October 2012

“The wise man is he who knows the relative value of things”. We rather doubt that the Dean of St Paul’s Cathedral William Inge had the international wealthy in mind when he uttered his sage words a hundred years ago, but many ‘wise men’ continue to see the ‘relative value’ in the bricks and mortar of London’s prime property market.

As we expected, international buyers have returned to the market in force after the lull of the European summer holiday and Olympics. In fact, at Black Brick we have completed on seven properties for clients in recent weeks. A review of these transactions provides insights we believe are applicable to the wider health of the PCL market.

Investors focus on sub £2m bracket

First, all of the transactions have been at the lower end of the prime market and below the £2m threshold for the higher 7% stamp duty rate. This is unusual for us and given it is only one month’s data it is – so rather early to be drawing definitive conclusions. However, as the focus of the majority of investment activity, it does appear that the sub-£2m bracket enjoys a broader demand base than more highly valued segments.

The nationality of these seven buyers is also worthy of note. In the last few weeks we have completed on properties for clients hailing from Cyprus, Nigeria, Canada, South Africa and India – with two domestic UK buyers. The obvious takeaway is that international demand is diverse and that it remains the dominant force in our market.

Five of the seven buyers were investors; safe-haven purchases of prime central London property to protect wealth are still significant. The argument that this demand is only short-term may be true – but a lasting resolution to the Eurozone crisis hardly appears imminent and geopolitical risks remain prevalent in a number of countries.

Competition remains fierce

Of those seven deals two went to sealed bids. The first was a family home in sought-after Wimbledon Village that we secured for our owner/occupier client despite three other parties offering the asking price. We also secured a fabulous one bed investment apartment for an Indian investor client in a new building with lift and porter services in South Kensington. This was despite the genuine interest of four other buyers and the process going to sealed bids. Not all of the other bidders had similarly strong relationships with the selling agents.

Our conclusions from this are straightforward: competition for the best properties, particularly at the lower price range of prime, remains extremely fierce. Overall supply remains constrained. Despite some new development schemes the overall imbalance between demand and supply looks unlikely to be rectified any time soon.

Supply shortage to intensify

According to one London-based property services group, new supply is expected to fall well short of expected household growth in London in the next decade as funding constraints limit development. This analysis of new development schemes in Central London concluded that some 56% of private demand over the next decade would not be met by development units currently in the pipeline. Of course, there is plenty of scope for these figures to be incorrect. But the scale of the potential mismatch makes for a compelling argument in its own right and should give any potential buyer comfort in the medium to long-term prospects for PCL prices. Simply put, new supply looks very unlikely to meet new demand.

Of the other properties we have secured we would highlight the incredibly rare two bedroom apartment in St James’ that we acquired for a UK investor – and a three bedroom house in Fulham we acquired on behalf of a Nigerian owner/occupier client. The latter house is in a modern and gated mews with secure on-site parking. Finally, our Canadian investor client was in the process of exchanging on another property but pulled out to buy a better flat we had found in the same street in Kensington.

London 2nd best performing ‘global’ city

The latest industry data echoes these conclusions. The Knight Frank Prime Central London index rose 0.7% in September to yet another new record high. The agency notes that prices have now risen some 51% since March 2009 and that prime London’s 10% price rise over the past year is the second highest among the world’s top fourteen ‘global’ cities. Only the property market in Miami has been stronger over the past twelve months. Knight Frank also points out that ‘safe haven’ capital continues to pour into PCL property with its key driver, the European debt crisis, “unlikely to become a neutral influence for some time.” There are now more multimillionaires in London than in the whole of France, according to a separate recent survey performed by WealthInsight.

The latest figures on the PCL rental market show no let-up in the dominance of overseas buyers in the capital’s most sought after postcodes. Foreigners accounted for 59% of all prime rents in the past year according to one recent survey. Activity in the rental market is increasing, with lettings volumes up 18% over the summer months compared to the same period last year as the lack of mortgage availability forces potential owner/occupiers to the rental market.

Recent economic data suggests that the employment backdrop in the UK may at last be improving. This bodes well for the rental market and for house prices in the wider domestic market. Certainly, the headline numbers of the widely-watched Royal Institute of Chartered Surveyors’ monthly UK housing market survey have stabilised in recent months. The latest survey showed a small improvement in the headline net balance from -23 to -19 with nearly two-thirds of survey respondents reporting unchanged prices.

Art Fair to bring international elite to London

As we look towards the end of the year the imminent Frieze London art fair often brings potential property buyers to London. Demand for fine art and for prime property are, unsurprisingly, closely linked. Celebrating its tenth anniversary and taking place in mid-October in a specially constructed viewing space in Regent’s Park, the fair presents art from over 170 galleries from Berlin to New York and London to Tokyo. It will be interesting to see how sales at the fair compare to previous years as a yardstick for high net worth spending.

Clearly, there are potential political headwinds to prime London property. But with so many supporting factors we believe that the PCL property market will remain relatively well supported in the coming months, particularly below £2m.