July 2011

Redcliffe Square in SW10 is two streets West of the well-known ‘Boltons’ and just a short walk from Old Brompton Road to the North and Fulham Road to the South. The many shops, bars, galleries and restaurants of the King’s Road are also very close at hand. The location is therefore unarguably an attractive one, though not within the narrow universe of Belgravia, Mayfair and Knightsbridge postcodes that are generally considered the most desirable and which tend to attract the broadest international interest.

Yet even here house prices are now comfortably eclipsing the previous highs as both international and domestic interest in real estate in London continues to strengthen. A two-bedroom flat in Redcliffe Square exchanged hands at £1,561 per sq/ft (£1.58m) in early July, a record for the street and significantly above the £1,000 per sq/ft to £1,300 per sq/ft that has been the recent benchmark.

This transaction is hardly a one off. There have been many other instances across central London of new price highs. Indeed, we believe that a recent report stating that properties in the most sought-after areas of London are exchanging hands 2% above previous peak levels is conservative.

Stark contrast between London and rest of UK property market

These new highs emphasise the huge dislocation between prime Central London property and the wider UK residential housing market. Indeed, the gap between prevailing conditions in each market has, if anything, widened since our last newsletter. Central London house prices rose 0.9% in June according to the Knight Frank Prime Central London Index, leaving prices 2% above the previous peak of March 2008 and some 34% above the low of March 2009 (all in sterling terms). Savills continues to predict that prices will grow 33% between 2010 and 2015 in prime Central London.

In sharp contrast, new research from accountants Pricewaterhouse Coopers forecasts that house prices in the wider UK market will not recover to pre-crisis levels until 2020. Meanwhile the headline balance from the widely-watched monthly survey from the Royal Institute of Chartered Surveyors (RICS) was -27% in June – ie 27% more surveyors reported price falls rather than price rises. RICS says the latest data highlights three key points:“first, house prices – on balance – continue to fall. Secondly, activity levels remain flat and are at relatively depressed levels. Finally, there continues to be a stark regional divergence with London continuing to buck the national price trend.”

While prices across prime Central London have been hitting new highs in sterling terms, the weakness of the pound against nearly all global currencies continues to offer overseas buyers significant discounts compared to a year or more ago. For buyers in a host of Asian countries currency moves equate to prices more than 25% lower than previous peaks. Importantly, many currency experts expect sterling to stay weak – good news for any potential overseas property buyer in London. According to recent analysis from leading investment bank Barclays Capital entitled ‘More cautious stance on sterling‘, the on-going softness of economic data in the UK suggests any interest rate rises will be delayed and “an aggressive appreciation of the currency over the quarters ahead now appears less likely”.

But are the gains in prime Central London sustainable in a global economic climate where Eurozone financial contagion remains an on-going concern? Camilla Dell, Black Brick Managing Partner, says: “To us at Black Brick the real change from previous cycles is the perception of real estate in London’s most sought after post codes as a unique and safe asset – one which offers a degree of protection from the vagaries of the global economy and geopolitical risk while still offering business opportunities and a safe environment with excellent education facilities for buyers with families. It is that combination of characteristics, rather than one in isolation, that continue to draw wealthy international buyers to London.”

Camilla continues: “Looking forward we see prices continuing to creep up for the remainder of the year given the continued shortage of available stock. On the demand side we believe international interest will remain strong and expect sales activity to pick-up markedly during the Islamic month of Ramadan as many buyers from the Middle East come to London. We are already hearing reports that several members of the Saudi royal family intend to buy two or three additional properties each in prime Central London in the coming months. Against this backdrop our advice to clients is simple: move quickly, or risk prices rising further.”

2011 so far…

Half way through 2011 and it is clear that the continued strength of the market has surprised many. Savills recently reported prices had risen 6.3% in prime Central London in the first six months of the year and upgraded its price forecast for 2011 from -1% to +8%. Knight Frank has followed suit, revising higher their forecast for the year for prime Central London from +3% to +9% after announcing a price rise of 6.8% for homes in London’s most sought after areas year-to-date.

The rental market in prime London is also extremely robust as potential buyers are forced to rent by affordability and funding issues. The lack of supply is also an on-going issue in the rental market, helping prime London rents to rise 1.8% in the quarter to end-June and 10% across prime London, according to Savills.

At Black Brick we have acquired in excess of £50m of property for our clients year-to-date, with around one in seven properties bought ‘off market’ without ever reaching the mainstream sales process. With the tightness of supply it has certainly been a very challenging year. On average we have bought properties at a discount of 5.6% from the original asking price in 2011. Although this does not sound like a large saving, in a market where sealed bids are the norm and not the exception, we believe it is testament to strong negotiating skills and the high quality of our clients.

From our data for 2011 we would also highlight two other trends. Domestic buyers, as a proportion of our client base, have nearly doubled since last year – albeit from a low base. Our typical domestic client is one that has missed out two or three times already on properties and has simply got fed up with the time required to find the perfect house or apartment and to complete the deal. We expect this trend to continue. Meanwhile, the increase in Russian money pouring into prime Central London has been the other trend worthy of note as safety concerns heighten ahead of key legislative elections in December. Most of our new Russian clients are relocating families.

Prospective new build in prime London is welcome – but still some way off

There have been several articles in the specialist property press in recent weeks about the amount of current and prospective new build in prime Central London. Consultancy EC Harris says £8bn of new development comprising some 4,000 units could come to the market by 2015 alone with a total of 9,000 units valued around £21bn currently on site or planned for delivery from now until 2020.

First, it’s important to say that at Black Brick we would welcome some new supply; it’s exactly what the market needs and we see high quality new builds in good locations – such as the consented 133 unit St John’s Wood Barracks site in NW8 – as a sign of a healthy market.

Second, we would err on the more conservative side when it comes to estimates of the volume of new build in prime Central London. The key word in the EC Harris estimates is ‘could’. Sites themselves are rare enough in prime Central London, while financing their acquisition and redevelopment is difficult at a time when banks are not keen to lend to a property sector where they are already heavily exposed. New supply is therefore likely to come at a trickle rather than a flood. For example while the St John’s Wood Barracks development is already being marketed, the Ministry of Defence, the existing owner, is not scheduled to leave the site until April 2012.

We look forward to assisting you fulfil your London property ambitions in the months ahead.