November 2018

Diamonds in the rough

It’s no secret that conditions are tough in London’s prime residential market. By some measures, transaction volumes have dropped to levels not seen since the Financial Crisis. Overall, prices have fallen sharply from their 2014 peak, although performance is highly uneven. But, for well-advised buyers who can move quickly when the right opportunity presents itself, there are still gems to be snapped up.

One such is our Acquisition of the Month, an amazing converted pub in Mayfair (see below for details). While every purchase is different, the circumstances of this transaction are illustrative of how value can be found in a difficult market.

The first element is finding motivated sellers. It’s simply a fact that vendors who do not need to sell are, by and large, keeping their powder dry and waiting for clearer signs that the market has turned, or are waiting for uncertainty, such as around Brexit, to lift.  A good example is Almacantar, which is redeveloping Centrepoint: it is halting sales rather than accept “detached from reality” offers, a position it is able to take because of sufficient sales to date and a strong financial position.

Red Lion House, on the contrary, was bought out of receivership after it was repossessed by the mortgage provider. Banks periodically review the value of properties on which they have written mortgages, and falling property prices can lead them to require lenders to post additional margin. Where owners cannot do so, the property may be repossessed. Banks then seek a quick sale and are, unlike some owner-occupiers, unsentimental about the price acheived, as long as they recover their capital.

“Through our contacts, we’re aware of a number of attractive prime properties going through this process that are likely to come to the market soon,” says Camilla Dell, Managing Partner at Black Brick. “They are likely to offer significant value for buyers who can move quickly.”

Speed is thus the second key element. While the market may be slow, there is considerable pent-up demand for the right properties. In the case of Red Lion House, we knew of at least two other serious bidders, and we and our client had to move fast. “Fortunately, our close relationship with the selling agent meant we got early notice of the sale; and it took us just seven days from viewing and reporting to our client to exchanging contracts,” says Dell.

The third element is understanding value. “There’s no point buying a property simply because it’s cheap if it’s still going to be cheap in five or 10 years,” says Caspar Harvard-Walls, Partner at Black Brick. “The challenge is finding properties that as well as being competitively priced are also really good quality.”

“There remains a huge amount of interest in London,” says Dell, noting that, for dollar buyers especially, price falls and sterling’s decline over the last couple of years make London prices extremely competitive. “It’s a question of finding properties that are sufficiently attractive to outweigh the uncertainties hanging over the market. Such properties are coming up, but buyers need to be confident and be able to move fast.”

For clients interested in learning more about the pipeline of repossessed prime properties expected to come to market soon, please email Caspar Harvard-Walls on caspar.harvard-walls@black-brick.com.

A benign Budget for Prime Central London

Chancellor Philip Hammond’s Budget, unveiled on 31 October, was an uneventful one for the prime residential market, we are pleased to report. Unlike his predecessor George Osborne, Hammond has avoided frequent raids on the property market and the one concerning proposal that emerged before the Budget – a potential 3 percentage point Stamp Duty surcharge on non-resident buyers – appears to have been watered down.

Instead, the government will open a consultation in January on a 1 percentage point additional charge, meaning the tax increase, if it does materialise, is unlikely to be introduced before the second half of next year. At best – and particularly given the challenge of defining ‘non resident’ in this context – the idea may be abandoned.

Like many in the property market, we opposed Osborne’s increases in Stamp Duty on more expensive properties, given the chilling effect they have had on the number of transactions in the market. But research from estate agent Savills shows that, overall, London is middle-ranked among global cities in terms of the property taxes faced by non-residents when buying, holding and selling a property.

On a $2 million property used as a second home and sold after five years, they would face total taxes worth around 13% of the property’s value. This compares with almost 35% in Vancouver, around 32% in Hong Kong, and almost 25% in Singapore. London is just behind New York, at around 15%. Moscow and Dublin levy the lowest tax, with both around 5%.

Elsewhere in the Budget, Hammond directed most of his attention to boosting investment lower down the property market, including the extension of Stamp Duty relief to shared-ownership buyers, and moves to allow local authorities to reap more benefit from the increase in land values following the granting of planning permission.

“It has been a very benign budget when it comes to property and tax,” says Dell. “As well as taking first time-shared ownership buyers out of Stamp Duty, it makes no announcements of punitive tax regimes hitting buyers looking to upsize, downsize or relocate. This will come as a relief to the industry.”

First forecasts emerge

The first two end-of-year market forecasts have emerged, from JLL and Savills. The former is forecasting a modest return to growth for PCL next year (of 1%), before prices accelerate to deliver total growth of 15.3% by the end of 2023. New builds will rise in value faster, by 17.6% over the same period.

JLL analysts are assuming that a Brexit deal will be struck in the coming months, ascribing a less than 10% probability that the UK will crash out of the EU without a deal. It believes that “greater political certainty will instill renewed confidence to UK businesses and consumers leading to improved housing markets.”

JLL’s forecasts follow those from Savills, released earlier in October. It is somewhat more cautious, estimating 12.4% property price inflation over the next five years.

However, it is more negative in the near term, predicting a 1% drop next year, after a 5% decline in 2018, before the market recovers strongly (up 6%) in 2021. 

Lucian Cook, Savills’s Head of Research, concedes that its forecast last year was too optimistic regarding a rapid return to normality after a Brexit deal, which it had penciled in for 2019/20. “We are pushing back that recovery to reflect the likelihood of an extended transition period once the Brexit deal is hammered out,” he writes.

He also notes that, when the recovery comes, it is likely to be rapid: “When prime housing in central London has looked like good value, it has historically bounced back at pace.”

“It’s hard to predict property prices five years out, and the job is particularly difficult given current political uncertainty,” says Dell. “But these analysts agree with out fundamental position: once some of the question marks have been removed, significant pent up demand is likely to push the market substantially higher.”

Dell to speak at private bank property event

Black Brick Managing Partner Camilla Dell is to speak later this month at the inaugural Wealth Planning Update, organised by EFG Private Bank. She will be providing a property market update, alongside Jatin Patel of Kinnison Finance. The event will also address high-net-worth immigration schemes, the government’s recently introduced Unexplained Wealth Orders, and the use of life assurance wrappers in succession planning.

It takes place from 2pm on Wednesday, 21 November in central London, and is followed by a networking reception. To attend, please email kate.abbott@black-brick.com for an invitation.

Acquisition of the month – Red Lion House, Waverton Street, Mayfair, W1 – £15,000,000

As we discussed above, our Acquisition of the Month is of a stunning pub conversion in Mayfair. Our client, who already owns significant commercial and residential real estate assets in London, had been looking for some time for a family home in the city, but he did not want to pay the huge premium that comes with buying new build properties. He needed four or five bedrooms and at least 3,000 square feet in Marylebone or Mayfair.

We were aware that Red Lion House had been repossessed, and offered potentially good value if we were able to purchase it out of receivership. The pub had shut down in 2009 and been sold to a luxury developer, resulting in an 8,500 square feet, six-bed freehold property, with two receptions, dining room, media room, gym, swimming pool, roof terrace and an internal lift.

It had been sold in 2014 for £19.175 million, and had originally been put on the market at £25 million. However, following its repossession, the bank was prepared to take £15 million, equating to a highly competitive £1,748 per square foot. This compares with the £2,000/sq foot plus usually achieved by unmodernised houses in Mayfair, and the well in excess of £3,000 per sq. foot for modernised properties. Given that Red Lion House is in almost new condition, the price was extremely attractive.

We were not the only potential buyers interested, and we had to move fast and demonstrate our ability to do the deal in order to win the contract from at least two other interested parties. By moving quickly, we were able to do so, taking just seven days from viewing to exchanging contracts.

As well as attractions of the property itself, the surrounding area is interesting from a future investment perspective. On one side, billionaire entrepreneur John Caudwell is developing his own 50,000 sq. feet private residence, and on the other he is developing a new luxury block of residential apartments, Audley Square. The latter is due to be one of the most luxurious new build developments in Central London, with prices expected to be up to £10,000 per sq. foot. 

In addition to helping our client with the acquisition, we are in discussions with him regarding our Vacant Care Service to help look after and service the property when he is travelling.