May 2010

UK politics – polls apart

Election fever has gripped the UK in recent weeks ahead of the May 6 voting date. While David Cameron’s Conservative Party won the most seats in parliament – the Conservatives did not win a sufficient number to form an overall majority, resulting in the first so-called ‘hung parliament’ since 1974. Data on the broader UK housing market prior to the election painted a mixed picture of the backdrop.

According to the Halifax House Price Index UK house prices were broadly unchanged in April, falling 0.1% from the previous month and up 6.6% from a year ago. This is the fastest annual pace of growth on the Halifax measure since October 2007. Meanwhile rival Nationwide reported a more robust 1.0% rise on the month, with the annual rate of house price inflation moving into double digits for the first time since June 2007 with a 10.5% rise.

Increase in new instructions

Interestingly both building societies believe that the recent strength in prices will stall in the coming months as the demand-supply imbalance which has been such a feature of the market for the last year begins to move closer to parity. Martin Ellis of Halifax says: “New sales instructions have risen, helping to push up the stock of unsold properties in recent months. As a result, the imbalance between supply and demand is easing somewhat. Our view is that house prices will be flat during 2010 as a whole.” Meanwhile Nationwide’s chief economist Martin Gahbauer says “…the last few months have seen an increase in the level of new instructions from sellers. All else equal, this should lead to a gradual flattening out of the recent upward price momentum”.

The Royal Institute of Chartered Surveyors (RICS) headlined on this issue in its monthly survey too – saying that new buyer enquiries “continue to be outpaced by new vendor instructions”. The RICS survey also revealed sentiment rebounding from March with the net balance of surveyors reporting higher prices over the last three months rising from +9 to +17. Stark regional contrasts continue to be a feature of the market with London house prices significantly outpacing price inflation in the North. A net balance of +68 of surveyors reported higher prices in London, compared to just +9 in the North, -2 in Yorkshire and Humberside and +10 in the West Midlands.

Overall we believe the outcome of the UK general election is only likely to have a modest impact on the broader domestic housing market. The new coalition government has already outlined ambitious targets to tackle the UK’s enormous public deficit as a matter of urgency. This is likely to ensure that short-term interest rates, gilt yields and mortgage rates remain lower for longer as money markets react positively to the coalition’s determination to address the fiscal issue. However, these positives are tempered by the fact that most of the money required to pay down debt is likely to come from substantial spending cuts and inevitable job losses in the public sector.

Key supports for prime central London property still very much intact

As for the impact of the election result on prime central London in which we are clearly more interested, the fact that the market is dominated by international investors means global economic factors are more important than domestic potential issues. A potential rise in capital gains tax in line with income tax will hit domestic property investors far more than overseas buyers. Finally, the weakness of the pound has been an influential factor in increasing the already substantial attractions of prime central London property, but unless there is a dramatic strengthening in the pound in the aftermath of the election we believe the fundamental case remains very firmly intact.

Indeed, while the domestic market may be in thrall to political developments, international investors appear rather less concerned with the party loyalties of the occupant of No 10 Downing Street. Camilla Dell, Black Brick Managing Partner, says: “Certainly from our perspective, political uncertainty hasn’t put off our broad international client base. The run up to the general election was incredibly busy for us, proof positive that for our clients the secular case for prime central London property remains robust. During the first two weeks of May alone, we have successfully acquired £16.5m of residential property in prime central London for our clients at an average price of £3.3m as overseas buyers continue to see the compelling long-term attractions of the very best property in the UK capital. In many cases we have had to fight off stiff competition from other buyers.”

Camilla adds, “An ideal way to buy in a competitive market, is to be the first one in through the door. Recently one of our clients was looking for a house in Chelsea. We sourced a great four bedroom house in the exceptional Kings Chelsea development. As there are only eleven houses in this development they very rarely come onto the market and so competition is fierce. We were the first to view the property, and as a result managed to secure the house and get it off the market in record time.”

European debt crisis prompting search for genuine ‘safe haven’ investments

The European debt crisis which started in Greece will have focused many wealthy investors’ minds on the advantages of a diversified investment portfolio outside of volatile equities and cash paying virtually no income. The crisis is also likely to have caused some to question what constitutes a ‘safe’ long-term investment when it is possible to lose money even in developed world government debt. We believe that as an asset class property in general is moving higher on investors’ agenda. But it is the unique nature of prime central London property – where supply remains extremely tight and the potential for new properties is limited by strict regulation – that underpins the investment case for many.

According to Knight Frank, this ‘safe haven’ quality is already attracting money from the more troubled European economies. Greek buyers now account for twice the market share in prime London than they did a year ago, helping to drive the fastest rate of annual price inflation in prime London property since April 2008. New figures show that compared with April 2009, the price of houses and flats costing more than £1 million in the English capital were up by 21 percent in April 2010.

“Greek buyers have been especially active and have been competing hard for the limited number of high-quality properties currently available,” says Knight Frank. “There has been a real trend for wealthy Greek families to invest in UK property for a variety of reasons, but the safe haven driver is a big one.”

Indeed at Black Brick our international client base continues to broaden geographically. A recent business trip to India, an emerging economic powerhouse with a fast-growing high net worth sector and strong historical links to the UK, revealed strong interest in prime central London property as investors seek to diversify. As interest in London grows, competition for the best properties remains extremely strong – reinforcing the merits of being able to view properties before they hit the open market and of having an experienced and skilled negotiator to complete the deal.

International interest in London continues to be strong

We note with interest the acquisition of London’s famous luxury department store Harrods by Qatar Holdings LLC, the investment arm of the emirate’s sovereign wealth fund, from the family trust of Egyptian-born businessman Mohammed Al-Fayed for £1.5bn. Though clearly retail rather than residential, in many ways the deal typifies the attractions of prime central London property in general to international investors. No doubt the timing of the decision to acquire the business was influenced in no small part by the weakness of sterling, but Harrods is unique – a landmark building with an iconic SW1 postcode at the junction of Brompton Road, Knightsbridge and Sloane Street. Given Harrods’ popularity as an unashamedly luxury brand favoured by wealthy visitors to London and so-called ‘non-doms’, the deal is also a significant vote of confidence in London’s enduring international appeal as a financial and social centre of importance – a viewpoint with which we at Black Brick wholeheartedly agree.

Looking ahead in 2010 and beyond…

Looking forward, the large monthly price gains we have witnessed since the spring of last year are unlikely to be repeated in the remainder of 2010 – and some small monthly price falls may occur. After all, no asset price moves in a straight line in perpetuity. However, we believe prime central London property prices are underpinned by a number of short- and long-term supports, particularly for international investors, offering relative stability that is increasingly attractive amidst rising volatility in other asset classes. And while immediate prospects for the UK economy may be weak, the prime London property market continues to beat to a very different drum.