October 2011

While Europe’s politicians and central bankers wrestle with the seemingly opposing forces of the region’s sovereign debt crisis, an undercapitalised banking sector, austerity measures and the need to stimulate economic growth, the focus on so-called ‘hard assets’ including property in an inflationary environment has intensified.

Indeed, the main impact of the eurozone’s problems thus far on prime Central London property has been a positive one – bolstering demand from international buyers seeking a safe haven from economic and political uncertainty. Prime London is also benefiting from investors’ current lack of confidence in other mainstream asset classes. Even bank deposit accounts are unattractive when systemic financial risk remains a possibility and when inflationary pressures mean ‘real’ returns are negative in many countries.

Of course, the continued weakness of the pound remains an important attraction to overseas buyers of sterling assets. The likelihood that sterling will remain weak was increased by the Bank of England’s recent decision to extend its quantitative easing programme by a further £75bn in a bid to help boost the economy.

Degree of caution

However, at the time of writing the extent and detail of any forced recapitalisation of Europe’s banks remains unclear, as does the size and scope of any emergency funding vehicle. Some senior bank executives are already on record as saying that they would rather shrink their loan books to meet more onerous capital regulations than issue shares at current low prices. Such a move would clearly not be a positive one for individuals and businesses seeking finance. Our feeling is that the mood among some potential property investors is, perhaps inevitably, beginning to temper against this uncertain backdrop – with a sense of nervousness at the current lack of resolution within Europe.

We have also noted a moderation in tone from some London property market commentators in recent weeks. As we highlighted in last month’s newsletter, a sustained economic crisis would unquestionably hit prices in prime London given the double hit of reduced demand from the domestic financial sector and a further contraction in available finance. Our view, simply put, is that these are uncertain times. When one possible outcome of the European debt crisis is a protracted credit crunch a degree of caution from some investors is understandable.

However, evidence from our day-to-day experiences paints a picture of a market in good health, albeit that some investors are awaiting a positive resolution of the eurozone crisis before committing. Camilla Dell, Black Brick Managing Partner, says: “For sensibly priced properties in the right areas competition is still fierce: a flat in the Princes Gate area of Knightsbridge immediately south of Hyde Park in SW7 went on the market recently at £1.85m and received three bids at the asking price within 48 hours. Meanwhile we continue to sign up new overseas clients, suggesting that overall interest internationally in prime London property remains strong. We have also completed on over £10m of property deals on behalf of clients in recent weeks, including investment flats in Knightsbridge, Kensington and Chelsea. We therefore believe that any weakness in prices, should it happen, is likely to be short lived – and viewed by many as an attractive entry point to a unique asset.”

Indeed, a recent business trip to the United Arab Emirates confirms the enduring attraction of London property in the Arab world, particularly on the investment side. With commercial property in prime Central London now yielding little more than 2% despite the economic slowdown, the focus from UAE investors is now very much on residential opportunities – with several expressions of interest from clients in investment properties above £10m.

Long-term confidence

Confidence in the longer-term outlook for prime Central London property is also clearly reflected in the robust market for development plots. Private equity firm Brockton Capital has recently announced plans for an 18 unit ultra prime development behind Piccadilly with an expected development value of £400m. Just streets away, billionaire founder of UK mobile ‘phone chain Phones 4 U John Cauldwell has paid £150m for a 160,000 square foot plot which will be developed into high end residential apartments. We believe these developments – and other recent transactions like them – show the confidence from industry insiders in the longer-term outlook for prime London property prices. At Black Brick we are advising a number of our ultra high net worth clients on land purchases and development opportunities in prime London. Please contact us if development land is of interest to you.

The latest industry data shows prices in prime Central London rose 0.6% in September as concerns about Europe and the global economy “only pushed more buyers into the Central London market”, according to Knight Frank. Prices in prime Central London have now risen 11.4% since September 2010 and are 5% above the previous market peak of 2008 in sterling terms. Meanwhile the rental market in the UK capital also continues to be robust as the lack of finance availability forces many potential buyers to rent. Rents in prime London rose 1.0% in the third quarter according to one major agent and are now 27% higher than the trough in 2009 and 2% higher than the previous peak in March 2008.

Two speed UK housing market

But as prime London prices continue to rise, the picture in the broader UK residential property market is worsening. The house price index of leading mortgage finance provider Halifax fell 0.5% in September, with prices down 2.3% over the past twelve months. Economic uncertainty, weak earnings growth, higher inflation and tax increases are likely to constrain demand, says Halifax. The September housing market survey from the Royal Institute of Chartered Surveyors reinforced the gloomy picture for mainstream housing in the UK with the headline net price balance unchanged at -23 and price expectations from surveyors remaining negative.

Finally, we believe that a significant proportion of property currently being marketed off plan in Asia as ‘prime’ is actually nothing of the sort. But does it really matter whether investment properties are ‘prime’ or not if the figures stack up, the buyer is happy and the yield is attractive? For those interested in long-term price appreciation, recent data shows that it matters a great deal. According to Savills the price of the top 10% of prime London property rose 151% in the six years to end-June 2011, while the bottom performing 10% rose just 42%. Camilla Dell, Black Brick Managing Partner, says: “The message from this report is clear: make sure you buy in the right area when investing in prime London property. If you’re not 100% sure what those areas are, make sure you’re well advised.”