November 2017

Forecasting season begins

It’s that time of year again when the main estate agencies start to predict what the future holds for the UK and London property markets in 2018 and beyond. First off the block with its annual forecasts is real estate firm JLL. Its recent research report notes that Brexit and affordability will work to dampen activity in London, while limited supply and continued international appeal will support prices. It is forecasting 8.7% price rises in Prime Central London over 2018-22.

Savills has also released its latest forecasts, predicting a much more bullish 20.3% for PCL over the same period, as well as a more modest 10.3% for Prime Outer London. It forecasts a subdued couple of years, but “once a degree of uncertainty starts to clear, we should see growth, when London will appear comparatively good value,” it states.

Strutt & Parker’s latest forecasts allow the agent to have its cake and eat it. It offers both a ‘best case’ PCL price forecast – where prices rise 23% in the five years to 2022 – and a ‘downside risk’ scenario. That latter has prices flat overall to 2022, after tanking 5% next year.

This wide spread between the various forecasts – even from the same shop – illustrates the need to treat price predictions with caution, to look at broader trends – and to be prepared to invest for the long term.

Meanwhile, leading private bank Coutts has also published its first quarterly index of Prime London property, covering 15 areas and 60 postcodes across the capital. It shies away from forecasting prices, beyond predicting that they are likely to remain broadly flat, and its headline findings will come to no surprise to readers of this newsletter: it reports prices back to 2013 levels, down 11.8% below their 2014 peak. It also notes that, while price declines are slowing, discounting on prime properties is widespread, and averages 9.3% on the asking price.

However, the report is worth reading for its breakdown of the factors at play in various parts of London, covering central London, north London, west & southwest London, and the super-Prime market. It also provides price performance for each of the 15 regions, going back to 2013.

“Certainly, looking back at historical data shows that forecasts – while interesting – are rarely accurate,” says Camilla Dell, Managing Partner at Black Brick. “The variations from agency to agency, and even within the same firm, highlight the importance for buyers to take impartial and independent advice. It’s worth remembering that most forecasts are from agencies who primarily act on behalf of sellers.”

“Our view is that the next few years are highly uncertain, and the best-case scenario is for flat prices, although there will be opportunities to be had, particularly with new build, and exchange rates are likely to remain favourable for overseas buyers.

“In this market, more than ever, property should be considered a long-term investment,” Dell adds.

Rates on the rise, but resilience is expected

It’s an extraordinary record: the quarter point rise in interest rates by the Bank of England’s Monetary Policy Committee on 2 November marks the first rise in interest rates for a decade. It is not likely to be the last: the Bank has signalled that this is the start of a gradual series of rate rises, designed to hold down inflation.

What does this mean for London property? Any increase in borrowing costs will weigh on prices. Certainly, ultra-low interest rates have supported the affordability of London property, in particular, even as prices have risen as multiples of earnings.

But we believe that the effect will be muted. As the Bank said in a statement, this does not herald a return to interest rates at the level seen before the Global Financial Crisis, when the base rate stood at 5.5%. “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent,” it said.

With borrowing costs remaining at historically low levels, countervailing forces keeping property prices steady or growing are unlikely to be reversed. Last month, we discussed the levelling off of price declines in Prime Central London: other analysts are also spotting green shoots.

Camilla Dell, Managing Partner at Black Brick comments: “The bank rate rise from 0.25% to 0.5% will not have an enormous impact on the prime central London property market – rates are set to stay at historic lows for some time to come. The financial markets are indicating two more interest rate increases over the next three years, taking the official rate to just 1%.

“In recent years, we have seen tighter controls on mortgage lending and, although rates will continue to rise in the years ahead, this will be done gradually, so we don’t expect to see lots of distressed properties becoming available for sale.

“What’s more, many of our clients purchase with cash, meaning that this will not affect them or their decision to buy a property. The bank rate rise will not herald a significant change in prices. It’s business as usual for the London property market.”

“Many of the factors that have supported prime London in the past – limited housing stock, its status as an international city, the importance of its financial sector – will underpin the market even as borrowing costs rise,” she adds.

Rental market proves its worth

Despite efforts by the government to discourage buy-to-let investment, there is a reason for continued strong interest in the sector: the attractiveness of rental yields compared with other investment opportunities. The Bank of England may have cheered savers with this month’s quarter point rate rise, but the fact is that savings accounts are still paying dismal levels of interest. Landlords will welcome the latest data highlighted by estate agency Chesterton’s, which reports rents continuing to rise across the UK.

According to figures from Homelet, the average monthly rent in the UK is now £927, up from £908 in September 2016. Rents in London average £1,593, 1.9% higher than the same period last year.

Chesterton’s also cites figures showing that 55% of private tenants have lived in the same property for five years or more. Declining turnover, with the associated costs, is also good news for landlords.

“With the political and economic issues that have affected the UK property market in recent years, both landlords and tenants are becoming increasingly attracted to the stability offered by long-term tenancies and are open to agree much longer terms at the start of the tenancy,”
says Richard Davies, Chestertons’ Head of Lettings.

We expect rents to continue to rise as rental supply continues to tighten: while the tax treatment of buy-to-let is less favourable than it was, which is likely to encourage some landlords to leave the market, it is likely to take some time for any increases in public-sector housing stock to feed through to rents.

That view is shared by Savills, which forecasts rents in London rising 17% over the next five years.

Property also remains a good hedge against inflation, which is currently around 3%, above the Bank’s target of 2%. However, potential buy-to-let investors should be cautious on the amount they borrow to invest in the sector: it is less tax-efficient than in the past.

On the demand side, meanwhile, we have noticed a marked increase in the number of Black Brick clients using our Rental Search Service.

“So far this year, 30% of our clients have been looking to rent, double the number from this time last year,” says Black Brick Partner Caspar Harvard-Walls.

“Often clients who are relocating to London prefer to rent first, before committing to an expensive property purchase. The cost of making the wrong decision on a property is huge given where Stamp Duty rates are.

“Our service often involves familiarising clients with an area first, and renting is an ideal way to do so. Once clients have had chance to live in an area they are much better equipped to take decisions on whether to buy there permanently or not. Our Rental Search Service is the ideal solution for clients relocating to London, students studying or visiting the city on a temporary basis,” he adds.

Looking ahead to the Budget

The property market will be nervously awaiting Chancellor Philip Hammond’s budget, due on 22 November: under his predecessor, George Osborne, they were frequently an excuse to increase taxes on property buyers. The good news is that changes in rates are not expected – but there are plenty of possible tweaks on the cards.

Below, our guest writer Sean Randall, Head of Stamp Taxes at KPMG, and author and editor of Sergeant & Sims on Stamp Taxes, gives his predictions for the 2017 Budget.

The likely

• End of the ‘mixed-use’ rule. This is the rule whereby the purchase of mixed property (residential and commercial) or a building used for mixed purposes is taxed at the commercial rates (0%-5%). It is unsustainable.
• Increase in the ‘anti-enveloping’ rate. A flat 15% rate applies to purchases made by companies. It is meant to be a deterrent and work as a toll charge – more tax is paid upfront to make up for the potential lost tax when the property-owning company is sold. Recent rate increases mean that it no longer has that effect.
• Increase in annual tax on enveloped dwellings. This tax penalises individuals using companies as ‘envelopes’ and encourages ‘ghost-mansions’ to be occupied or let. It works alongside the anti-enveloping rate. Some apparently still view it as an acceptable cost. Increasing the annual charges would be an easy ‘win’ politically.

The unlikely

• Introduction of a land-rich charge. Sales of property-owning companies are not stampable. Introducing an indirect charge on sales of land-rich companies has been rejected three times. Brexit might make the introduction of such a charge easier in the future. But for now, this one is unlikely.
• Changes in rates. There is nothing to indicate that rate changes (including the abolition of the higher rates for additional properties) are likely. Making a change this time would be the fifth in seven years.
• Relief for environmentally-friendly homes. A stamp duty relief for zero-carbon homes was only claimed by a handful of people before it was scrapped. Resurrecting it is probably unlikely.

Confusing rules

There are many reasons why understanding how much stamp duty to pay on the purchase of a dwelling is hard. These are just some.

• Which rates apply? There are four sets of rates.
• When do the higher rates for additional properties apply? The rules are especially complex. They apply to the purchase of ‘additional’ properties. But they sometimes deem you to own dwellings you do not and deem you not to own dwellings you in fact do. In some cases, the only reason why a transaction is taxed at the higher rates rather than the standard rates is the timing or order of the events.
• Does a relief apply where your family home includes an annex?
• Does a building that was last used for commercial purposes but is capable of use as a dwelling constitute a dwelling?
• Are live/work units and country estates ‘mixed-use’ properties?

The author recently corrected some published material on the higher rates written by a tax generalist. So, respectfully, what hope is there for conveyancers to get it right? Buyers beware.

For any clients currently in the process of buying and requiring assistance in working out what rate of stamp duty they should be paying, please contact us. We would be delighted to introduce you to Sean.

(The views expressed are the author’s and are not necessarily shared by KPMG.)

Christmas is coming

A seasonal deadline is looming for potential buyers: Christmas. The Regent Street lights may not yet have been switched on (that’s November 16) but, in terms of property transactions, Christmas is just around the corner.

A completion in time for Christmas can be highly motivating for vendors, making November a great time to make an offer – both of Black Brick’s partners bought their family residences in the run-up to Christmas. As always, we remain ready to help, and we have a reputation for making the buying process as speedy and pain-free for our clients as possible.

Acquisition of the month – Heathview Gardens, Putney, SW15

Our clients, a British family, were looking for a large, detached house in South West London. Their ideal property needed to be private, not overlooked and with a secluded garden. With three dogs, access to nearby open spaces was also an important requirement. They had previously been under offer on a property in Wimbledon at £6.5 million, but had lost confidence in both the property and the price being paid, and so engaged us to provide proper guidance and advice.

We spent time educating our client on alternatives to expensive Wimbledon, identifying Putney as a promising location. Through our network, we found an off-market house in Heathview Gardens, with uninterrupted views across a cricket pitch to the front, a stunning, private 90-foot west-facing garden at the back, and surrounded by woodland.

Crucially, we managed to save our client £300,000 or 5.1% from the asking price, concluding the purchase at £5.5 million, or £935 per square foot, bringing them a total saving of £1 million while finding them the perfect property.

Rental acquisition of the month – Fitzrovia Apartments, W1

Our Indian client was looking for a two-bed apartment for his daughter, between her university, Central St. Martins, and Marylebone. It was essential that the property was modern, secure and very close to the Tube.

Our in-depth knowledge of the area allowed us to shortlist a handful of developments that met our client’s criteria. They settled on Fitzrovia Apartments, a small block next to Great Portland Street Tube, with 24-hour security and concierge. On the market for £850/week, we negotiated a rental of £800/week, saving our client 6%.