March 2012

There may have been an extra day in the Western calendar in February to mark the quadrennial ‘Leap Year’ but for prime Central London property the last month has been very much a case of business as usual. The overall price backdrop remains extremely resilient with international demand continuing to outstrip meagre supply. As a general rule, the more prestigious the location, the greater the competition. Sealed bids, attended exchanges and fierce competition are part and parcel of sale conditions for the best properties. Against this background, strong relationships with selling agents can make all the difference.

Social unrest, economic uncertainty supporting PCL prices

Political unrest overseas and the desire to preserve wealth from such uncertainty remains an important driver on the demand side – alongside the very real caché of owning a home or investment property in this iconic capital city. Indeed, wealth preservation overall is an increasingly prominent motivation for potential property buyers in Central London in a world where economic and geopolitical risks are heightened and where traditional investment ‘safe havens’ do not appear to offer long-term capital security. The enduring popularity of the UK capital also means that prime London is relatively liquid in global property market terms – another attraction to those seeking to preserve wealth.

Importantly, these factors hardly seem transient. The latest bail-out for Greece may have been agreed but few believe that the Eurozone debt crisis is resolved. Unsurprisingly, wealthy Greeks keen to protect their wealth from a devaluation are honing in on London property. Elsewhere, continued political unrest in the Middle East, the forthcoming presidential elections in Russia and stricter property investment controls in Asia are all adding to buyer interest in London. At Black Brick we have seen a particularly sharp pick-up in new enquiries from Russia in recent weeks.

Such strength is reflected in the most recent market data. The Knight Frank Prime Central London Index rose 0.9% in January, with the pace of growth in the three months to end-January accelerating to 2.7% – the fastest pace since July. Over the past twelve months prices have risen 11.9% – well ahead of most forecasts. The basic premise for price rises in any asset is that there are more buyers than sellers – and new buyer registrations continue to outstrip the volume of housing coming on to the market. This imbalance is now most pronounced in the segment above £5m. Given such statistics – and the breadth of interest in property in London from overseas evidenced by our own client base – we do not expect any material weakness in the market in the months ahead.

Recent deals that we have completed on behalf of clients perfectly reflect the broader forces at work in prime Central London property. These include a £9m four-bedroom lateral apartment that we acquired for a client from the Middle East in the Belgravia enclave of Lowndes Square SW1. With its white, stucco-fronted terraces, Lowndes Square has remained one of the most prestigious addresses in London since its development two centuries ago. Despite the fact that we were able to view the apartment before it hit the open market competition for the property was predictably fierce given its location. Yet we managed to secure the apartment for our client despite it being under offer from another party. This was due to our client’s ability to execute a swift attended exchange, but also due to the selling agent’s confidence in Black Brick and our high quality client base.

Large residential freeholds – a wise investment

One particular area in which we have seen increased investor interest of late is in entire freehold residential buildings. Many of our investor clients in this £10m+ area would have historically put their money to work in the prime commercial property market. But with rental yields now in the 2% – 3% range on commercial property, and with increased void risk due to the economic backdrop, the risk/reward is clearly more attractive in large residential property investments. Such properties also offer the flexibility of selling individual units within the building as well as more attractive yields of 4.5% to 5.0%. Please contact us to discuss your requirements if investment in large residential properties is of interest to you.

While the broader UK residential property market does not enjoy the same diverse and cash-rich international demand base, the most recent industry data has struck a mildly more positive note. The Halifax House Price Index rose 0.6% in January for an annual return of -1.8%. The marginally more upbeat tone was echoed in the latest monthly price balance reported by members of the Royal Institute of Chartered Surveyors. With sixteen per cent more surveyors reporting price falls than rises the balance is the least negative since July 2010. The size of the falls is also small according to the RICS survey with 82% of surveyors reporting falls doing so in the 0% to -2% range.

Investment market – location is key to rental value

We have noted in recent weeks data suggesting very moderate signs of weakness in the rental market. According to Knight Frank, residential rents in prime central London slipped 0.2% in January – leaving rental costs some 7% higher than a year ago. These figures run contrary however to what we are experiencing on a day-to-day basis.

Camilla Dell, Black Brick Managing Partner, says: “If there is any weakness in prime Central London rents, we are certainly not seeing it in the areas in which we tend to advise our buy-to-let clients to invest. Rents are very much location driven, with large variances depending on the desirability of the property’s situation. In East London, which stretches the definition of ‘prime’ in the first place, there is now over-supply relative to demand as new developments have been aggressively marketed off-plan to investors in Asia. Indeed, a recent Savills report said Pacific Asian buyers now account for a third of all new build purchases in prime London. Yet properties in East London are almost exclusively reliant on City tenants at a time when employment prospects in London’s financial services industry are diminishing.”

Camilla continues: “However, the picture in other parts of central London is very different and we see void periods in Knightsbridge, Kensington and Chelsea as minimal at worst. We seek out properties for our investment clients with multiple tenant angles in order to preserve and enhance rental value. The area south of Kensington Road is a good example. In additional to the obvious advantages of the property’s prestigious central location, it also benefits from proximity to Imperial College and the London University’s affluent international student body. Just for good measure the Kensington campus of the International Richmond University is also just streets away. The pool of potential tenants here is therefore deeper and broader and not overly reliant on a single segment or demographic. We believe that good advice is vital when investing in London property in order to maximise returns and minimise void risk.”

2012 Budget

At the time of writing there is much speculation in the UK press that the government’s forthcoming Budget announcement on the 21st March will include provisions that may adversely impact existing and potential owners of high value property. The most widely expected changes are the introduction of measures to prevent both stamp duty avoidance when acquiring properties through offshore companies – and capital gains tax when selling a property held in an offshore company. If such provisions are indeed introduced we do not see them as changing the fundamental supply and demand characteristics of the market. Contrary to the speculation in the press, our experience is that this practice remains rare and that any potential stamp duty saving is normally seen as a bonus, rather than a driver of price.