December 2010

The impact of the heavy snow that fell across the UK during November served as a suitably seasonal metaphor for prevailing conditions in the UK residential property market – as businesses continued largely as usual in central London while many areas outside the capital were heavily affected.

Snow aside, the most recent data on the wider UK housing market points to a market in a state of gentle decline. According to Halifax, UK house prices fell by 0.1% in November with the pace of decline over three months accelerating to 2.1%. Prices are now marginally lower than a year ago – down 0.7% since end-November 2009. Meanwhile, the Nationwide house price index edged 0.3% lower in November, with three month rate of change slowing marginally to -1.3 and annual prices rising 0.4%. The Royal Institution of Chartered Surveyors (RICS) also showed house prices slipping further in its monthly survey – with a net balance of 44% of surveyors reporting falling prices in November. New buyer enquiries fell for the sixth month in a row, according to RICS.

2010 – a year of two distinct halves

Looking back at 2010 it is clear that the paths of prime central London property and the wider market have become ever more divergent as the year has progressed. All of the major UK residential property indicators enjoyed strong gains in the early part of the year as cash-rich buyers chased limited supply. But while more stock came onto the market outside of London as the UK employment backdrop deteriorated, a supply shortage has continued to be a feature at the top end of real estate in central London.

Tighter mortgage lending conditions, prospective tax rises and public sector job losses have also had a much more pronounced impact on the wider market than they have on prime central London, which continues to be more closely linked to the global economy and remains supported by an ever-broadening pool of international demand. The on-going weakness of sterling, particularly against a host of emerging market currencies, has continued to provide overseas buyers with a significant price advantage.

Indeed, while economic necessity has been behind the recent increase in properties for sale in the wider market evidence of distressed sellers in prime central London has been thin on the ground – hardly surprising given the equity rich nature of the majority of owners. However, a number of developers who have mistimed their investments have been forced to sell by bank creditors keen to reduce their property loan books. We have recently seen evidence of several whole buildings ranging from £10m to £30m producing net yields in excess of 5%.

In the main however, we have seen no let up in demand from our geographically diverse international client base. We have seen an increase in demand from Asia in general and India in particular over the last twelve months – and have completed on over £72m of property transactions in 2010 as a whole at the time of writing. A significant number of properties have been sourced without the property ever reaching the wider market – reinforcing the advantages of strong contacts. Despite a market in which competing bids are commonplace – we have saved each client an average of just under £150,000 off the asking price due to strong negotiating skills.

London property to remain as safe-haven in 2011

Despite the recent strengthening of the pound against the euro, the perception of prime central London property as a true safe-haven asset appears to be strengthening amidst the latest concerns about European debt contagion and the future of the euro. London property firm Sandfords recently estimated that 60% of current buyers in the W1 postcode were European. High-end housebuilder Berkeley Group also highlighted the capital’s unique qualities in its recent interim results, stating that London’s “status as a World City and business centre continues to attract customers from overseas who are looking either for a home in London or an investment.”

Looking ahead to 2011 we believe property prices in prime central London will continue to show greater stability than those of wider UK residential property. Camilla Dell, Black Brick Managing Partner, says “With the economic backdrop in many major Western countries still uncertain, we expect 2011 to be a challenging year. But with strong demand from international buyers and an increasing perception of prime central London property as a safe-haven asset we expect prices to remain relatively resilient. Certainly, we do not expect a so-called ‘double dip’ of sharp price falls in prime central London.”

The UK media have also honed in on the divergent prospects of prime central London property and that of real estate outside of the capital. In The Financial Times, Jonathan Davis recently described central London property as being “a world apart”, a market that “continues to be driven by quite different factors from those influencing the housing market in the country as a whole.”

Camilla Dell continues: “Many estate agents that we are in touch with on a regular basis would normally expect to have a bank of new properties lined up, ready to come onto the market for the New Year and spring time market, but this doesn’t seem to be the case this year. The prime central London property market has constantly suffered from a shortage of stock, and our advice for potential buyers looking for a home is simply to focus on finding and buying the right property. In terms of property prices, we don’t anticipate that prices will fall significantly in central London next year. Yes, the market does face challenges – mortgages are still extremely difficult to access, and taxes, VAT and stamp duty are all going up next year. However, any price falls are likely to be limited in central London, where the buyer profile is very international, and there is a constant lack of supply. In addition, recent reports suggest that a significant proportion of bank bonuses are likely to be spent on London property next year. With central London property yielding between 4% and 5%, borrowing costs at 3%, rents rising at their fastest pace for years, and the high prospect for capital appreciation, a buy to let property is a far more attractive investment than leaving your money on deposit.”

Strong lettings market driving attractive rental yields

In The Times newspaper Patrick Hosking honed in on exactly this theme in early December in an article titled ‘Property will keep its attraction’. According to Hosking: “The true prospects for house prices are increasingly to be found, not in the mortgage market tea leaves, but in the rental market statistics. Rents are rising across most of the country and soaring in London and the South East. According to the Royal Institution of Chartered Surveyors, landlords have rarely found it so easy to raise rents. Voids, the periods between lettings, are falling as prospective tenants scramble for a home. It’s a dramatic turnaround from 2008-09, when rents plunged. After all costs and taking account of voids, a well managed property can yield 4 or 5 per cent of the purchase price, sometimes much more. That’s mighty attractive, not just to City workers needing to park their bonuses, but also to huge swathes of the affluent middle class. They are fed up with footling interest rates of 1 or 2 per cent on their savings. They have been burnt too many times by stock market-linked investments.”

Government seeks to attract wealth foreigners

Such powerful economic arguments are clearly supportive, but we see a number of other longer-term supports for prime central London property – the latest being the UK government’s attempts to attract wealthy foreigners to the UK by easing residency qualification criteria. Theresa May, the Home Secretary, recently clarified that high-net worth individuals would also be exempt from the UK’s new cap on non-European migrants.

At Black Brick we are already seeing an influx of clients currently based outside the UK looking to spend between £4m and £10m on substantial family homes in desirable addresses such as Mayfair, Chelsea, Knightsbridge and Kensington. Safety, good schools and the attractive current tax regime for UK resident ‘non doms’ will, we believe, continue to make London a top choice for many high-net worth families looking to relocate.

Prime Investors: commercial or residential?

We have had many clients ask us recently about the relative merits of commercial property in prime central London against residential property. In many respects the two are linked with a healthy financial services sector underpinning both office and residential property demand, while the international elite who now call central London home are simultaneously supporting high-end retail sales. However, at Black Brick we believe residential property in prime central London holds a number of key advantages over commercial property as an investment. First, the entry point for residential property investment in prime central London is markedly lower than the minimum £5m needed for a sound commercial investment. Second, demand from investors has driven commercial rental yields lower, and in some cases to a level well below those available on residential property. Third, we believe commercial property to be inherently more volatile than residential property and see the prospect of gradual capital appreciation in prime central London on top of attractive rental yields as a compelling alternative to low bank deposit rates and government bonds.

Finally, may we take this opportunity to thank all of our clients for their business in 2010 and to wish all a peaceful and prosperous 2011. We look forward to helping you fulfil your London property aspirations in 2011.