April 2011

For international investors and family owner occupiers, prime Central London property remains a harbour from rising geo-political risk, a wealth diversifier, a unique asset with severe secular supply constraints and a relative safe-haven from volatile equity and bond markets. For many, the lure of wanting to buy property in Central London comes from wanting to own a prestigious home in an important global financial and business centre, with a growing international community and excellent schools.

The very fact that there are so many reasons behind purchases of property in prime Central London is, of course, precisely why the Capital’s most desirable homes continue to garner interest from an ever broadening base of international buyers. Whilst we don’t doubt that a sharp strengthening of the pound would slow international interest in London markedly, there appear to be a host of secular supports that are not related to currency benefit. It is this breadth of support that is behind our belief that the immediate outlook for prices remains robust and why the contrast between market characteristics in prime Central London residential property and the wider UK housing market is likely to remain so pronounced.

Residential property remains a key investment for high net worth individuals

According to a recent report by Knight Frank and Citi Private Bank, property accounts for 35% of the investment portfolios of ultra high net worth individuals, second only to investing in their own businesses. Over the course of 2010, London and New York recorded prime property gains of 10% and 13% respectively and remain the most popular destinations. However, it is the Central London residential market that is the world’s most international city with around 50% of all £2m plus properties being sold to overseas buyers compared to 15% in Manhattan and 25% in Singapore and Hong Kong. Camilla Dell, Black Brick Managing Partner comments: “The results of the survey are not a surprise to us, and we see the results reflected in our own business, with 80% of our clients being based overseas. When it comes to choosing where to buy, our clients top choice is always London, and they are far more cautious about investing in other cities, especially in Asia, where many people fear the market is over-inflated.”

Commodity price boom feeding through

A rising oil price may be stoking inflationary pressures around the world and eventually will act as a drag on the global economy but there are clearly significant beneficiaries of high crude prices too. It is no coincidence that buyers from oil-rich West Africa, the Middle East and Russia have returned to London in force in recent months as the price of ‘black gold’ drifts ever higher.

At Black Brick we have seen a large increase in Russian families in particular relocating to London in recent months. This echoes recent research from Knight Frank that shows Russian buyers representing by far the largest proportion of overseas buyers in prime Central London over the past year. We have also seen a broadening of our client base in the Middle-East as geo-political tensions and unrest prompt a growing number of wealthy individuals and families to seek the relative security of prime Central London.

Camilla Dell, Black Brick Managing Partner, says: “The overall backdrop to prime Central London property remains very supportive – with a broad and deep pool of international buyers competing for an extremely limited supply of high quality properties. Over the last 18 months we have seen a growing trend amongst our clients who are now looking to buy residential property as an investment, not necessarily to live in. They tend to want to buy prime assets in the best locations, in buildings that will rent well and also stand the best chance for long term capital appreciation. This year we have completed a number of investment deals for our clients, including an £9 million freehold building in Notting Hill consisting of 8 flats, all let out producing a net yield of 5.3%. Whilst Notting Hill/Bayswater is not “super prime”, we believe that secondary stock in good locations present a real opportunity for investors, as they often trade at significant discounts to the best stock and have genuine scope for appreciation over the long term, particularly if you can add value to the property”.

Indeed, Knight Frank’s latest research reveals some 61 nationalities bought property in prime Central London in the twelve month period to the end of February 2011. We believe the recent announcements from the coalition government including the Budget should help sustain London’s competitive advantage over other ‘international’ cities. We touched on the government’s plans to address the issue of planning complexity in last month’s newsletter. To briefly recap, the Budget raised the prospect of commercial to residential usage change without the need for planning permission. Should it become law, the change will provide much greater flexibility to developers and to purchasers of mixed-use property in prime Central London. We don’t think these changes will lead to a sudden over supply in the market, but it will help encourage first time developers and we could also see some areas improve where empty commercial property has blighted the environment for a long period.

Government eases visa qualification criteria for wealthy investors

Meanwhile, Chancellor George Osborne told the House of Commons in the Budget that he viewed the top rate of 50% income tax as “temporary” – an important message that should allay fears that the UK government is set on a fixed path of draconian tax measures against high earners and the wealthy. This followed a week after the Home Office announced a number of well-flagged incentives to foreign entrepreneurs and investors to come to the UK that included the easing of visa qualification criteria for the wealthy. Under the changes, people who come to the UK will be able to gain full visas faster the more they invest. International investors who invest £5 million will be allowed to settle in the UK after 3 years, and those investing £10 million or more will be allowed to settle after just 2 years. This compares with the current minimum 5-year requirement. Importantly, the right to an accelerated visa will also apply to those who are already in the UK and have invested large sums. Entrepreneurial migrants will also be able to settle in the UK more quickly if they create 10 jobs or turn over £5 million in a 3-year period. The plans to lure the super-rich to the UK will also see the number of days overseas visitors are allowed to spend out of the country double from 90 to 180 while still qualifying for UK residency.

Immigration Minister, Damian Green said: “The UK remains open for business and we want those who have the most to offer to come and settle here. Entrepreneurs and investors can play a major part in our economic recovery, and I want to do everything I can to ensure that Britain remains an attractive destination for them. Last year we issued far too few visas to those who wish to set up a business or invest in the UK – I intend to change that.”

While the changes are unlikely to have a large impact in the short term we believe that they are certainly supportive to attracting international money to the UK. The announcements come at a time when the Swiss private wealth & banking industry is suffering from an unwelcome degree of scrutiny from its own regulators that is threatening the anonymity on which its success has largely been based. All of which is resulting in yet more capital flowing to London.

Other noticeable changes to our client base at Black Brick include a growing number of frustrated domestic buyers who have been unable to find what they want via traditional methods. However, in contrast to the weight of international money being invested, domestic money invested in property may well decline this year. According to specialist high net worth research company, Ledbury, over £1bn of bankers’ bonuses, which is half of the 2010 level, will be spent on luxury properties in London this year. The restructuring of bonus payouts to include longer-term equity tie-ins are likely to be the principal driver behind this decline. This may lead to a softening of prices in non-prime areas of London such as Battersea, Clapham and Balham in the south, and Camden, Islington and Farringdon in the north.

Finally, for any of our current or prospective clients considering coming to London to view properties in the next few weeks we would advise against coming at the end of April. The customary two national holidays around the Easter weekend fall on April 22nd and April 25th this year. There is a further day of holiday for the Royal Wedding on April 29th followed swiftly by the early May bank holiday on May 2nd. The clustering of so many public holidays in a short space of time is likely to result in the closure of many shops and restaurants in the capital, along with most estate agents. Black Brick, however, remains open for business and you can contact us at any time with any property related queries.