September 2009

Prime London leads the charge

If a rising tide does indeed carry all ships, then some ships are clearly more buoyant than others. The most up-to-date UK residential property market data and commentary all highlight further strength in prices over the summer months and a welcome increase in transaction levels. But it is Central London – and Prime Central London in particular where the action is at its hottest as the influence of cash and equity-rich buyers and a well-documented shortage of supply are at their most pronounced. Unsurprisingly, such market dynamics are resulting in higher prices.

At Black Brick enquiry levels have picked up over recent weeks from already strong levels. In particular, our ability to access properties before they hit the open market is proving particularly attractive to prospective buyers recognising the importance of first-mover advantage in a London market where well located prime property remains extremely scarce. Astute international investors continue to account for a large proportion of our interest.

We believe the long-term case for Prime Central London at current valuations is extremely strong for sterling-based investors given the unique and prestigious nature of the asset. New supply is strictly controlled by prohibitive new build regulations. The case becomes all the more compelling for overseas investors in light of currency moves over the last eighteen months which accentuate the already substantial long-term valuation attractions.

Knight Frank reported recently that residential prices in Prime Central London rose 1% in August – the fifth consecutive monthly rise. The latest price rise equates to a 6.4% rise from the low point in March and, according to Knight Frank, the recent revival has been led by boroughs such as Chelsea and Kensington.

James Pace, head of Knight Frank Chelsea, commented: “The price growth has been focused on quality. Property that is well-presented, in a good location and priced correctly will continue to do well. Property that is compromised will lag behind.”

Savills’ latest prime markets research note entitled ‘Central London leads recovery’ also takes up the theme and addresses directly the improved buyer sentiment toward the capital’s prime areas and the on-going supply shortage. Lucian Cook of Savills says: “It remains too early in the recovery process for improved sentiment to bring discretionary sellers into the market. The resultant shortage of property available has meant that the predominantly cash-led buyers who have returned to the market have been chasing a shrinking supply of stock, and this has intensified the recent price increases recorded in the prime London markets.”

Strength of recent data surprises

The plethora of residential housing statistics released during the last few weeks all show the housing market stabilising and the recent bounce in prices extending. The widely-watched Nationwide House Price Index rose 1.6% in August with the 3 month on 3 month rate of change – generally viewed as a smoother indicator of the near-term trend – rising to 3.3%, the highest level since February 2007. Elsewhere the Land Registry reported house prices rose 1.7% in July in England and Wales, the biggest monthly rise in five years.

Such has been the strength of recent data that many industry commentators who had been predicting a second year of double digit falls for UK house prices have revised up their forecasts. The Royal Institution of Chartered Surveyors (RICS), which had originally said that prices would fall 15% in 2009, now believes prices for the year as a whole could end up in positive territory.

RICS’ latest survey shows new buyer enquiries rising for the ninth consecutive month and agreed sales per surveyor on a rolling three month basis rising for the fourth month in a row.

Degree of caution still merited

We remain wary of getting carried away by the recent bounce in prices, particularly when transaction levels remain a fraction of historic norms. The Council of Mortgage Lenders recently reported that July mortgage lending rose to its highest level in nine months, while the Bank of England said the number of mortgage approvals in July rose to its highest level in fifteen months. While these data points are certainly supportive the overall level of mortgage lending in July remained some 36% down on the same month a year ago. Interestingly, consumer credit and net mortgage figures for July were actually negative as people paid back more than was borrowed over the month – reinforcing the still-cautious nature of the UK consumer at large.

Meanwhile, UK unemployment continues to rise and base rates cannot stay at 0.5% in perpetuity. UK taxes will also have to rise substantially to redress the ever growing hole in the public purse. All of which suggests a more bumpy ride ahead for house prices than has been the case in the most recent months.

On a more positive note the appearance of new players in the UK mortgage market is worthy of mention. Attracted by high net interest margins, new entrants including Bank of China are willing to undercut the diminishing number of existing domestic lenders. Increased competition can only be good for the volume of lending. In addition, demonstrating the continued easing of the mortgage market, HSBC bank has launched a new mortgage deal at just 1.99% for borrowers with a 40% deposit in a bid to gain an even larger share of the mortgage market. However, such improvements are currently only at the periphery. Until mortgage availability improves in step with prospects for economic growth and a more liquid market exists, the question as to whether this is a bounce for breath in a down market or a turning point is likely to remain unanswered.

City bonuses fuel fierce competition

While the topic of City bonuses and the rights and wrongs of the basis on which they are awarded continues to attract newspaper column inches and occupy the minds of regulators and liberal commentators alike, the return of substantial awards in the financial sector is unlikely to be greeted by any opprobrium within the property industry.

Indeed, a big factor in the recent buoyancy of the London market in particular has been the renaissance of substantial City bonuses. The Square Mile is an important driver of the UK economy and the return to profitability of financial leviathans including the likes of Barclays, HSBC and Goldman Sachs has been a key driver to the recent Prime Central London price rises. Some of the recent awards will inevitably be spent on property. In tandem with an easing of attitudes by lenders towards large loans – there is much to suggest that Prime Central London is in much better shape to rise further in the remainder of 2009 than the wider UK residential market.

Year-to-date trends

At Black Brick we put a great deal of time and effort into informing our clients of the peculiarities and realities of the London property market. Looking back on some of the market’s key trends year-to-date we would highlight the growing divide between buyers and sellers expectations. Many investors, understandably, approach with the impression that London is awash with distressed sellers who are willing to take whatever bid they can find. While that may have been the case for a short period when overleveraged financial sector employees sold in haste, at Black Brick we believe that this period has passed. In fact, there hasn’t been nearly as much distressed selling as many market commentators forecast or feared. This has been partly due to sellers letting rather than entering forced sales – but also because there simply are not many distressed sellers in Prime Central London, with many owners in areas such as Knightsbridge, Belgravia and Mayfair relatively untouched by the financial crisis.

With media coverage of competing bids and gazumping increasing, sellers are simply not prepared to reduce prices. Indeed, many potential vendors are withdrawing properties in the hope of further rises. There has therefore often been a sizeable valuation gap between the expectations of potential purchasers and vendors who see the market from understandably different perspectives. That gap in expectations has widened as sellers expectations firm.

Last month we reported on the renaissance in the £10m+ prime segment of the prime market. While transaction levels and competition remain at their highest at the lower end of prime (£1m – £1.5m), we continue to see an increase in interest at the very top end of the market. We continue to believe this exclusive area represents excellent value. Although there is clearly a smaller universe of available properties, competition is proportionately smaller – and meaningfully so, providing an attractive mix of value and choice.

Camilla Dell, Managing Partner at Black Brick, says: “A two tier market separated by financing and location is becoming increasingly apparent. Cashrich buyers are competing for properties in a prime market still woefully short on supply – and prices are rising. Away from these areas and further down the property food chain vendors are still struggling to sell. Bonuses and lack of supply are supporting the former, while rising unemployment is exacerbating the situation in the latter. There is little on the immediate horizon to suggest that this split will do anything other than widen.”