June 2010

House prices less than 10% below 2007 peak…

The Halifax and Nationwide house price indices – the two benchmarks for the wider UK domestic property market – revealed differing price behaviour in May. According to Halifax house prices fell 0.4% in May from April and rose 6.9% from a year earlier. In contrast, Nationwide reported monthly house price inflation of 0.5% in May – and an annual rate of 9.8% that leaves house prices just 9.5% below their October 2007 peak.

Halifax rationalised its prediction that prices will be flat over 2010 as a whole by saying that: “Further falls in the number of people in employment are curbing housing demand whilst the pick-up in market conditions over the last year has encouraged more homeowners to attempt to sell their property.” The inconsistencies between the two indices suggest to us a market that is in the first stages of slowing. Meanwhile the Royal Institute of Chartered Surveyors’ (RICS) latest monthly survey revealed a net balance of +17 of surveyors reported rising rather than falling prices in April prior to the general election. This was up from +9 reporting rising prices in March.

..but shadow of grim fiscal reality beginning to lengthen

With the UK’s new coalition government barely missing a media opportunity to highlight the impoverished state of the public finances that they have inherited or the depth and breadth of the austerity measures to come, sentiment towards the prospects for the broader domestic housing market has begun to waver in recent weeks.

The very real threat of widespread public sector job losses and higher taxes are casting a growing shadow over mainstream residential property. The new government’s emergency budget on June 22nd will provide more detail of the spending cuts and tax rises necessary to strengthen public finances and assuage the important debt ratings agencies on which the UK’s AAA rating and cost of future debt relies. But as Fitch, one of those agencies, recently noted: “The scale of the United Kingdom’s fiscal challenge is formidable”.

The one bright note for the domestic housing market is that interest rates are unlikely to move significantly higher against this backdrop, not least until the Bank of England’s interest rate-setting Monetary Policy Committee is confident that consumer spending – the main contributor to the UK economy – is on an even keel again.

Meanwhile it has been widely reported that the emergency budget will contain a hike in capital gains tax (CGT) to bring it in line with income tax alongside measures to tax the disposal of non-business assets. This could include second homes and buy-to-let investment properties. A significant time lag between any such announcement and its implementation may prompt some homeowners to seek to crystallise gains ahead at a lower tax rate. Indeed, we have noted a degree of caution among some of our investors ahead of the emergency budget. While understandable, we do not believe that any changes to CGT will have a material direct impact on prime central London property given that the tax is not paid by overseas investors who remain the market’s key support.

Demand for prime central London property still strong

Meanwhile, the prime central London residential property market remains extremely robust. At Black Brick we have now completed on just under £40m of deals year-to-date at an average price of £2.5m. Despite the strength of competition – a number of these deals have gone to sealed bids – we have still managed to negotiate an average of £137,000 off the asking price for our clients.

Indeed, competition for properties remains extremely fierce in the £1m – £3m price band where the majority of investment and owner-occupier demand is focused and where supply remains limited relative to this demand. We believe however that the fundamentals of the ultra prime market above £10m are much more favourable for buyers. As Savills recently noted: “in the ultra prime market buyers have been rebuilding wealth. Transactions over the past 12 months have been slower to recover and price growth has been more subdued than in the lower tiers of prime.” Meanwhile, the stock for sale to buyer ratio favours the latter to a much greater degree than at the lower end of the prime market.

Camilla Dell, Black Brick Managing Partner, says: “Our view is that the very top end of the prime market may continue to suffer. On the demand side there simply isn’t the number of buyers that there used to be. The Russian oligarchs have all but disappeared and even wealthy bankers who can afford homes over £10m are considering something less extravagant for fear of adverse media headlines. At the same time there are a number of new properties at the top end about to come onto the market. Developers that bought 12 to 18 months ago and used finance to develop will struggle to sell for a profit in the current market. Therefore the top end may represent an interesting opportunity for anyone looking to buy.”

London still No 1 for European investment

There is little doubt that the weakness in sterling has played a significant role in the increasing status of prime central London property as a relative safe-haven from the volatility in other asset classes. But if currency helps the timing of a purchase, we are keen to reinforce the other attractions that constitute the long-term fundamental case.

It is no co-incidence that London was recently named as the leading European destination for foreign investment by international accountancy firm Ernst & Young in its annual European Investment Monitor – for the twelfth year running. Mayor of London, Boris Johnson commented: “There is a clear confidence in what London offers international firms locating here, with unrivalled access to western markets, a skilled workforce and one of the most diverse social and leisure scenes in the world.”

At Black Brick we believe London has grown increasingly cosmopolitan in recent years. Certainly, the spread of our client base reinforces the point unequivocally – covering Central and Eastern Europe, the breadth of Africa, the Middle East, India and Asia. But we also have a growing UK client base – demonstrating that even buyers living and working in London are finding it hard to source and acquire properties that meet their requirements. They are therefore turning to the expertise of buying agents.

Such international demand is one of the many reasons why we believe investors who intend to rent their properties should not worry unduly about void periods. Indeed, as long as investors take advice on prospective purchases we would expect void periods for prime properties in the right areas of central London to be minimal. The rental market at the top end of London property is supported by the UK capital’s enduring attractions to the financial services sector and to other multi-national corporates – and by a demand/supply imbalance that is very firmly in favour of landlords. This comes at a time when banks are shrinking their loan books and remain extremely reluctant to increase loan exposure to real estate. Lending criteria in all segments of the UK residential property market remain stringent – resulting in a significantly larger-than-usual demand pool for prime rental properties.

Finally, the significant benefits of using knowledgeable and experienced property consultants are being acknowledged by an ever greater number of market participants. In the Financial Times, journalist Merryn Somerset Webb, editor-in-chief of Money Week, reported on her recent family house move:

“…there is one thing I would recommend: do as we do and use a good search agent. It strikes me as very odd indeed that people go into a market in which they are not expert and spend hundreds of thousands, even millions of pounds, without taking advice from someone with their interests at heart (ie not an estate agent). A search agent will know houses are coming on the market long before they hit primelocation.com.” The article’s final paragraph begins: “Good agents will pay for themselves several times over.” We hope you will forgive what constitutes free advertorial for the services that we provide here at Black Brick, but we could hardly have written it any better ourselves.

Black Brick in action

A client recently contacted us wanting to invest in a freehold building containing flats, commercial units or a combination of both. We managed to locate a five storey building right in the heart of Notting Hill (W2) that had a three storey commercial unit with two floors of residential accommodation above comprising of four flats. Unfortunately the building was already under offer. However, we were able to secure the building for our client below asking price by showing the vendor that our client had funds in place and was ready to move quickly in what is called an attended exchange. The commercial space was promptly let on a 15 year lease on a 6% gross yield while the four flats have all been let on Assured Shorthold Tenancies on a collective gross yield of 5.2%. Shortly after completion the property was valued at 20% above the purchase price by an independent surveyor.