigorate faltering Western economies does not appear an easy conundrum to solve to non-credit specialists like ourselves. But against this backdrop, it seems unlikely that the attractions of prime Central London property as a safe-haven asset and portfolio diversifier will diminish significantly in the coming months.”

On the same theme the Financial Times recently reported that investors fleeing volatile bond markets were investing in property and other ‘real’ assets. “Many institutional investors have been tactically shifting some of their fixed income allocations to real estate”, the article reported. We see this trend on a daily basis from our diversified overseas investor client base. Apart from the large and obvious currency advantage in the wake of a weakened pound, it is the belief that prime Central London property represents a stable and well supported investment compared to other asset classes that is driving demand.

Market conditions still supportive

The recent volatility has prompted some misleading headlines. Bloomberg recently reported that “London house prices plunge on financial turmoil” based on data from property website Rightmove revealing asking prices dropped 3.4% in July. Though hardly positive, we would simply point out that this is not quite the same thing as falling transacted prices. Our own transactions and the latest data from a host of other industry analysis points to a very different market backdrop to that implied by the Bloomberg headline.

Camilla Dell says: “We believe it’s instructive to compare conditions now in the prime Central London property market to the last time equity markets fell so steeply – in the aftermath of the demise of Lehman Brothers in 2008. What’s different now is the significantly reduced amount of speculative money in prime London property. Banks are extremely reluctant to lend to developers and a large proportion of overseas buyers are in the “buy for life” category thereby ensuring supply remains constrained. Second, while prices in London certainly did fall post-Lehmans, transaction levels were very low and the majority of sellers were over-leveraged. Since that time, London property prices have risen sharply and are now 35% higher than the post credit crunch trough in March 2009. Most overseas buyers are also cash rich. Our view is that we don’t anticipate prices will fall in aggregate in prime central London in the coming months, a conservative view compared to recent research by Knight Frank, who are forecasting that prices will rise by 9% this year and 8% next year while Savills are forecasting an 8.0% rise this year and 6.5% in 2012.”

Perhaps a better reflection of the impact of recent events on the market is new client sign up – and there has been no sign of a slowdown here with Asian buyers in particular coming to the fore. Asian buyers have traditionally been aggressive buyers of prime property in Australia given its geographic proximity but the rise in the Australian dollar and the fall in the pound has resulted in a shift in focus towards London.

On the supply side we have seen a slight pick-up in new properties coming onto the market over the past few weeks. Given that late July and August are periods when most UK nationals take their main summer vacation this is a small surprise. This has led to a rise in transaction numbers – but the overall backdrop remains one of pent-up demand against a severe supply shortage.

Business as usual

With a host of new clients facing these same supply difficulties we believe that the long-term outlook for prime Central London remains positive. While we do not expect any price weakness in the coming months, if any does materialise we believe that it should be seen as a strong buying opportunity. Despite the negative headlines about the global economy in recent weeks, as far as we at Black Brick are concerned, it is very much a case of business as usual for prime London property.