August 2016

Rate cute latest sign of post-Brexit jolt to London market

The implications of June’s surprise referendum result are still only just beginning to sink in – and months of uncertainty await as the UK negotiates a new relationship with the EU. One clear development has been the first interest rate cut since 2009, to a record low of 0.25%, as the Bank of England seeks to head off the damage the vote is expected to inflict on the UK economy. But, as far as Black Brick is concerned, the referendum result has generated enormous buying interest as our clients spot an opportunity and as vendors reassess their price expectations. This may seem surprising, given some of the gloomier economic and property price forecasts. But consider, as a thought experiment, the opposite outcome. A ‘Remain’ vote would have kept sterling high and encouraged vendors to raise their asking prices. The likely result: market stagnation. Instead, the pound is down some 12% against the greenback, making London a bargain for dollar-based buyers, and those vendors who are motivated to sell have become more realistic in terms of their asking prices.

This is a conclusion reached by estate agency Savills. In a recent research note on the impact of Brexit on the prime market, it states that “early indications are that a relatively high proportion of sellers have already adjusted their price expectations, and there remains a seam of demand for good quality, well priced stock.”

Our clients fall broadly into two categories: those for whom Prime Central London is suddenly a bargain, on account of the drop in sterling; and those who remain cautious, out of concern that the pound – and property prices – have further to fall.

Certainly, the latter outcome is a possibility. It is far too early to come to any conclusion on the eventual effect on Prime Central London property – the only certainty to date is the currency movement we’ve already seen.

But our experience of the 2008 financial crisis is instructive. After the initial panic subsided, we saw enormous interest among buyers seeking opportunities. And, initially, we also saw reasonable volumes of transactions as distressed sellers were prepared to accept offers. However, the supply side of the market dried up relatively quickly.

One of the characteristics of Prime Central London is that there tend to be few forced sellers. Many potential vendors own their properties outright. Even among those with mortgages, low interest rates help ease financial pressure to sell – pressure that has been further reduced by the BoE rate cut. Vendors can – and do – opt to rent out properties instead of selling. This can be a source of frustration to buyers hoping to snap up bargains.

But, longer term, it is also a source of the market’s strength. Perennially limited supply, with little risk of large volumes of property flooding the market, provides a firm base for investments in prime London real estate.

“The challenge for buyers is finding sellers who are actually motivated to transact,” says Black Brick Managing Partner Camilla Dell. “That’s where we come in. Our contacts and experience means that we have the inside track on vendors who need to sell. That’s the key to buying successfully in this market.”

m

m

m

Investors eye commercial opportunities

While prime residential property owners may be able to resist pressure to sell, commercial property is a very different proposition. London’s commercial market is, therefore, likely to offer attractive opportunities for investors with a medium-term outlook and access to dollar-based capital. The problems besetting UK-orientated property funds since the referendum vote have been well documented – rapid outflows have forced several funds to lock-in investors, given their inability to provide liquidity by quickly selling assets. These funds will, in the months to come, be forced to sell properties to repay investors. But it is likely that the fears of the retail investors who have fled these funds are overdone. In a clear indication that many businesses remain bullish on London’s continuing importance as a financial centre, US bank Wells Fargo is reported to have spent £300 million on a new office building in mid-July, despite planning to merely lease the building.

According to property agent JLL, the office vacancy rate for London is just 3.3%, compared with 7.3% in Paris and 10% in New York. Indeed, we are already seeing pricing move in buyers’ favour, with rental yields rising from 3-4%/per annum to 6-7%. 

Further opportunities are likely to emerge in the coming months; for example next year will see a rating revaluation take place – the first in seven years. This will mean that total occupational costs borne by tenants (meaning rent + service charge + property taxes) in places like Shoreditch and Clerkenwell will next year be in line with those of more established markets such as core Midtown and the City Core. We expect this to create significant tenant dislocation, with some tenants choosing to relocate to more core locations within Central London, thereby creating opportunities for the strategy focused investor to access superior investment returns. 

At Black Brick, we have a relationship with a leading commercial property advisory firm, allowing us to help clients with searches and acquisitions in this part of the market. To discuss further, please don’t hesitate to call us on +44 (0) 20 3141 9861 or send an email to camilla.dell@black-brick.com

Acquisition of the month 1 – Thornwood Gardens, W8

With market uncertainty encouraging some vendors to let properties rather than seek to sell, now is a good time for those new to London to rent before committing to buy – as was the case with one of our Russian clients, whose daughter is starting school in London in September. He was looking for a apartment within 15 minutes walk of her new school, with a daunting list of requirements: a prestigious address, 24-hour security and underground parking. Despite very few properties meeting his criteria, we not only found the perfect one, but we were able to negotiate a 10% discount on the rental price. Our client will now be able to explore his new neighbourhood at his leisure before seeking to buy – a purchase that we are also delighted to be helping him with.

Acquisition of the month 2 – The Villas, Goldney Road, Maida Vale, W9

London’s continuing long-term appeal was top of mind for a client from Africa, who was seeking a property as both a second home and good investment. With a limited budget of £1.5 million, he was seeking a spacious 3-bed property, in good condition, with Central London – a tough brief. We introduced our client to Maida Vale, having identified an opportunity to purchase one of eight new-build contemporary villas within a gated, landscaped mews, offering allocated parking and a media room – a rare gem of a property. We negotiated hard, securing a £125,000 discount to £1.35 million, equating to £946 per square foot, amazing value for a new build in such a central location. We also introduced our client to the right lawyers and a trusted mortgage broker, offering a holistic service to make the purchase as stress-free as possible.