July 2010

Emergency budget – but no flashing red lights

If investors in UK property were holding their breath ahead of the emergency budget of June 22 they need not have. The budget of the new coalition government contained little that we at Black Brick believe will impact prime central London residential property in the coming months. Financial commentators also appeared to greet the budget’s austerity focus positively. George Buckley, UK Chief Economist at Deutsche Bank, said the new government “struck an appropriate balance between cutting the deficit and attempting to limit the fal-out on economic growth”.

Fears of a material hike in capital gains tax (CGT) that might prompt wholesale restructuring of asset portfolios were misplaced. The modest rise in CGT was also effective immediately, removing any potential dislocation caused by a delay between any change to CGT and its implementation. The emergency budget was also generally recognised as posing little threat to London’s position as a major commerce and financial centre – characteristics that are key long-term supports to prime residential property in the UK capital.

Tax rises and job cuts loom large for wider UK housing market…

Inevitably the emergency budget did though highlight significant public sector spending cuts which will result in widespread job losses. Alongside tax rises and pay freezes in the public sector, household disposable incomes will be squeezed. This is a situation that is likely to temper significantly the strong momentum in house prices exhibited over the last twelve months.

Indeed, the latest data suggests that the steam is already beginning to come out of the wider residential property market in the UK. The Nationwide House Price Index rose 0.1% in June from a month earlier, while the annual rate of inflation dropped to 8.7% from 9.8%. Meanwhile prices dropped 0.6% in June according to Halifax following a similar decline in May. Halifax cited a sharp increase in new instructions from new vendors following the recent abolition of Home Information Packs as a major factor in relieving the upward pressure on prices. These themes were reinforced in the June survey of the Royal Institute of Chartered Surveyors which revealed buyer interest falling for the first time since the start of the year while property coming onto the market increased at the fastest pace since May 2007. The net balance of price expectations for the next three months slipped to -4, the lowest level since May 2009.

…but demand/supply backdrop very different in prime central London

According to Savills there has also been a cooling in prime central London property with prices rising only 0.6% in the three months to end-June after four consecutive quarters of much stronger rises. Prices now stand 12.7% higher in sterling terms from a year ago – and 17.4% higher than the low of early 2009.

Looking forward we would not expect prime central London property to remain completely immune to the potential storm clouds gathering over the broader domestic housing market, particularly fears of a fresh downturn in the global economy. But we believe that there are separate and stronger long-term supports to the top end of UK housing that will allow it to weather a so-called ‘double-dip’ better than the wider UK housing market and the majority of other asset classes. Indeed, there is an argument that heightened risk-aversion among high net worth investors only increases the attractions of prime central London as a relative safe-haven.

Camilla Dell, Black Brick Managing Partner, comments: “Given the strength of demand from overseas buyers, prime central London property continues to exhibit completely separate demand/supply characteristics compared to the mainstream housing market. Indeed, according to one survey, international buyers accounted for some 68% of all transactions in London above £5m in June. But what is important to note is that for many overseas buyers, prime central London property is not a short-term investment. In fact, in many respects it is not an investment at all – as they have no intention whatsoever of selling. It is an asset that will stay within the family for generations – and therefore the normal buying patterns that drive the market are largely irrelevant. An increasing percentage of potential stock for sale is therefore removed from the market in perpetuity with every month that passes – compounding the issue of short supply.”

Knight Frank’s latest update on prime central London went as far as to claim that demand from the global wealthy “means that short-term pricing trends are becoming an irrelevance.” The report stated: “Arguably, no other market, including Manhattan or Hong Kong, can compete with the breadth or depth of demand experienced at the top end of the London market.” Knight Frank believes prime central London price growth will moderate a little in the second half of the year as sterling strengthens – leaving prices 7.5% higher at the end of 2010 compared with a year earlier. Savills also believes prices may soften a little in the coming months but the group says “our mid-term prognoses for the prime markets still remain positive, as the fundamentals of the prime markets, particularly in central London, remain sound.”

Prime mortgages – not a contradiction in terms

Much has been written in the wake of the credit crunch about the impact on the broader UK housing market of tighter lending standards and banks shrinking their loan books under pressure from regulators and shareholders. This backdrop stands in sharp contrast to the significantly higher proportion of cash-rich buyers in the prime residential market.

Yet while the vast majority of our clients at Black Brick have no need of finance at all, an increasing number are taking advantage of attractive borrowing rates and benefiting from the marked interest rate differential between the historically low emergency rates in the UK and materially higher interest rates in faster-growing economies outside of Europe. Interestingly an increasing number of private banks have entered the high-end mortgage market in recent months, resulting in ever more attractive borrowing rates. No doubt to a bank or lender, a potential borrower who clearly has significant assets and scant need of finance is actually the ideal customer – and a rather more attractive risk/reward proposition than is possible in the mainstream mortgage market. Due to our success as a business we have established excellent relationships with a number of private banks and specialist finance providers.

Globalisation of prime central London demand a secular theme

Continued competition, at its fiercest in the £1m to £3m prime segment, means buying well in central London is extremely difficult and requires experience, specialist knowledge and considerable negotiation skill. At Black Brick client interest remains extremely robust – the more so now the emergency budget is out of the way – because we offer precisely those skills. Our client base continues to broaden and diversify geographically. We currently have clients from Nigeria, Malaysia, Singapore, Turkey, Cyprus, India, Bahrain, Kuwait, Australia and Greece among other countries. India and the rest of Asia are particular hotspots at the moment in terms of expressions of interest – reflecting the area’s fast-growing high net worth contingent and strong historical links with the UK. Although the ‘globalisation’ of prime central London property has been aided in no small part by the weakness of sterling relative to almost all other currencies, we believe it is a long-term theme.

In particular, we would highlight the enduring attractions of London’s excellent schools to the international elite. The relatively light regulatory burden on companies wishing to gain a public listing in London compared to New York means that London is the stock market of choice for many international corporates seeking capital. Meanwhile London’s geographic position enables access to Asian markets in the morning UK-time and American markets in the afternoon and evening – an important factor for many companies. Taken together we believe these factors will continue to provide material support for prime central London property prices for the foreseeable future.

Black Brick recent acquisitions…

Lowndes Square SW1: Acquired for £6.65m
For our international client we sourced a rare 4 bedroom lateral apartment in an exclusive portered building in arguably one of the best addresses in Knightsbridge. The property benefited from garden views, a share of freehold and underground parking. The property was not being openly marketed but had private interest from another buyer in the building. Black Brick’s reputation meant that the vendors selling agent advised the seller to agree the purchase with us. Subsequently another flat has come onto the market in the same building, of a comparable size, with a lower ceiling height, for circa £10 million.

Flood Street SW3: Acquired for £1.375m
Our client was looking for a flat for his daughter to use, and also a good investment opportunity. We sourced this charming 2 bedroom property that required some refurbishment and managed to save our client £25,000 off the asking price.

There was a great interest in this property with 2 other buyers waiting in the wings. Our relationship with the estate agent meant we were able to get this property under offer and off the market quickly and exclusively.