September 2011

In the last few days equity markets have fallen sharply around the world following announcements from the US Federal Reserve and the International Monetary Fund regarding rising risks to the stability of the financial system and to the global economy. Our long-term view on prime Central London property prices is a positive one for reasons we have articulated many times, but it would be unrealistic to suggest that London property would somehow be completely immune from a renewed and sustained credit crunch.

Post-Lehmans, prices dropped sharply as distressed sellers dominated low transaction volumes. However, we believe the ownership structure is meaningfully different compared to that time. A large proportion of buyers over the last three years have been the cash-rich and internationally wealthy. London’s financial services industry also remains an influential force in the capital’s prime property market. Should the escalating crisis result in widespread job losses in the City there will inevitably be some negative impact. Meanwhile, the banks’ reluctance to lend to individuals in the mortgage market extends to even greater caution towards commercial property projects. From a supply point of view, new development is likely to dry up quickly in an environment where capital availability becomes more limited.

These are certainly challenging times for the global economy but at Black Brick we base our market opinions on what we see in our own business dealings on a day-to-day basis. The message from this source remains very positive. New client sign-up, unsurprisingly a strong lead indicator for future transaction levels, remains high – and from a broadening and increasingly diverse base of domestic and international buyers. Meanwhile, stock levels of available property for sale are unusually low for this time of year. Simply put demand and supply dynamics for prime Central London property continue to be supportive in the near term.

Will prime Central London prices continue to go up?

After over two years of virtually uninterrupted monthly rises are prices in prime Central London starting to look and feel stretched? We don’t think so – and the majority of our clients that we speak to on a daily basis, don’t think so either.

Those looking for contrarian indicators would no doubt say that this is exactly the sort of anecdotal evidence that might preface a fall. However, we believe there is a simple but powerful fact behind this trend. Compared to the sharper rises in residential house prices in many leading Asian cities – the rise in London house prices actually looks relatively pedestrian. Add in the significant and ongoing discount available to overseas buyers provided by the weakness in sterling – and London house prices start to look an extremely long way from bubble territory. Against this backdrop it is not hard to see why the bricks and mortar of the UK capital’s smartest post codes continue to look attractive to overseas buyers. This view is also supported by recent forecasts. Knight Frank predicts property prices will rise 9% this year, with a very strong possibility that growth may end up over 10% and they are forecasting a further 6% uplift next year.

At Black Brick we exchanged on some £12 million of properties in recent weeks on behalf of clients across the prime London spectrum. The properties included a Mews House in NW1 for a young professional couple, a family home in Coombe adjoining Richmond Park, and two flats in Knightsbridge for separate international investment clients.

Competition for properties is at its fiercest at the lower end of the prime market, between £800,000 and £2 million, due to the higher proportion of investor buyers. By way of example we recently met the £675,000 asking price of a flat in Fitzrovia on behalf of a client on the property’s first day on the market. Three other interested parties subsequently bid on the property within a matter of hours and the flat went to a sealed bid process. This is hardly atypical.

Despite a rising and fiercely competitive property market, we have also been successful in securing deals for well below the asking price for many of our clients. We recently acquired a new build house in Marylebone for a client for £2.05 million, despite having agreed the deal at £2.15 million, against an asking price of £2.2 million. Camilla Dell, Black Brick Managing Partner, explains; “Due to the thoroughness of the due diligence process we discovered that there were strong grounds to go back to the vendor and renegotiate the price. We successfully negotiated a further £100,000 discount for our client, purchasing the property for £2.05 million, an impressive £150,000 discount from the original asking price. We believe that the deal would have almost certainly fallen through for an unrepresented buyer in similar circumstances, but we were able to achieve a successful outcome for our client due to our strong relationship with the selling agent and our knowledge of the market.”

Rents continue to rise offering better returns for investment Landlords

According to recent research by Knight Frank, rents hit a new high in August and have now climbed a staggering 26.3% since June 2009. Camilla Dell, Black Brick Managing Partner says, “The very strong rental market is the key to investor demand and with the volume of new rental instructions some 35% below levels seen in previous years, we believe rental rates are well underpinned. In addition, there is a growing pool of professional corporate tenants in the market, people that live and work in the city and would ordinarily like to buy, but just can’t find the 30% to 40% deposit now required to obtain the best mortgage deals. The reluctance of banks to lend to the property sector is true to all but those with very large deposits and perfect credit. The difficulty in obtaining mortgage finance has been the major driver to the strength in rental prices in prime Central London. We do not see that strength changing anytime soon.”

At Black Brick, we have recently completed on some very lucrative buy to let investment deals on behalf of our clients. For example, we recently acquired a property in St John’s Wood for £1.8 million and we had it successfully let out to a good corporate tenant within a week of it being advertised. We achieved £1950 per week for our client, generating an impressive 5.6% yield, which is above average for prime Central London.

Middle East interest in London rebounding

Recent business trips to Asia and Africa confirm the sustained strength of international interest in prime residential homes and flats in London. From our contacts and client base in the Middle East we sense there is more confidence coming out of the UAE as the economy stabilizes – and a renewed desire to hold a diversified international property portfolio rather than one overly concentrated on local new build development. We therefore expect an increase in buyers from this part of the world.

Meanwhile the wider UK residential market continues in a state of torpor. It used to be said that the housing market in the UK was ‘two speed’, reflecting the fact that whatever happened in London was amplified and usually a precursor to what would happen in the wider market in the coming months. The spectacular rise in emerging market wealth has helped to drive foreign buyers to London to such a degree that London’s property dynamics now have little to do with the domestic economy – and therefore bear little relation to residential property outside of London. Industry newspaper Estates Gazette recently described the capital as “Island London”. Not so much ‘two speed’ – as ‘two direction’.

The latest industry data merely confirms these trends. Knight Frank’s Prime London Index jumped 0.9% in August from the previous month with rents in the same area rising 0.2%. In contrast, the monthly survey from the Royal Institute of Chartered Surveyors highlights that house prices across the UK continue to decline: a headline net balance of 23% percent of surveyors reported falling prices. Interestingly, 78% of respondents cited economic uncertainty as negatively impacting the housing market with some two-thirds of respondents also highlighting the lack of mortgage availability. New buyer inquiries also declined during the month – perhaps the key driver behind the continued deterioration in price expectations.

Safe haven – and a lot more besides

London property prices have unquestionably benefited to a good degree from the same sense of investor uncertainty that has sent US treasury yields tumbling and gold to an all-time high. But for the vast majority of our clients wealth protection is rarely the only reason for buying in Central London. Relocation, a European business or leisure base, a place for a child to stay while completing studies, attractively valued safe haven investment – these are just some of the rationale we hear from our clients for buying in London. Until those drivers diminish we believe long-term property prices in prime Central London are well underpinned.