January 2009

As 2008 drew to a close, many across the UK found themselves bidding good riddance to a year which witnessed the greatest banking crisis in living memory and the reversal of a sustained bull run in UK property prices. But as shoppers across the country line up to bag themselves a bargain in the January sales, those looking to make a purchase in the property market have more reason than most to greet the new year with enthusiasm as opportunities abound for well positioned buyers.

The final quarter of last year saw further falls in UK house prices, as scarcer mortgage lending continued to strangle the broader market and economic conditions deteriorated despite a series of drastic interest rate cuts. As the year staggered to a close, the market-leading surveys of house price values reflected the grim reality facing vendors, with most showing an acceleration in price falls over December. The UK’s biggest mortgage lender, Halifax, reported that values had fallen by 16.2% over the year as a whole and the market’s stagnation was demonstrated in a severe decline in sales volumes. Transactions fell to their lowest level for thirty years; a function of both the lack of available mortgage finance and the continued unwillingness of many vendors to lower their prices to more realistic levels.

The fourth quarter was particularly notable for the travails of the UK’s most expensive properties, which had previously demonstrated greater resilience to the downturn. As financial markets plummeted and City redundancies escalated, large discounts began to surface on some exceptional residential properties in London’s most desirable areas. Property group Savills reports that the value of prime central London property fell by 8.7% over the latest three month period and declined by nearly 4% in November alone. Rental levels also suffered, falling nearly 10% during the past three months as the historical sensitivity of this sector to the fortunes of the Square Mile came sharply into focus. Areas typically favoured by City employees, such as Kensington, Holland Park and Notting Hill, and South West London locations such as Putney, Barnes and Fulham have been hardest hit. In contrast, more established prime Central London locations such as Mayfair, Knightsbridge, Chelsea and Belgravia have been less severely impacted. According to Savills, this is largely because these areas have a more diverse group of occupiers, wealth is more established and they remain attractive to an international market. Nonetheless, the most exclusive areas have also witnessed repossession sales as the global recession bites into the fortunes of the super-rich. Even the hitherto robust ‘super-prime’ sector succumbed in the closing months of the year. The value of houses over the £10m mark have experienced price falls of 8% since August, as falling commodity prices erodes the cashflow of the world’s wealthy.

As the property industry adjusts to a very different world, one group of participants finds itself in an excellent position to exploit the opportunities ahead. Camilla Dell, Managing Director of Black Brick Property Solutions, explains: “This is an enormously exciting time for well positioned buyers to be entering the market. The key question from our clients is when they should purchase, and we are advising them to start their search now. Professional investors are already negotiating large discounts on properties that rarely come to market and the best bargains will be uncovered early, before they appear in estate agents’ windows.” Ms Dell points out that patience will be an essential ingredient in the most successful transactions. “There is a continued reluctance amongst vendors to move prices down so in some instances buyers should be prepared for a protracted negotiation period. But there is currently a much wider range of properties to choose from, so investors who have time on their side are in a powerful position to achieve a price that reflects the reality of the market.”

And whilst the prospect of tantalising discounts looks set to encourage UK buyers back into the market, buyers from overseas are even better placed to snap up a bargain. The most sustained run on the pound since Britain was ejected from the exchange rate mechanism in 1992 has seen sterling fall to record lows against currencies such as the euro, dollar and yen. This is creating huge savings for overseas buyers. Black Brick offers a practical example of the currency impact. On behalf of a dollar-based client, the group recently purchased a property in Belgravia which had initially been marketed in September 2007 at £10.95 million. At the time, each pound was worth $2.02, bringing the property up to a hefty $21.2 million in dollar terms. In August 2008, Black Brick completed the deal at the significantly reduced price of £7.4 million, or $11.3 million for the US buyer at the current exchange rate; a staggering 47% discount from the initial asking price. Three factors contributed to this huge reduction. Firstly, 20% was accounted for by market movements. By August 2008, the housing market downturn meant that the property’s asking price had dropped to £8.45 million, or $17.1 million in dollar terms (based on the previous September’s rate of exchange). Secondly, negotiation played a key role. Black Brick was able to negotiate a further $2.1 million reduction to bring the completion price down to £7.4 million. And finally, the currency factor topped off a very satisfying transaction for the buyer. At the point of sale in August ’08, one pound sterling bought $1.53, significantly below its level a year earlier. This meant that currency movements saved the buyer $3.6 million at the point of sale, a 17% discount from the price that the property would have sold for had the exchange rate stayed at its 2007 level.

Black Brick’s example demonstrates the very compelling argument for foreign investors to be looking closely at London property at the present time, and London estate agents are already seeing this effect on the ground. Hamptons International’s Knightsbridge office reports a 50% rise in deals in December, primarily due to buyers from the Middle East, China and India. Knight Frank has seen increased interest from Europeans and Americans, while others are fielding enquiries from Hong Kong, Singapore and Italy. Ed Mead, sales director at Douglas & Gordon says: “The increase in overseas buyers is marked. It will be a long time before they see these savings again.”

As the economic downturn gathers pace, the stark contrast between the property winners and losers is evident in the UK’s auction rooms. Since the autumn, auction sales have been rising rapidly as investors and developers attend in large numbers, although experts are noticing the growing presence of owner/occupiers. The price fetched by homes at auction is considered to be a good indicator of the true market value of a property, largely because vendors at auctions need to sell their stock and therefore are more realistic about pricing. Auctions therefore tend to be ahead of the market, offering bargains for investors prepared to look that little bit harder. The average price of auctioned properties in the fourth quarter was more than 30% below its 2007 level and some auctioneers have pointed out that prices are down to those seen in 2004. Allsops, the UK’s leading auction house, reported in November on a groundbreaking sale in which 91% of lots on offer sold unconditionally, 80% of which were made up of repossessions. These numbers contrast sharply with recent reports that estate agents had sold on average only eleven homes each over a three month period. With repossessions set to rise in the new year, the number of homes under the hammer is likely to grow in number and reach an even wider audience of enthusiastic bidders.

As property values have diminished this year, so too has the willingness of the mortgage giants to predict the extent of the downturn in the coming year. Both Halifax and Nationwide, as well as the Council of Mortgage Lenders, have declined to issue official forecasts for 2009. However, those at the sharp face of the industry have been more forthcoming. “The positive view is that Spring is the logical time for a recovery”, Knight Frank comments, noting in its December update that prices could have fallen around 30% by early to mid 2009, a level at which the banks may begin to loosen their lending criteria. Knight Frank highlights the large number of wealthy buyers waiting on the starting blocks. “There are a large number of cash-rich individuals and funds looking very hard at the market and looking to pick up what they will consider bargains or at least very good deals in the next few months” the group points out. Savills also expects wealthy buyers to lead the way. “The prime markets will continue to be hard hit in 2009 as the repercussions of the credit crunch rumble on but the diverse wealth and high levels of equity vested in them means prospects for an upturn are greater than in mainstream markets, and we therefore expect earlier recovery”, says Savills Director Yolande Barnes. Hamptons International predict a further 5% fall in prices in 2009 and expect to see a bottoming out in the Spring. The group strikes a note of optimism for those looking to enter the fray, commenting that 2009 might be “the best buyers market we have seen in many a year.” Elsewhere, evidence is emerging that interest is picking up if the price is right. Some agents are reporting increased activity as sellers begin to accept substantial reductions. “Our experience is that pretty much any property currently offered to the market with a real 30% discount on the 2007 peak price will see offers being achieved” says Knight Frank’s Liam Bailey. And Chesterton Humberts has reported that December’s viewings were at December 2007 levels, with offers exceeding the levels seen last year. “In five years, people will look back and wish they had bought now. Next year will be a short-lived window of opportunity” says David Adams, Chesterton Humbert’s head of residential. Rising levels of interest are reflected in reports from the Royal Institution of Chartered Surveyors (RICS). Simon Rubinsohn, Chief Economist of RICS states that buyer enquiries are picking up sharply and now are at their best level since October 2006. This is remarkable, Mr Rubinsohn added, given the continued negative headlines and ongoing financing difficulties, and tells us a lot about the enduring appeal of property.

As global property slumps, the attractions of London come into focus…

It is often said that when America sneezes, Britain catches a cold. And ever since the 2007 meltdown in the US sub-prime mortgage market, the slump in the UK property sector has echoed the fortunes of its counterpart across the pond. As we head into 2009, it seems that nowhere is immune from a downturn that is curbing the decade-long price boom in some of the world’s most desirable locations and bringing the truly global nature of the world’s property industry sharply into focus.

Amongst the world’s economic powerhouses, the US remains at the centre of the storm. According to the Case-Schiller house price index, property values across the country fell by 16.3% in the 12 months to the end of the third quarter last year, compared with a 4.6% fall in the same period in 2007. Just as in the UK, the headline figure disguises significant regional variations and it is notable that former hotspots such as Florida, California and Arizona have fallen significantly more than the average. Even in New York, year-on-year sales volumes for single family homes were down 15% in the 12 months to September 2008 and the decline in the wider New York market is expected to continue.

But the US is not alone. The Knight Frank Global House Price Index, released late last year, showed that average global house prices had declined by 0.3% in the third quarter, the first quarterly fall ever recorded. Nicolas Barnes, head of international research at Knight Frank, commented: “It is now clear that no part of the world is likely to escape the credit crunch as property prices start to fall in more and more parts of the globe.” Mr Barnes pointed out that prices in more than half the countries surveyed had fallen, commenting: “We expect that trend to continue with the vast majority of locations showing zero or negative quarterly growth by the end of the year.” One location under the microscope is Dubai, where big developments are being delayed and residential prices are now falling for the first time since non Gulf-Arab buyers were allowed to purchase property there in 2002. The contrast between today’s slowing market and the exuberance of Dubai’s sales activity over the past few years is dramatic. Some property agents say prices have plunged by as much as 50% in locations where the highest rises had taken place, such as on Nakheel’s reclaimed Palm Islands and in developments around Burj Dubai, the tallest building in the world, as speculators and short term investors flee the market.

But as Knight Frank point out in their assessment of the global picture, the property downturn is breeding opportunities for those waiting patiently for an entry point. “Although homeowners may beg to differ, the scale and speed of some of the falls is positive in a way because it means investors who are in a position to buy are now sensing that some markets are offering relative value compared to pre-credit crunch conditions.” One market that may have much to gain from the deteriorating situation elsewhere is prime Central London, which has long been a favourite with the world’s wealthy thanks to its time zone, political stability, favourable taxation regime and lifestyle benefits. Karen Goodin, Partner at Black Brick Property Solutions explains: “Areas like Mayfair, Belgravia and Knightsbridge have always been popular with international buyers. In these very turbulent times, mature, well established markets are likely to be viewed more favourably than some of the world’s volatile and speculative hotspots. We are experiencing an upsurge in interest from our overseas clients and of course the weak pound only adds to its attractions for buyers with euros, dollars or yen to spend.” Liam Bailey, head of residential research at Knight Frank reiterates the long term attractions of London, pointing out that it does not suffer the oversupply problems of Spain and the US. In the most popular prime locations in Central London, planning for new build and development is extremely limited and therefore the most desirable residences rarely come to market.

News from Black Brick – Our team

We are delighted to announce the appointment of Caroline Takla to head up our Middle East initiative. Prior to joining Black Brick, Caroline held senior roles at the leading London property groups Chesterton and Hamptons International, where she developed specialist knowledge of the prime central London property market, particularly in the popular areas of Hyde Park, Marylebone, Notting Hill and Paddington. Caroline’s experience working on behalf of high net worth individuals and corporate entities from the Middle East and North Africa and her fluency in the Arabic language represents a unique combination of skills that underscores our commitment to providing a highly personalised service to clients across these regions. Caroline will be a frequent visitor to the area and we welcome her to the Black Brick team.

We would like to extend our congratulations to Karen Goodin, who has recently been made a Partner at Black Brick Property Solutions. Karen joined the Black Brick team last year, having spent many years building a wealth of expertise in the prime London residential market. Karen prides herself on her knowledge of key locations such as Mayfair, Knightsbridge, Kensington and Chelsea and has dedicated her career to sourcing exceptional properties for high net worth individuals and corporate clients. Karen’s success at Black Brick reflects her formidable ability to understand the requirements of her clients as well as the critical role she fulfils within the Black Brick team.

Black Brick move to Mayfair

Since it was first developed in the mid 17th Century, Mayfair has been considered the most fashionable part of London, boasting such famous names as Savile Row, Old and New Bond Streets and Sotheby’s, yet offering a peaceful haven for residents and visitors alike. Today, Mayfair is home to some of London’s most exclusive shops and hotels, and its beautiful squares, elegant Georgian thoroughfares and numerous museums and galleries continue to make it a magnet for the world’s wealthy. We are delighted to announce that this month, the Black Brick team is moving to a new office at 15 Bruton Place, London, W1J 6LU, close to Berkeley Square and right at the heart of Mayfair’s bustling prime property sector. Our move puts the Black Brick boardroom on the doorstep of our clients and business associates. Of course, Mayfair boasts some of London’s finest restaurants and we look forward to combining business with pleasure by entertaining clients and colleagues in our new neighbourhood.

Watch this space…

The first quarter of 2009 will be an exciting time for the Black Brick team. In addition to our move into Mayfair, Black Brick will launch a property fund designed to take advantage of the significant discounts currently emerging on prime central London’s most desirable properties. Camilla Dell comments: “2009 offers a very rare opportunity for well placed buyers to purchase prime central London properties at prices significantly below their market value. The range of properties on offer is currently wider than it has been for some years but competition will increase quickly and discounts reduce as buyers return to the fray. The best deals will be won by those who look hardest, uncover opportunities early, and negotiate cleverly to secure sizeable reductions. We intend to put our expertise to work to build a portfolio of exceptional properties at levels which do not reflect their outstanding long term investment potential.” More details on the fund will be available in Black Brick’s next Bulletin.