November 2011

The Eurozone debt crisis continues to dominate the world’s media and the actions of global investors, bringing to mind the prophetic words of American journalist HL Mencken nearly a century ago that ‘for every complex problem there is an answer that is clear, simple and wrong’. With the crisis threatening to engulf the significantly larger debt burdens of Spain and Italy, at the very least the ‘answer’ does not appear to be simple – or close at hand.

Yet despite a backdrop that appears far from supportive to the prospects of any risk asset class, prime Central London property has continued to prosper amidst the maelstrom. As a clear beneficiary of the weak pound, wealth creation in economies that are still growing and increasing demand for ‘real’ as opposed to paper safe haven assets, the breadth of support for London’s most sought after homes from international buyers is what continues to drive prices higher.

Flight to safety

Thus far at least, the Eurozone debt crisis has only served to fan demand for prime Central London investment properties as the worried wealthy in peripheral European countries such as Greece, Italy and Spain seek a safe home for their capital. Interestingly, it has not just been London property that has benefited from this flight to safety. Ten year gilt yields have tumbled below 2% in recent weeks as investors increasingly view the UK as a relative fiscal and political safe haven outside the Eurozone.

That strength of demand for prime Central London property is clearly reflected in high levels of activity here at Black Brick. We have had over 30 new enquiries from potential buyers in the past month – and have now completed on over £75m of deals calendar year-to-date with a further £10m of property under offer. Over the last month the main feature has been the sharp increase in demand from Greek clients seeking to protect their wealth by expatriating large sums into London property. Unsurprisingly, our recent Greek clients have also been extremely keen to complete deals as quickly as possible. They are looking for property priced anywhere from £800,000 all the way up to £5 million, and often the property is for investment rather than for their own use. Meanwhile, Russian clients too have been to the fore ahead of next year’s potentially volatile general elections, while appetite from the Middle East in general and the UAE in particular has remained strong. Many of our clients from the Middle East are looking to invest quite significant sums of money into London residential property, from £10 million – £20 million, and they like to buy freehold residential blocks.

In the wider UK economy the difficulty in obtaining mortgage finance remains a major obstacle to house price growth in the wider UK property market as banks respond to the crisis by reducing their loan books. The slowing UK economy, the prospect of additional job losses and inflationary pressures are sapping real incomes and consumer confidence. With such dire fundamentals it is only the material support of low interest rates that is preventing steep declines in house prices. The monthly housing market survey undertaken by the Royal Institute of Chartered Surveyors (RICS) continues to show more surveyors reporting price falls than price rises. At -24, the headline net balance of price changes reported by RICS members was in line with last month’s reading of -23. Both the Halifax and Nationwide house price indexes posted rises in October leaving prices broadly unchanged over the last twelve months. The mortgage providers highlight the importance of low rates in ensuring a degree of stability in the housing market at a time when the economic and labour market backdrop remains challenging.

In contrast, prices rose 0.7% in prime Central London in October to yet another record high, according to Knight Frank. The latest monthly gains equate to annual growth of 12.5% and means prices have risen 38.2% in sterling terms since March 2009. The continued strength has also prompted an increasing number of the industry’s major players to change their forecasts for the coming twelve months. Generally speaking our view on forecasts meets with British novelist J G Ballard’s famous quote that “as a general rule if enough people predict something it won’t happen”. Twelve months ago none of the industry’s heavyweight players was forecasting another year of double digit returns. The most eye-catching of the latest forecasts was Knight Frank’s prediction that prices will breach the £10,000/square foot in London in the next few years. We have put together a table below of some of the main forecasts for your interest:

House Price Forecasts:

Two-speed prime market

Camilla Dell, Black Brick Managing Partner says: “After another year of double digit gains our view is that price growth overall in prime Central London will moderate in 2012. The main supports are that wealth creation in emerging markets is a secular trend while the influx of capital seeking sanctuary from economic and political risk elsewhere also appears to have further to run. We also expect a widening gap within prime London between peripheral sites favoured by domestic buyers and the ‘core’ prime postcodes favoured by the broader pool of cash-rich international buyers. Prices in secondary areas popular with domestic buyers such as Balham, Clapham, Battersea, Putney, Fulham, Islington, Richmond, Chiswick and possibly even the prime areas of Notting Hill and Holland Park could suffer as they are most exposed to the domestic economy. We do not expect any such weakness in core prime areas such as Kensington, Mayfair, Knightsbridge, Chelsea and Belgravia given the continued strength in overseas demand.”

Camilla continues: “While the Eurozone debt crisis has certainly strengthened demand from a ‘flight to safety’ perspective it would be disingenuous to suggest that the repercussions of the debt crisis are wholly positive. Normally at this time of year bankers and hedge fund managers are working out their year-end bonuses and what they are going to spend on property. But as the world’s investment banks focus on strengthening their balance sheets, improving capital ratios and returns, we expect the trickle of redundancies announced thus far to accelerate into 2012 and bonus payments to fall well short of previous years. The inevitable slowdown in demand from domestic buyers will clearly hit some prime areas harder than others.

Indeed, job losses in the financial services sector may also hit the prime London rental market, though again this is likely to be concentrated in the secondary prime areas mentioned above. Prime London residential rents fell for the first time since June 2009 in October according to one survey – though the major issue appears to be the volume of new rental instructions rather than any sudden weakness in demand. Over the medium-term we believe that the lack of mortgage finance will continue to be an important support for the prime rental market in London.”