February 2009

The New Year has ushered in a series of dramatic milestones for the UK. As the country enters its first official recession since the early 1990s and interest rates stand at their lowest levels in the Bank of England’s 315 year history, the pound is the latest benchmark measure to fall under the spotlight. But as sterling plummets to historical lows against many foreign currencies, one sector of the economy has more reason than most to anticipate the emergence of ‘green shoots of recovery’. After months of plummeting house prices, the fall in sterling is generating a flurry of interest from foreign buyers scrambling to secure a London bargain while the exchange rate remains in their favour. Closer to home, meanwhile, firmer evidence shows that price falls are tempting cautious domestic would-be buyers back to the market. This budding theme is injecting a long-awaited spirit of optimism into the market and has seen some industry insiders reporting on extraordinary increases in viewing numbers. One report suggests that viewings rose nearly 65% in January compared with the same month in 2008, with particularly strong interest in prime West London areas such as Belgravia, Mayfair, Knightsbridge and Chelsea, where viewings rose by an exceptional 80%.

At first glance, statistics from the giants of the UK property world appear little changed in 2009. House prices continued to slide in January, as evidenced by mortgage group Nationwide’s report of a 1.3% decline over the month. The Council of Mortgage Lenders reported that borrowing was at its lowest since 2002, a feature that has seen only those with sizeable deposits and spotless credit histories able to obtain mortgages. Leading estate agent Knight Frank also lowered its expectations for prime London property, forecasting that the sector could now drop by at least 35% peak to trough.

Regular readers of both the industry and mainstream press, however, will have noticed a change in tone, as many commentators begin to look ahead to the opportunities created by current circumstances and begin to report more widely on renewed interest in UK property as an asset class. Nor have the leading data providers ignored this rising tide. Nationwide noted that new buyer enquiries were “recovering quite strongly”, a sentiment matched by figures from the Royal Institution of Chartered Surveyors that showed the number of new buyer inquiries rising at the fastest pace since August 2006. Meanwhile, industry commentators have begun to debate the point at which fair value may have been reached. Knight Frank’s Liam Bailey says “The good news is that as prices near a 40% decline, they begin to look too cheap on our current models, given the recent influx of potential overseas buyers.” Whilst noting that the interest has yet to translate into sales, Bailey expects transactions in prime markets to increase gradually thoughout 2009.

So who are the buyers expected to lead the UK property revival? The most active group at present are international players, spurred on by the sharp decline in the value of sterling against the euro, dollar and other currencies since the beginning of 2008. The impact of the currency effect is pronounced, particularly when combined with already significant price falls in the prime central London sector. Property group Savills report that the average price of prime central London property from the September 2007 peak to January 2009, adjusted for currency fluctuations, is 42.2% lower in euro terms and 43.5% lower for buyers fortunate enough to be purchasing in US dollars. In practical terms, a flat that cost £3m in 2007 would now be worth £2.4m to a UK investor; an already impressive discount that translates into just £2.5 million euros or $3.5 million dollars. Particular interest has been seen from the Middle East, Africa and other dollar-linked buyers. “The start of the recovery could well be driven by these types of investors” comments Yolande Barnes, Savills’ Research Director, who points out that it was Middle Eastern, European and American buyers who revived a collapsed London market in 1993 after a disastrous year for sterling.

But domestic interest is also emerging from the sidelines, as more realistic pricing levels tempt watchful would-be buyers. The Lombard Street Research/Daily Telegraph housing affordability index, a measure which compares house prices to other financial factors including earnings and mortgage rates, recently inched close to 100 points. This signifies the average housing value over the past fifty years and implies that buyers who purchase a house now will be doing so at about its fair value. Lombard Street Research’s Jamie Dannhauser comments: “There are actual signs from the market that things are improving. There’s no reason why you couldn’t have a month by the end of the year where prices go up by 0.1pc.” Nationwide also points out that house prices are back below their long-term trend for the first time since 2001.

Of course, the common denominator amongst all types of would-be buyers is that cash is king. Ed Mead of London-based estate agent Douglas & Gordon recently revealed: “Buyers are really out in droves and are willing to buy, at the right prices, but getting a mortgage is best described as a nightmare.” But those backed by plenty of cash or a sizeable deposit are finding some of the best buying conditions for many years. One agent has pointed out that a year ago there were just five houses between £2 million and £3 million on the market in Chelsea and South Kensington but currently there are forty on offer. The excitement in some corners of the market is palpable. “This is set to be the year of the quality property deal” says Miles Shipside, Commercial Director of the online property portal Rightmove.

Here at Black Brick Property Solutions, the view is characteristically enthusiastic, tempered with some timely advice on when buyers should start their search. Managing Director, Camilla Dell, comments: “This is a sweet spot for would-be buyers. Vendors are finally becoming more realistic about the price they can achieve and forced sales are on the rise, even in the most exclusive areas of central London. This means an abundance of choice in the most desirable postcodes and more opportunity to negotiate huge discounts off asking prices. But the tide will turn quickly given the large numbers of international buyers and professional investors currently scouring the market. Interested buyers therefore need to start looking now if they want to snap up the best bargains.” Black Brick, London’s market leading independent buying agency, is uniquely placed to help clients take advantage of the current exceptional circumstances, a fact evidenced by the company’s increasing market share over recent months despite the generally adverse economic environment. “Many of our clients are cash-rich overseas buyers looking for an investment property or residence in London,” Ms Dell explains. “Our recent sharp pick-up in business activity suggests that prime London property has reached levels that will tempt buyers back to the market. The added discount from a weakening pound can only accelerate this trend and gives us plenty of reasons to anticipate a very busy year ahead.” Above all, Black Brick are seeing compelling evidence that in the current uncertain investment climate, risk-averse clients are increasingly favouring more traditional asset classes such as property over some of the more exotic financial products on offer. The ongoing banking crisis has highlighted the risk/reward benefits of owning bricks and mortar and in prime Central London, the best located and highest quality properties are increasingly being sought after as a sound and tangible route to achieving long term capital growth.