November 2015

Coming back down to earth

Is the logjam in prime London property finally set to start breaking up? Ever since the May General Election, there has been precious little good news for the market. Activity is down, prices at the middle and higher end of the market have been stagnant, and the supply of properties coming available has slowed to a trickle. However, there are signs that things could be about to change. The turning point is, perversely, two leading agents cutting their price forecasts. Savills has cut its expectation for Prime Central London price growth this year to -2%, from -0.5%. Knight Frank, meanwhile, has revised its 2016 forecast for annual price growth in prime central London to 2% from 4.5%.

While this may appear to be a negative indicator, we believe it may – belatedly – inject some realism into the market, and help to temper the currently unrealistic expectations of many vendors. The strong economy, the election of a majority Conservative government, and healthy demand at the lower end of the market (driven by chronically low supply and a tax-driven exodus from the £2 million plus segment) have, we believe, encouraged many sellers to expect prices out of line with buyer sentiment.

We have explained in previous newsletters why we think vendors may have got carried away. The low price of oil is weighing on many overseas buyers’ ability to spend. A strong UK currency is making London property more expensive for dollar or euro buyers. The effects of the Chancellor’s changes to stamp duty are still being felt on sales of more expensive homes – although, here, there are also signs that things are changing. A report from data provider LonRes finds that buyers of £10 million-plus homes are negotiating an average of 93% of the additional stamp duty costs off the asking price.

Meanwhile, Knight Frank is also reporting that, in the third quarter of 2015, the number of new prospective buyers was down almost a third (-30%) on the same period in 2014. This will increase the leverage of those buyers remaining in the market.

This will contribute to the more positive longer-term picture. Savills is forecasting price growth of 21.5% for Prime Central London over five years, while Knight Frank is forecasting 22.1%.

In the short-term, however, overly optimistic sellers and cautious buyers creates stalemate. But with more agents tempering expectations, we are hopeful that vendors will become more realistic on the price they can achieve for their properties. “An important part of the process is in identifying motivated and realistic vendors,” says Black Brick Managing Partner Camilla Dell. “We do extensive due diligence on vendors to ensure they are prepared to transact, and are not taking a fantastical view of market conditions.”

34 completion days to Christmas

When it comes to vendor motivation, few deadlines focus the mind more than the run-up to the Christmas holidays. While many vendors take their properties off the market as Christmas nears, those who don’t are likely to be extremely serious about closing – giving buyers the opportunity to snap up a bargain. It’s no coincidence that both of Black Bricks’ partners bought their family homes at Christmas time. So, while we hesitate to mention Christmas before the decorations on Oxford Street have gone up, it’s worth bearing in mind that, in property terms, it’s closer than you think.

London takes a bite out of the Big Apple…

It’s not all doom and gloom for London’s market. A recent report has shown how London has moved ahead of New York in terms of prime residential sales and prices. In 2009, there were just over 2,000 sales in London of houses and apartments in the $2 million-5 million range, behind Hong Kong and about the same as New York. Five years later, and London has roared ahead: there were 6,250 sales in that bracket in 2014, twice the number in Manhattan and three times those in Hong Kong, Singapore and Sydney. London has also delivered the highest increase in prime prices over a 10-year period, at 138%, compared with 93% in Hong Kong and 78% in New York.

“It’s worth remembering just how favoured London is for real estate investment for the global rich,” says Black Brick Partner Caspar Harvard-Walls. “Its legal, political, commercial and cultural attractions mean that there will always be demand for prime London residential property.” That said, of course, we are always happy to help clients find properties in other global cities, and to that end Black Brick enjoys close partnerships with buying agents around the world. Don’t hesitate to email for more details.

…And its rental market roars on

London also remains extremely attractive in terms of buy-to-let investment opportunities. High property prices in the capital are creating unprecedented demand for rental properties – which is generating healthy returns for investors. The average total return (taking into account rental income and capital appreciation) of buy-to-let property in London was 11.5% in the year to July, according to brokers Reeds Rains and Your Move. This compares with a 2.3% return from UK equities over the same period.

Rental demand is forecast to continue to rise. Aldermore Bank forecasts that 26% of UK households will lease from private landlords by 2022, up from 18% in 2013. The July budget will see the tax relief on interest payments on buy-to-let mortgages reduced, which is likely to make it less attractive to borrow to purchase buy-to-let properties. This will have the effect of reducing competition for such properties, creating opportunities for cash investors.

“We have seen a resurgence in instructions to find buy-to-let properties, with more than half of our clients buying property as investments this year,” says Dell. This compares with less than one-third in 2014. “Our clients consider buy-to-let as an attractive long-term investment, with many buying with a view to passing the property on to children as they get older.”

However, continuing investor demand means that buyers need to be cautious about overpaying. A good understanding of the local rental market can make the difference between an investment achieving targeted yields and seriously under-performing.

Property acquisition of the month: the Hermitage, Kent

The difficulty of finding suitable family homes in London is encouraging some of our clients to look further afield. We were tasked with finding just such a property within commuting distance of the capital and close to railway links. With such an open brief, the challenge involved finding both an appropriate locale as well as the right property. Such a search would have been incredibly time consuming for our clients. Following a detailed analysis of the most attractive villages, we focused on Kent, and sourced an impressive seven-bedroom period home, with the benefit of a large walled garden, for £1.75 million. We were also able to negotiate our clients a £25,000 reduction on the asking price.

To view the case study please click here.

Black Brick at the Bloomberg Summit

As we flagged in last month’s newsletter, our Managing Partner Camilla Dell participated in Bloomberg Markets Most Influential Summit last month. For those who weren’t able to attend, Camilla’s panel session – ‘Surreal estate: London Property’ – is available to watch online.

A Shard for Paddington?

The architect behind the Shard in London is planning a 65-storey skyscraper on a site in Paddington. The £1 billion project – backed by Singapore’s Hotel Properties – would create London’s equal fourth-tallest building. Architect Renzo Piano says the development, which includes 200 new homes, 150,000 square feet of office space, restaurants and a roof garden, would invigorate overlooked Paddington. But it’s early days for the scheme, known as 31 London Street: an application is due to be submitted to Westminster council next month.

And a happy Diwali

Finally, we would like to wish our Hindu, Sikh and Jain clients a happy Diwali, and a prosperous and healthy year to come.