April 2009

Signs of life in the UK property market

The onset of Spring has brought a welcome change of mood in the UK property market. Following months of dismal headlines about sliding house prices and a deepening recession, signs of life in the property market were confirmed by the release of some upbeat reports from a number of major institutions.

House prices rise in March…

For the first time in 16 months, the Nationwide Building Society reported a rise in monthly house prices. March saw a 0.9% increase in house values across the UK, reducing the annual rate of decline from -17.6% to -15.7%. The lending giant cautioned against using this “surprise bounce” to conclude that the market has turned, but points out that the recent huge cuts in interest rates appear to be having an effect in encouraging borrowers to return to the market.

…and mortgage approvals increase

The Nationwide also noted that mortgage approvals are at their highest level since May 2008, a trend recently highlighted by the Bank of England, which revealed that the number of mortgages approved jumped by 19% in February.

But while the big hitters retain a ‘wait and see’ approach to any impending recovery, others interpret the recent trends as a sign of better things to come. A Capital Economics spokesman observed that the Bank of England’s household borrowing figures “suggest that housing market activity may finally have turned a corner”, while Howard Archer, Chief UK and European Economist at IHS Global Insight said: “There are increasing signs that the housing market may have passed its worst point, helped by the substantial fall in house prices from their 2007 peak levels and markedly reduced mortgage rates.”

A return to competition

And away from the headline statistics, property insiders are producing real evidence of houses selling for more than their asking prices, multiple bidders and, in some instances, the return of the practice of gazumping. Black Brick’s recent experience is indicative of the current heightened activity for particular types of properties.

Surge in interest in properties between £1-3m

Managing Director Camilla Dell explains: “We have seen a marked surge in interest in the £1-3 million price bracket of the prime Central London market, and a noticeable increase in competitive bidding for the best located, and most sensibly priced properties. We have come up against stiff competition from other buyers on each of the last six properties we have bid for and we have had to fight hard to secure deals for our clients.”

Sensible pricing is the key to a sale

And whether a property flies off the shelf, or languishes on estate agents’ books, seems to be increasingly dependent on the marketed price. Vendors who set asking prices that still reflect the former boom times are struggling to generate interest, whereas those whose prices reflect current market conditions are attracting considerable attention. “With values down around 25% from their peak, all buyers – owner-occupiers as well as investors – are conscious that it is important to get a good deal at present.” says Camilla Dell. “Highly motivated sellers who follow some common sense pricing principles should have no trouble selling their property. We have seen some properties attracting multiple serious offers in less than a day, and increasingly, cash buyers are first in the queue”. In recent weeks, Black Brick has acted on behalf of cash clients seeking to buy properties in areas such as Knightsbridge, Kensington, Chelsea and Pimlico, but have come up against other cash buyers bidding for the same properties. In several instances, competition has led to the property selling for more than the asking price.

Double the competition: international buyers out in force…

So who are the buyers? There remains a steady stream of interest from foreign nationals who view London as the location of choice, thanks in no small part to the continued weakness of sterling which has increased the discount for those with foreign currency to spend. Black Brick Buying Consultant Caroline Takla comments: “House-hunters from the Continent, particularly Italians, have had a strong impact on the capital in recent months, but we are also seeing increasing interest from Asian buyers, particularly from Singapore and Malaysia, as well as from British ex-pats who feel the time is right to come back to the UK.” While some of these buyers are searching for a London pied a terre, others view the capital as a safer haven for a property investment than volatile locations such as Dubai. In this sense, the move to London can be seen as a ‘flight to quality’, with factors such as its stable political background, highly regarded education system and its continued status as the world’s leading financial centre acting as a magnet for the world’s wealthy.

…but the British are back

But whilst the international contingent is out in force, the strength of the British domestic buyer should not be underestimated. There remains a large body of cash-rich home-grown prospective buyers who have chosen to spend recent years out of the market, often in rented accommodation in anticipation of the downturn but who now feel the time is right to make an entrance.

An attractive investment option compared with bank deposits

And increasingly, domestic buyers are viewing property as an appealing – and tangible – investment option in the face of plummeting equity markets and historically low interest rates. Indeed, with the base rate standing at just 0.5%, most deposit accounts provide little incentive for risk-averse investors to keep their money in the bank. Karen Goodin, Partner at Black Brick comments: “In addition to derisory bank deposit rates, many investors have lost faith in equity markets and are wary of investing in exotic financial instruments. In the current environment, a sure-footed investor securing a discounted property could find that their asset provides a healthy gross rental yield of around 4-5% together with the prospect of sound capital appreciation over the medium to long term.”

Yields are becoming relatively more attractive

Meanwhile, experienced property investors are finding some exceptional deals in the struggling buy-to-let development arena, which has been one of the biggest victims of the downturn. James Mannix, Head of Residential Research at Knight Frank, recently commented: “For the first time in years, it is possible to buy investment property and take an income out of the rent. And investors are buying cheap so they are going to get significant capital upside once growth returns”.

Stock levels starting to fall

One inevitable result of increased interest at the top end of the market will be a shortage of stock, particularly in the key prime Central London market where the best located, highest quality properties have always been in short supply. This theme has been noted in the wider market by RICS, whose last survey registered a fall in the number of unsold property on surveyors’ books. Knight Frank also reports evidence of a shortage of stock, noting that many vendors are opting to wait for a recovery in both prices and demand before putting their houses up for sale.

Wider market conditions remain tough

But while competition in prime Central London is hotting up, there is no denying that broader market conditions remain tough, even despite the increased presence of window-shoppers and more upbeat recent newsflow. Most experts agree that the catalyst for increased volumes, particularly outside the cash-driven prime sectors, will be the easing of credit conditions. “Potential buyers continue to come through estate agency doors” comments RICS spokesman Jeremy Leaf, “but without mortgage finance, transaction levels are likely to remain close to all-time lows”. But in recent weeks, efforts to thaw the mortgage markets have stepped up a gear. Knight Frank believes that the introduction of quantitative easing by the Bank of England should increase economic activity and ultimately stimulate the housing market, and points out that the Government’s decision to force the nationalised banks to provide mortgages will also help to free up credit.

…but recent measures to ease credit seem to be helping

Meanwhile, lenders and economists increasingly agree that the severe interest rate cuts of the past year are having some impact, as evidenced by the recent encouraging headline numbers on mortgage approvals.

Don’t underestimate market competition

In such a diverse environment, Black Brick is advising clients looking for a bargain in the most competitive sectors to be wary of underestimating the challenges of clinching that dream deal. Although a small number of distressed sales have emerged in prime areas such as Mayfair, such opportunities are largely confined to the over-leveraged elements of the new-build sector, most of which is located outside traditional prime Central London. Those discounts that do appear on high quality period conversions within ever-popular areas such as Knightsbridge, Chelsea and Mayfair are increasingly picked over by a rising tide of investors and prospective owner/occupiers.

Preparation is key

To ensure success in this market, clients must be prepared. Those unable to buy in cash should ensure that their financing is secured and available before beginning their search. Buyers who wait for the market to bottom out should be wary of potentially missing out. Prices have already fallen by significant levels and those who wait in the hope they can pinpoint the exact bottom risk missing the most exciting and rarely available opportunities.

A fundamental sign of strength

Camilla Dell comments: “Our searches have a much greater sense of urgency than at the beginning of the year and flexible cash buyers are using their position of strength to their advantage in the negotiation process.But while this makes the search process more challenging, it should also reassure would-be property investors that the market for this asset class is fundamentally strong.”