February 2011

The civil unrest in Egypt that has dominated international headlines in recent weeks has been a salutary reminder to many that for all the economic progress in emerging markets over the past decade, potential political volatility is often still close to the surface.

Camilla Dell, Black Brick Managing Partner, says: “When we speak to potential clients in emerging markets, a common counter argument to investment in prime Central London is the much higher returns available within their own domestic market. Recent events in Egypt, a country previously considered to be at the more stable end of the emerging market geopolitical risk spectrum, highlight the importance of diversification.”

“Prime Central London property may not offer double digit rental yields or the prospect of large immediate capital gains. What it does offer is a degree of security – and the prospect of long-term capital gains based on London’s unique international appeal and on a host of other supportive factors. The case for those who have made their money in emerging markets to diversify their wealth into lower risk ‘safe haven’ assets such as prime Central London property, is, we believe, extremely robust.”

Wider domestic residential market remains moribund

The wider UK housing market, however, remains resolutely sensitive to consumer confidence and to domestic economic factors. As such, prices appear to be trending gently downwards but with nothing to suggest that any prolonged or sharp acceleration in recent price declines is imminent.

According to Nationwide, house prices fell by a modest 0.1% in January, leaving prices 1.1% lower than a year earlier while rival Halifax reported prices 0.7% higher in January resulting in an annual decline of 2.4%. On the smoother three month measure, widely accepted as a better reflection of the underlying trend, prices fell 0.7% and 0.5% according to Halifax and Nationwide respectively in the quarter to end-January. Both lenders cite a slowdown in new properties coming on to the market as a key reason why they don’t expect prices to drop sharply in the coming months.

Meanwhile, the headline net price balance of the widely-watched Royal Institute of Chartered Surveyors (RICS) rose for a third successive month to its highest level since July last year. However, at -31, that balance remains overwhelmingly in negative territory after readings of -47 in December and -49 in November. According to RICS, of those that did signal a shift in prices the vast majority suggested that the drop was very modest (0 to 2%) – reinforcing the overall picture of a broadly stable market.

At the current time, interest rates at historic lows and employment conditions stabilising are the main positives for residential property in the UK, alongside “tentative signs that the volume of houses coming onto the market may be slowing”, according to Nationwide. However, these are counterbalanced by rising taxes and an economic outlook that remains uncertain. Against that backdrop, “We expect limited movement in house prices overall this year”, says Martin Ellis, housing economist at Halifax. Rising inflation represents the biggest risk, though the Bank of England faces a delicate balancing act between controlling rising prices and stimulating demand growth.

International interest in luxury London property intensifies

Conditions in prime Central London property though remain very different and there is little to suggest that the wall of money coming from outside the UK into housing is about to abate any time soon. News that the number of Russian billionaires has risen to its highest ever level will comes as little surprise to those involved in prime Central London property. Indeed, Knight Frank’s Prime Central London Index rose 1.1% in January – a rise which leaves luxury property in the UK capital some 10.3% higher than a year ago.

Liam Bailey, Head of Residential Research at Knight Frank, says that London has bucked the wider UK trend in recent months with strong price growth and resilient demand. “The real drivers of this demand have been overseas buyers, especially Europeans, and also City based buyers, who have been more numerous than expected given the uncertain discussions over bonus levels.”

The imbalance between demand that continues to strengthen and a supply situation that remains extremely constrained is evidenced by Knight Frank’s latest figures which show viewings up 30% in January compared to a year ago while stock volumes are just 3% higher over the same period. It is little wonder that prices continue to rise against this backdrop. Knight Frank highlights particular strength in Knightsbridge and Kensington where prices have risen by nearly 6% in the last three months.

At Black Brick we are witness to the shortage of stock on a daily basis and don’t believe that the situation will change dramatically in the coming months. Camilla Dell, Black Brick Managing Partner, says: “Despite the strong price rises of the last two years, sellers have simply not been tempted back to the market in any meaningful volume. Meanwhile, the rise in stamp duty in April from 4% to 5% for houses over £1m will further inflate the cost of moving and is likely to act as an additional disincentive to potential sellers.”

For what little good quality stock there is on the market we have seen very strong demand and have taken part in four sealed bids for properties already this year. Strong relationships with selling agents can make all the difference in such a fiercely competitive environment in a number of ways. The benefits to our clients include all-important early viewings and access to so-called ‘discreet sellers’ who do not want their luxury property heavily marketed or publicised. The benefit to the agent of a close relationship with Black Brick is the ability to represent to the seller an extremely high quality client base of affluent high net worth investors and occupiers who are able and willing to complete a transaction quickly.

That strong reputation and relationship with selling agents was perfectly demonstrated recently when we bid on behalf of a client on a property in Admirals Court in Shad Thames. Interest in the property from other parties was strong and eventually the sale went to sealed bids. Despite being the underbidder, the seller’s agent recommended that his client accept our client’s lower bid. Why? We had dealt with the agent many times over the last few years and he was well aware of the cash-rich, chain free high quality nature of our clients. We were delighted to secure the property for our client in such circumstances.

On the demand side only a sharp appreciation in sterling against other currencies is likely to temper international interest in prime Central London property. This is not an outturn that many economists expect. If anything, the international pool of prospective prime Central London property buyers continues to widen and deepen as London’s many qualities attract both investors and owner occupiers. We believe that concerns about political volatility add to those attractions.

We have also continued to see an increase in domestic interest in recent weeks – partly as a result of relatively strong bonus payments and partly, we believe, due to frustrations at the lack of quality properties on the market. One client who recently came to us has been looking on his own for nearly two years without success. It is not an isolated story.

Government seek to attract wealthy to UK

Meanwhile, assuming that the changes are endorsed by Parliament, the UK government’s new plans to encourage high net worth individuals and families from overseas to attain visas and live in the UK appear likely to provide a further boost to demand for the best properties in London. According to the The Financial Times, wealthy migrants will only have to spend six months a year in the country rather than nine under current rules to qualify. Waiting times for permanent residency will also be dramatically reduced for the very wealthy. For example, waiting times will come down from five years to two for those bringing in more than £10m.

With so many factors supporting demand for prime Central London property and little to suggest that supply can or will increase significantly we remain extremely confident in the long-term case for luxury property in the heart of London.