February 2014

PCL bubble trouble? We answer the headlines

As we write, a report on the UK housing market by economic forecasters the EY Item Club is hitting the media headlines. The report says that “the warning lights are flashing in London” as “limited supply and strong demand have driven price-to-income ratios and income multiples back to previous highs, signalling the potential for overheating.”

However, despite the headlines, the report actually predicts annual price rises in London of an average 7% over the next five years. The writer’s principal concern about London house prices appears to be aimed at the impact on businesses and on workers’ spending power.

Camilla Dell, Black Brick managing partner, says: ”First, it is impossible to generalise about prime Central London property. Market conditions vary significantly by price segment so talk of a bubble across the whole of PCL is well wide of the mark. However, in recent weeks we have taken part in two sealed bids at the bottom end of the prime market that point to evidence of overheating. In the first, 36 buyers pushed the price of a small apartment on Sloane Avenue nearly 40% over the original asking price. In the second, we were one of nine involved in a similarly competitive bidding process for a home marketed at £945k that eventually sold for £1.15m.

We did not come close to winning either property for our clients. We were not disappointed. We believe these events show the importance of being properly advised in a market where supply is short, competition fierce and ‘value’ hard to understand.

Moreover, these price hikes are being fuelled by chronic undersupply and by improving credit availability. If there is any segment vulnerable to a setback in prime Central London (PCL) then it is beneath the £2m threshold where borrowers may have overextended themselves and overpaid. We will find out when interest rates rise.

However, competition above £2m, though still strong for quality properties, is not as frenzied as it is below £2m. Price and competition levels vary significantly depending on exact location and specification – hardly in keeping with the indiscriminate buying that often characterises asset bubbles.

Of course PCL property is not immune to basic financial forces and there will inevitably be some shorter-term fluctuations in values. We have always told clients that as an asset class property is more suited to long-term investment than short-term speculation. Importantly, there are a number of long-term supports to PCL property that remain very much in place: not least the continuing influence of wealthy overseas buyers to whom the Item Club’s price-to-income ratios and income multiples are of little relevance. In short, we continue to believe that the longer-term case for PCL buyers who do their homework or take advice is compelling. “

Buoyant UK economy, continued safe-haven status supporting PCL prices

As we head deeper into 2014, the key supports to prime Central London property (PCL) show no signs of wavering. Demand from our international client base remains strong while the pool of domestic buyers continues to broaden.

International demand for PCL property remains supported by a number of factors including emerging market wealth creation. Looking forward, Chinese buyers in particular look set to play an increasing role in London’s property market in 2014, buoyed by the liberalisation of foreign exchange rules and by the improving cultural and business links between the two countries that we highlighted in last month’s newsletter.

Meanwhile, London property’s status as a safe haven asset in an uncertain world also remains as strong as ever. The escalating emerging market currency crisis, on-going violence in Egypt, civil unrest in the Ukraine, Turkey and Thailand, growing concerns about the shadow banking system in China – these are all evidence that both global geopolitical and economic risks remain prominent.

Importantly, rising domestic demand for PCL property has been a particular feature at Black Brick in recent months. Nearly 60% of the enquiries we received in January were from UK domestic buyers. Recent data shows the UK economy in increasingly rude health – boosting high-end domestic employment prospects in the process. In the latest edition of a quarterly report compiled by the Confederation of British Industry and Pricewaterhouse Coopers, confidence in the UK’s important financial services industry is shown rising at its fastest pace since the report began in 1997. As activity and profits rise, “overall levels of headcount are reported to be climbing by the strongest balance since 2006”.

Improving economic confidence in the UK has also been clearly reflected in the wider domestic residential housing market. The Nationwide House Price Index rose 0.7% in January, marking the thirteenth consecutive monthly rise for the measure as low interest rates, government support, rising employment and a shortage of available stock continue to push prices higher. According to Nationwide, house prices rose at an average 8.8% in the year to end-January.

Supply shortage worsening

The imbalance between demand and supply that has characterised and supported the prime Central London property market for over four years is worsening. On the demand side, the capital’s attractions as a place to live and work are well established, underpinned by a favourable tax regime and a whole host of business, leisure and educational attractions. Meanwhile, new supply has been extremely muted. According to recent data from the Royal Institute of Chartered Surveyors, London RICS members currently have just 25 properties each on their books. This compares to 32 a year earlier and 59 in 2002.

Even with a number of sizeable developments in the pipeline, this new stock is unlikely to satisfy the strength of demand. In particular, as London’s economy continues to expand at a faster pace than the broader UK economy, the capital’s population is expected to grow by over 1m in the next decade.

According to CBRE, the world’s largest real estate advisory services and investment firm, even London mayor Boris Johnson’s hugely ambitious target to build 42,000 homes a year in London is likely to fall significantly short of demand that the organisation estimates at 52,000 homes a year.

As CBRE points out, there is already a significant backlog: under 40,000 homes have been built since 2011. The current pipeline for London stands at just over 300,000 homes with 66,000 under construction, developments totalling 199,000 already having been granted permission and developments totally a further 44,000 homes at the application stage. Unfortunately, these figures need to double to meet CBRE’s projection of housing demand in the capital.

Black Brick- Seven years strong

We are delighted to announce that Black Brick turned 7 years old this January. Over that period we have acquired just over £0.5bn of property for our clients.

Camilla Dell, Managing Partner, comments: “It’s been an incredible seven years at Black Brick. The team has grown from an initial two man band, working from the loft of my West Hampstead house, into a nine-strong team based in Bruton Place, the heart of Mayfair. I am incredibly proud of the achievements of my team and want to take this opportunity to thank all of our clients and supporters without whom none of this would have been possible.”

When Black Brick started in 2007, the property market was right at its then peak. The lending environment was fluid, with Private Banks and high street lenders all lending freely to buyers. 2008 was a very different year given the financial crisis, but we started to get busy with a very different type of buyer: investors, all keen to jump on the falling London property market and weakness in sterling. Sales in 2008 grew 60% from 2007 – an incredible outcome in extremely challenging market conditions that saw several of our competitors go out of business.

Today, our client base is truly global – and we have expanded our offering to meet their needs. Apart from London we are now able to assist clients looking for properties in the Home Counties, West Country and South East. We have also formed strategic relationships with firms in New York, Dubai, South of France, Hong Kong and Singapore to offer clients a truly global solution to their real estate portfolio needs. The popularity of our Property Management, Property Concierge and unique Vacant Care Service are testament to both the quality of the service we offer and their attraction to busy international clients who are not always in London.

We were also incredibly proud to have won “Property Advisor of the Year” in last year’s Spears Wealth Management Awards.

Plans for the future include expanding our Property Management department. With so many poor managing agencies in existence our management service sets new standards in terms of quality and dedication to our clients and their Trustees. We also plan to expand our service to include commercial property search.

Rental Market Update 

2013 was a mixed year for the rental market in prime London but prospects for the year ahead appear strong. Long-term demographic trends are positive. Today a quarter of all London households live in rented homes – a figure that has risen steadily over the past decade. In boroughs including Westminster, the City of London and Kensington & Chelsea, that percentage is approaching 40%.

According to Savills, PCL rental values edged 0.5% over the year as a whole as increasing demand was met for the most part by new supply – largely consisting of new buy-to-let properties from overseas investors. Mirroring the sales market, there has been a ripple down effect in London’s rental market as tenants look for value in suburban and non-Central London locations. Prime flats in outer South West London and east of the City enjoyed the strongest rental gains last year.

Savills forecasts five year rental price growth of 20.4% for prime London and 25.8% for London ‘mainstream’ as the latter benefits from the improved outlook for the economy and employment.

As ever, rental growth in 2014 will be heavily influenced by location and property quality. This is particularly the case in prime Central London, where prices per square foot can vary from below £35/sq ft to well over £100 sq/ft.

For new investors we strongly recommend taking advice on the best locations in order to optimise rental yields. However, we believe long-term rental demand will be underpinned by powerful demographics and the continued shortage of housing in London. With the London population expected to increase by around a million over the next decade and the delivery of housing likely to fall massively short of fulfilling this demand, the basic factors affecting the rental market certainly appear strongly supportive.

Recent data shows the acute shortage of housing stock available to buy. Inevitably this will push more and more frustrated buyers into rented property. According to the Royal Institute of Chartered Surveyors, the average number of properties for sale per RICS member stood at its lowest level in November 2013 since records began.

Meanwhile, the buoyancy of the UK economy in general and of the financial services sector in particular all bode well for London rental prospects for the year ahead. Overall employment levels have risen sharply over the past year, with recent surveys showing the financial services sector is hiring at a pace not seen since 2006.

Happy Year of the Horse

As we write, it is Chinese New Year. In London, the celebrations are said to be the largest outside of Asia with hundreds of thousands expected to attend the annual parade and organised events. May we take this opportunity to wish all our clients across Asia celebrating this auspicious occasion a very happy Year of the Horse.