January 2011

New year, same story

While it would be nice to kick off 2011 with headlines that demonstrate Black Brick’s strikingly contrarian views about prospects for prime Central London property in the coming year – the reality is a little more consensual and a little less controversial. At Black Brick we see little in the way of price appreciation or depreciation for property in prime Central London in the year ahead. Meanwhile the strength of the rental market continues to ensure that savvy investors ready to pounce will prosper when individual opportunities arise.

Like gold, the higher price bracket echelons of the UK capital’s property market have exhibited resilience in the face of a sharp economic downturn in developed economies that few predicted. Meanwhile the explosive wealth creation in emerging markets that is behind much of the international wealth in London is, we believe, a secular not cyclical force. With no obvious reasons why sterling should retrace lost ground to currencies of faster growing and fiscally stronger emerging economies we believe that overseas buyers will continue to provide the bulk of support to prime Central London property. But after eighteen months of strong gains and many questioning the strength of the global economic recovery we believe any further price rises may be muted in the short-term. As it did in 2010 we expect prime Central London to continue to outperform the wider residential property market in 2011.

Down but not out

The statistics that test the health of the wider UK residential property market continue to return mixed signals, though heavy snow throughout December in tandem with the seasonal Christmas slow down make the December monthly figures even less reliable than normal. The Halifax Index dropped 1.3% in December from November, while Nationwide showed prices rising 0.4% in the final month of the year. The rather more significant three month changes showed prices falling 0.9% and 1.0% during the final quarter of 2010 on the Halifax and Nationwide measures respectively. To put recent falls into context, this compares to quarterly falls of 5% – 6% during the second half of 2008. House prices fell 1.6% over 2010 as a whole, according to Halifax – and rose a modest 0.4% according to Nationwide. Looking forward, the wider market faces a number of headwinds including higher taxes, high unemployment and the possibility of interest rate rises should inflationary pressures persist and grow.

By contrast, property in prime Central London enjoyed a strong finish to 2010. The Knight Frank Prime Central London Index rose 1.3% in December – posting a relatively robust 2.0% rise for the year’s final three months. Prices appreciated 10.3% over the year as a whole, according to Knight Frank and now stand some 26% higher than the market low of March 2009 but still 4.4% below their March 2008 peak in sterling terms. Liam Bailey, Head of Residential Research at Knight Frank, says: “In terms of market performance, there is no doubt that the strongest performing market is likely to be London and central London in particular. Anecdotal feedback from the market confirms that the “safe haven” role played by central London property is once again being recognised by international purchasers.” “The division in the UK market, between an equity-rich top tier and a more financially stretched lower tier, looks set to continue into 2011. The real potential for tighter regulations surrounding the mortgage market suggests there is even scope for this division to widen as the year progresses.”

2011 Forecasts

^[1]Source: Financial Times

The above table shows how consensual the forecast for ‘small gain for prime London, small drop for wider UK property’ has become. Savills is alone in believing that prices in the centre of London will fall in 2011, albeit by a modest 1.0%, but describes the capital as a “funnel” for money from the international elite. The ability to buy houses freehold is an important factor, say Savills. “In central London it is possible to own houses freehold, thereby buying into a limited commodity. Physically owning a piece of London’s land, as well as the building on it has an emotional appeal unavailable in the apartment-dominated real estate markets of other global cities.”

Camilla Dell, Black Brick Managing Partner, says: “At Black Brick our own view is that while prices overall in prime Central London may end 2011 broadly unchanged from the level they started, it would not surprise us if individual properties in the ‘hottest’ post codes of Kensington and Mayfair return to or exceed peak prices in sterling terms. There are always multiple buyers for the very best properties in the best locations.”

But if the outlook for underlying prices in the short-term is hardly stellar – the outlook for rental yields is rather more robust and we expect continued strength in the prime London rental market in 2011. For investors prepared to take a longer-term view we believe that 2011 could therefore be a good year for buying and improving properties in prime Central London. Knight Frank’s London Lettings Index reveal Central London residential rents rising 2.2% in the final three months of 2010 finishing the year up 16% as strong demand meets limited supply. Savills predict further rental growth of 8.0% in prime London on 2011.

Why has the rental market seen such demand from tenants? According to Knight Frank: “Two reasons stand out. Firstly employment conditions in central London are much healthier than they were in 2009. Morgan McKinley, the City recruiter, noted that the number of new positions advertised in the central London financial and business services sector rose by 9% in November 2010 compared to November 2009. Secondly, in addition to the strength of London’s employment market – the fact that the sales market is still struggling to create stable growth in the number of deals means that many prospective buyers are still locked out of owner-occupation and have to consider rental as the alternative.”

Overseas buyers to continue to dominate

2010 saw the potential pool of international buyers broaden significantly in geographic terms and we expect this trend to continue in 2011. Says Black Brick’s Camilla Dell: “Soaring commodity prices have created huge wealth in a number of resource-rich countries spanning the Middle East, South America, Africa and the former Soviet states – but it is buyers from India, with its dynamic economy and strong historical ties to the UK, that we expect to feature more prominently in London property in the months ahead.” London’s status as a global financial centre, high quality and diversified schools, cultural and arts scene, stable political backdrop and the increasing belief in prime Central London property’s rarity value and safe haven status are all part of the attraction for international buyers, especially in light of sterling’s current weakness.

Meanwhile it has been a strong start to the year for us at Black Brick with a number of deals already completed and several more in their early stages. So far this year we have submitted over £35 million of offers on property. Interestingly, there has been a higher proportion of domestic buyers than has been the case over recent months as local buyers struggle to find properties that fulfil their exacting requirements. Indeed, the overall supply backdrop remains largely as it has been for the last eighteen months – extremely constrained. Part of this is structural – with shorter-term investors selling to longer-term owner buyers and part of it is cyclical – with some potential sellers believing prices will rise still further should the global economy recover quickly. As Savills noted in its late December update: “research shows that once bought by investors and occupiers from overseas, properties are far less likely to return to the market, so it is becoming more difficult for buyers to source stock in the central areas. This rarity factor will underpin values in the core central locations and beyond their boundaries.”

Elsewhere in prime Central London, the landmark One Hyde Park development finally opened its doors in January with around 60%, or £1bn of the development’s apartments sold. The building, which is opposite Harrods in Knightsbridge and was developed by the Candy brothers and the Qatar investment fund, features some of the UK’s most expensive property with prices on recent sales in excess of £6,000sq/ft, according to the Financial Times. We recognised the allure of the property’s unique address and prestigious location right at the start of its development and negotiated an excellent deal on behalf of a client at £4,200 sq/ft in 2008, however, our view is that there is better value to be had in equally well positioned properties.

And finally, a rise in the rate of stamp duty from 4% to 5% for properties valued over £1m becomes effective on April 6th. We would urge both buyers and sellers to take advantage of the lower rate before it changes.