July 2014

Price cuts and record highs? Headlines in prime Central London paint conflicting picture

Last month we reported that an increasing number of over optimistic sellers in prime Central London had been forced to drop their prices in the face of resistance from potential buyers to chase prices higher. Since then, the pricing environment has remained extremely fluid – with confusing and apparently conflicting media headlines including “London’s cut price mansions” and “London house prices soar at fastest pace for 27 years”.

Yet both headlines are true. We have said before that London is not a homogeneous market. Indeed, it is becoming increasingly difficult to generalise about market conditions when precise location, facilities, vendor situation and motivations can all make a significant difference on price. For both vendors and buyers, experience and informed advice are invaluable qualities to have on your side.

Certainly, there is now an increasing degree of price sensitivity to a wide range of factors within prime Central London. In these conditions, different tactics and marketing are required to maximise prices. Against this backdrop an increasing number of agents have realised that it is now better to price competitively in the first instance to create interest than risk missing out on viewings and buyer interest due to over-optimistic initial pricing.

However, it’s important to note that we do not believe that these conditions herald the start of any protracted demise in PCL prices. While the prospects for short-term capital growth may understandably now be more muted after the strong gains of recent years, the more important long-term factors supporting London house prices remain very much intact. Supply remains constrained and London remains a city with truly global attractions, backed first and foremost by the strength of its international business links but also by educational and cultural attractions that support an economy and housing market with very different drivers and dynamics to those in the broader UK.

UK buyers increasingly to the fore, international demand base still strong

But while it is overseas interest that dominates the media headlines, as we have pointed out in a number of our communications this year, it is actually a rise in domestic buyers of PCL property that has been the dominant feature of 2014 to-date.

According to industry research, UK buyers have accounted for 53% of prime London transactions in 2014, up from 36% in 2013 and 27% in 2012. The combined figure for UK and European buyers is 79% so far in 2014 compared to 46% throughout the whole of 2013. The same research estimates that just 7% of properties trading hands over the past eighteen months in Greater London have been acquired by overseas purchasers. In the context of these figures, the notion that vast swathes of London are being bought up by overseas investors and left vacant is clearly risible. Nonetheless, the fact remains that London property prices are now a political issue and there is potential for at least a short period of uncertainty in the run up to next year’s general election.

The bottom line is that for the right property in the right location demand remains strong and geographically broad. Even if buyers are now more price sensitive than has been the case for much of the last four years, there is little to suggest that fundamental demand is weakening or about to weaken dramatically. Importantly, wealth creation in the developing world and the pool of global ultra high net worth individuals continues to expand rapidly. London’s economy is increasingly entrepreneurial and supported by fast-growing technology and media sectors alongside its traditional financial services strengths.

Flats up, houses down: sales volumes focused on apartments

With new clients from UK, South Africa, Qatar, Singapore, Greece, Ireland, Nigeria and Thailand since our last newsletter, our own business clearly reflects the continuing breadth of international interest for central London property across mandates from just over £0.5m to north of £30m.

In contrast to the ‘price cut’ headlines, we have seen prices on a per square foot basis hit new highs at the very top end in recent weeks, most notably in the exclusive development at 5 Princes Gate in Knightsbridge just south of Hyde Park where prices on sold apartments equate to over £7,000 per square foot.

As we have highlighted before, we believe that the understandable focus of international investors’ on new developments such as the one in Princes Gate continues to highlight the relative value in the capital’s existing housing stock for potential owner-occupiers. This view is further supported by industry figures showing apartment sales in a number of prime Central London boroughs up 32% year-to-date while house sales have fallen 21%.

On the supply side, new developments are trickling through and many are in the development stage but the simple fact remains that demand continues to outstrip supply across the majority of London and particularly in the sub-£2m segment. Planning regulations remain complex and cumbersome and are a significant barrier to new supply in their current state.

Elsewhere, the growth in our Managed Sale service reflects both the strength of our reputation and the simple but powerful truth that managing a sale remotely is difficult and time consuming. Black Brick continues to offer rare expertise across all major property services and it is precisely that broad knowledge base that continues to inform the advice we give to clients.

London property gets its own Bank of England policy: measures designed to cap not stop price growth

The broader UK housing market continues to strengthen, posting a fourteenth consecutive month of gains according to leading mortgage lender Nationwide. Prices rose 1.0% in June, 2.0% in the calendar second quarter and 11.8% in the year to end-June across the UK. According to Nationwide, prices rose 7.6% in Q2 and by 25.8% over the past year in London. The annual pace of growth is the fastest since end-September 1987.

In late April, tougher borrowing criteria aimed at stopping irresponsible mortgage lending took effect. Despite the strong headline house price figures, data shows that the number of mortgage approvals in the UK actually fell to their lowest level in over a year in May in the immediate aftermath of the changes, suggesting the broader housing market may be losing steam of its own accord without the need for interest rate rises.

More recently, the Bank of England has also introduced measures to temper house price gains in London and the South East of England in response to growing concerns about an emerging house price bubble and the long-term risks to economic stability from inflated asset prices.

They include limiting the proportion of lending at or above 4.5 times borrowers’ income to no more than 15% of new loans and a ‘stress test’ to ensure that borrowers can afford a three percentage point increase in lending rates.
Clearly aimed specifically at London’s housing market and viewed as a more effective tool for addressing this perceived sector specific risk than a base rate rise, most commentary has determined that the measures are unlikely to have a significant impact on housing transactions or the pace of price growth in the near term. Most major lenders are already using a stress rate in their affordability calculation that is broadly consistent with the new stress test. According to figures published by Nationwide, the proportion of house purchase loans at or above the 4.5 times income threshold is currently below 12%.

Property acquisition of the month: Richmond Hole-in-one

The back story to our acquisition of the month for July will be a familiar one to many readers. Our British clients had been looking for a home in the Richmond and Petersham area for over a year before coming to Black Brick, enduring a frustrating period of lost opportunities and high stress levels. We helped them narrow their search to just four roads, all within easy walking distance of their preferred school. Rather than sit and wait for a property to come onto the main market, or rely on an impersonal and easily ignored leaflet mail shot, our senior advisers knocked on every one of the 200+ doors in those four streets.

As a direct result of our tenacity and hard work, we were able to source completely off market a £3.7m house backing on to Richmond golf course that perfectly fits our clients’ exacting requirements and budget. Our clients’ recommendation needs no embellishment:

“After 12 months of fruitless attempts to close on selected homes, the best decision we made as a couple was to appoint Black Brick. Caspar and the team hit the ground running and helped us refocus our attention and reposition our strategy. This eventually resulted in us securing our preferred choice, despite the home never coming to market. Without the Black brick team we would not have secured our new home.”

Please click here to view this case study on our website.