September 2010

Media focus on negative housing data…

The domestic media have barely missed an opportunity in recent weeks to indulge in speculation as to the likelihood of sharp price falls in the UK housing market.

The 0.9% month-on-month fall in the Nationwide Building Society’s house price index in August was the first time since February 2009 that prices have dropped for two consecutive months – and was greeted with predictably negative headlines and editorial comment. Prices are now unchanged over the last three months while the annual rate has dropped from 6.6% at the end of July to 3.9% at the end of August.

More recently the Royal Institute of Chartered Surveyors (RICS) reported a sharp rise in the number of surveyors seeing falling rather than rising prices. The net balance of surveyors reporting a drop in prices over the last three months rose to 32% in August from 8% in July. This represents the most negative reading since May 2009. RICS says the weaker price trend in prices is being driven by the recent increase in supply at a time when enquiries from new buyers are falling. However, according to RICS “the new instructions net balance of +12 is lower than last month’s reading of +33. This suggests that the initial surge in supply following the abolition of HIPS has started to fade.”

…but overall picture on wider UK housing remains mixed

We disagree with the very negative predictions – and believe some of the more recent UK housing data needs to be put in context. Certainly, it is premature to be talking with any sort of conviction about a looming crash in UK house prices. July and August are the months in which most UK residents take their annual holiday. The summer is therefore traditionally a period of extremely low housing transaction volumes. It is both difficult and dangerous to extract long-term conclusions from such potentially misleading data points.

Concerns about rising unemployment and the imminent prospect of higher taxes are certainly material headwinds to the wider market that are unlikely to abate any time in the near future. Moreover, the impact on prices of a lack of supply has been exacerbated due to low transaction levels – and this situation is now unwinding. But interest rates are likely to stay extremely accommodative for the foreseeable future. And if the Bank of England’s choice is between risking raising rates a little too early or a little too late, we believe they would rather leave rates lower for longer and be confident that consumption growth has stabilised. Low interest rates are therefore likely to ensure that any fall in house prices is limited.

Indeed, the dangers of reading too much into one piece of summer data were revealed by the publication of the Halifax House Price Index some ten days after the Nationwide figures. The Halifax Index rebounded 0.2% in August when analysts had expected a 0.5% fall. According to Halifax: “These developments suggest that the market is broadly stable with house price inflation having cooled since last year when supply shortages helped to push up prices. The improved economy, strengthening labour market and low interest rates are all supporting housing demand. We expect that UK house prices will remain static overall in 2010.”

Large regional variations – London the strongest market

We also think it is important to remember that there are large regional variations within this country-wide data. Berkeley Group, a publicly quoted UK house builder, made this succinct but insightful summary of market conditions in its latest update to shareholders on September 8th: “Demand for properties in the period from 1st May to 31st August 2010 has been resilient, particularly in London which has a shortage of supply and specific demand from international purchasers who are keen to invest in the Capital. Outside London, which is reliant on the UK domestic economy to a greater extent, a lack of credit availability and overall consumer confidence is a constraint”.

Prime central London property support still in place

The prime property market also suffers a summer lull for many of the same reasons. Given the importance of overseas investors from the Middle-East to the prime London market an additional factor this year has been the timing of the month-long Muslim festival of Ramadan.

Against this backdrop the 0.1% fall in prime central London property prices in August reported by Knight Frank is hardly worthy of note. The fall leaves average prices at the top end of the capital’s 16% higher than a year ago – a figure that should be taken in context with the 3.9% and 4.6% annual rises posted by Nationwide and by Halifax respectively. Knight Frank cites the recent strengthening of sterling against the euro and the US dollar as a contributing factor but we believe it is really only the marginal investor whose decision-making will be materially influenced by the small recent moves in foreign exchange markets.

Indeed, of the £62.4m worth of property we have acquired on behalf of clients in 2010, the overwhelming majority continues to be on behalf of international owner-occupiers rather than investors. We believe our figures are very representative of the prime central London property market as a whole – and underline that even a sharp downturn in the global economy is unlikely to result in a wave of forced sellers who may depress prices.

Knight Frank’s monthly update goes on to report that “the biggest drops are being seen in the £1m to £2.5m sector.” That is certainly not our experience at Black Brick and nor do we expect it to be. The bottom line is that for quality properties in the right areas demand remains extremely strong and competition fierce – particularly in this price band, though perhaps Knight Frank’s report reflects a broader definition of ‘prime’.

Specific areas within the central London property market that may be more vulnerable in the coming months are secondary properties, locations on the periphery of prime and the very top end above £10m where the demand/supply dynamics are less favourable. For those of our clients interested in more obvious value, our contacts tell us that there are a number of developers of prime sites outside of London that are effectively distressed sellers. These include properties on the Wentworth Estate and St George’s Hill in Surrey.

Bank and consultant hiring spree – prime rental market to remain strong

Importantly for prime London market prospects in the months ahead, recent figures suggest that London’s financial services sector is in good health. Recruitment company Morgan McKinley’s most recent monthly London Employment Monitor showed City hiring levels remaining buoyant with a 7% increase in new opportunities in July from June and a 71% increase from a year earlier. The overall number of new positions is the second highest since August 2008. According to Morgan McKinley the figures illustrate “that the jobs market for professionals in financial services continues to follow a steady pace of recovery.”

Meanwhile, the increasing regulatory burden on banks and the pressure on businesses to restructure in the wake of the economic downturn are also prompting a major hiring spree at the major accountancy and consultancy firms across London. According to announcements from the companies themselves, over 1500 management consultancy roles will be created in the UK in the coming months within the so-called ‘big four’ consultancy firms of Deloitte Touche, Ernst & Young, PricewaterhouseCoopers and KPMG.

At the very least this bodes well for rental rates within London that are already well underpinned. Savills recently reported that rental rates in prime central London are within 5% of the previous peak. With a lack of stock for rent and a number of demand drivers we expect the prime rental market in London to remain strong regardless of what happens to prime property prices in the short-term.

Camilla Dell, Black Brick Managing Partner, says: “Given the overall backdrop we don’t believe that there is the potential for any sharp short-term gains in prime central London property – but property has never been an asset class for short-term speculation. However, what prime central London property does offer is diversification and a degree of protection away from traditional asset classes. Continued volatility in equity, bond and foreign exchange markets must surely only increase the attractions of prime central London property. Meanwhile the quality of London’s schools and the Capital’s importance as an international financial centre are the basis for London’s enduring attraction to international owner occupiers. While the scope for material short-term gains may be limited, we continue to believe that there will not be a significant drop in prices in prime central London property in the coming months. More importantly, long-term prices are underpinned by a host of demand drivers and by a lack of supply that is protected by planning law. In that sense prime central London is truly a unique asset class.”