May 2011

The hottest April on record in the UK made for an appropriately temperate backdrop for the continued strength in prestige residential property prices in London’s most sought after enclaves in recent weeks – even at the very top end of prime Central London real estate. While the £136m purchase of the penthouse suite at No1 Hyde Park by Russian oligarch, Rinat Akhmetov, is certainly a one-off, there has also been growing evidence that market conditions in so-called ‘super’ prime properties valued above £10million are on the up. Indeed, the major news in the prime Central London property market in recent weeks has been the pronounced increase in activity in ‘super’ prime properties after a prolonged hiatus.

Camilla Dell, Black Brick Managing Partner, says: “Until recently properties at the very top end in central London have not enjoyed anywhere near the same robust market conditions as have existed at the lower end of prime London. This has been a reflection of less favourable market dynamics – simply put: less demand relative to supply. But this now appears to be changing. Despite widespread industry predictions of a quiet April due to the large number of bank holidays and the Royal Wedding, we have seen four transactions in Belgravia and South Kensington over £10m in the last few weeks. One house in Chester Square was bought for the full asking price after just one viewing. We believe that it is the continued increase in emerging market money coming to the capital, helped in no small part by high commodity prices, that is the prime driver of this trend.”

Outside of London residential property market is subdued

A brief round-up of the main indicators for the wider UK residential property market shows just how different conditions are in prime Central London compared to the rest of the UK. The latest figures are consistent with an underlying trend of moderate decline. The Halifax House Price Index was down 1.4% in April and down 1.2% on a rolling three month basis while Nationwide said house prices fell 0.2% in April. Completing the subdued picture is the latest analysis from the Royal Institute of Chartered Surveyors. In April, the headline balance of surveyors reporting rising prices was at its highest level since July 2010 – but still comfortably in negative territory at -21. The wider market is currently a fine balance between the positives of low mortgage servicing costs and the negatives of rising taxes, potential job losses and concerns about economic growth.

Currency advantage to overseas buyers still material

Investor concerns about the prospects for global economic growth and a so-called ‘hard landing’ for the Chinese economy have prompted a marked increase in volatility in risk assets in general and in commodity markets in particular recent weeks. It will be interesting to see whether this has any impact on prime central London property prices if the sharp falls posted in both precious metals and the energy complex of commodities are sustained.

Alongside the boost to resource-rich countries provided by high commodity prices, the weakness of sterling has been a significant support for property prices in our specialist market. The continuing attractions of London as the international business centre, as a relatively low risk wealth diversifier and as a safe-haven from heightening geo-political risk across North Africa and the Middle East are all boosting demand but it is important to remember that the currency advantages to potential buyers across Asia and the emerging markets remain material.

Camilla Dell, Black Brick Managing Partner, says: “According to a recent article in the Sunday Times, prices in Westminster, Chelsea, Kensington, Hammersmith and Fulham are now back above the 2007 peak in sterling terms. But for many investors and potential owner-occupiers based in fast-growing emerging countries, prices of prime Central London property are actually still well below the 2007 peak in their own local currency terms. For example, we have a substantial client base in Malaysia. Its dynamic economy has created a new group of high net worth individuals who are interested in property in London for a wide variety of reasons. For the majority of 2007, there were approximately 7 Malaysian ringgit to the UK pound. Since the credit crunch, the divergence in economic growth rates between the two countries has been pronounced and the ringgit has strengthened by around 30% versus sterling. To Malaysian buyers, prime Central London property therefore does not look expensive relative to history.”

This scenario is true for a whole host of countries across the emerging markets and Asia: the Singapore dollar has strengthened by around 35% against the pound since summer 2007, the Taiwan dollar by 31% while its Hong Kong counterpart has strengthened by 22%. For international investors scouring the world for unique assets with a degree of safety that are not exorbitantly valued, prime Central London continues to fit the bill. This is one of the principal reasons why we don’t see prices coming down in prime Central London in the coming months and a large proportion of transactions going to sealed bids. With competition so fierce, finding attractively priced ‘deals’ is proving ever more difficult in the first tier of London postcodes, though still possible in fringe areas.

We have also seen an increase in clients looking for both serviced apartment blocks and hotels as investments. The hotel industry is one that many of our Asian clients in particular understand well and which offers scope for new owners to add value and thereby increase the yield. With London’s enduring popularity as both a business and leisure destination coupled to the imminent 2012 Olympics, the market characteristics certainly look supportive. We are helping an increasing number of clients in this area.

Rental market strong, land values soaring

Overall the rental market in prime London remains extremely robust due to growing corporate demand, a lack of supply and potential buyers forced to rent because they are unable to find or finance purchases. According to a recent report from Knight Frank, average prime London rents increased by 5% in the first three months of 2011 and by 16.3% in the past twelve months. Savills also report strong rental growth of 3.4% and just under 12% over the same time period. According to Savills this “shows little sign of slowing.” With yields expanding, we expect investor interest to continue to grow – Savills also report that land values in prime Central London have risen by a heady 12.5% in the last two quarters as builders and developers compete for a piece of the prime London property action.

At Black Brick our own transaction pipeline provides compelling evidence of the continued demand for prime Central London property. We have over £20m of property under offer on behalf of clients and have signed up new mandates totalling over £15m in the last few weeks from clients in Russia and the Middle East. Some clients are simply looking for investments or a safe-haven from geo-political risks at home while some are making a new home in the capital. Says Camilla Dell: “With supply still very tight – a situation that we do not believe will change for the foreseeable future – we have also signed several domestic clients who have given up trying to find a suitable property on their own. Time-consuming and, on occasion, simply unpleasant, many say they find the whole process incredibly frustrating. We’re here to make the process more pleasant – and successful.”