UK: Prime London Property – Relapse or Recovery or Both?

Last Updated: 29 September 2010
Article by Richard Crosthwaite, Prevaze Ahmed and Oliver Russell

As we enter the final months of 2010 it looks very much like a year of two halves for Prime London property as more cautious forecasts on short term prospects are heeded by property buyers. Looking further ahead analysts seem, with good reason, to be struggling to predict with any certainty which way the pendulum will swing in the next twelve months in the face of increasing uncertainty at home and strong demand from abroad. Five year predictions are easier, if even less reliable; bar external shocks most research teams are of the view that London house prices will be higher, and possibly a great deal higher, than they are today.

2010 started well enough as the busy conditions of 2009 continued into the new year; plenty of equity rich buyers picked out the best properties in a thin market and consequently pushed prices up to within a whisker of their 2007 peak levels. Then came the May General Election and the Budget and it all went a lot quieter. Knight Frank reckon that they had ten buyers for each property in early 2010, but by July they were seeing a 25% increase in the number of properties on the market, compared to the same period in 2009. Savills reported much the same; they saw prices rise by 3% in Q1 2010 but by only 0.6% in the second quarter. However, they maintain that these modest increases have helped to produce a year on year increase across Prime London of 12.3% to July, which, if correct, is remarkable given the underlying economic circumstances.

This burst of activity, illogical though it may now seem, brought with it a sense of optimism that London house prices were almost immune to global financial shocks. Knight Frank's head of residential research went so far as to wonder whether the rises and falls of house prices in Prime Central London really mattered. He has a point; the lack of supply of attractive properties in the golden postcodes has become so constrained and, in theory at least, so coveted by some sectors of the international rich that price movements within a fairly narrow band of, say, 10% may be irrelevant to these incredibly well heeled buyers.

A case in point is The Lancasters, a five star redevelopment of a Victorian hotel on the north side of Hyde Park, which has seen off plan sales rocket this year, achieving over £3000 per sq ft, with over half the flats sold eighteen months before completion. A year ago the agents were aiming to achieve £2000 per sq foot, then an unheard of figure "north of the Park."

Pound sterling rather than pound per square foot?

In this rarefied market sector it appears that the problem is not so much the price – Central London has long been a hugely expensive place to buy a home - but rather the difficulty in accessing the very limited supply of those properties which offer the space and quality that today's international buyers demand.

If prices per square foot may not be quite as important to potential buyers as they are to those advising them, currency movements most certainly are. The continuing weakness of Sterling against dollar backed currencies has been a prime motivator in the revival of the Prime London Residential Market over the last 18 months. This, along with a sustained period of global wealth generation, particularly in Asia, has been largely responsible for the recovery from the collapse of confidence post 2007

Caution returns

Although there may have been plenty of Prime London buyers with a pretty relaxed attitude to the prices they were having to pay earlier this year, our recent experience is different. Experienced and careful buyers want advice on obtaining value for money, even at the very top end of the scale, just as much as they look for help in finding the perfect property. Concerns over Eurozone sovereign debt and growing fears of a double dip affecting equity markets have not gone away and have to be factored in when assessing the right price to pay. For domestic buyers the UK's long path to economic recovery affects London as much as anywhere else; higher taxes will kick in in 2011 and, despite low interest rates, the reality is that mortgages are still hard to secure. There are now more properties coming onto the market than we have seen for some time, and, unless competitively priced or, like the Lancasters, the best available, this new stock does not seem to be selling very quickly.

All of this leads us to conclude that we are entering a period of maybe up to a year or more where the buyer will increasingly call the tune. Given a continuing supply of good properties being offered to the market and no shocks to the system, the buying and selling process should experience lower volatility, always assuming stocks are replenished by realistic sellers.

This is supported by the most recent London estate agents' forecasts, which point to Prime London values remaining flat, if not falling back slightly, through the remainder of 2010 and well into 2011. Savills predict 0.5% growth in Prime Central London in 2011 (roughly the cost of a small bathroom in a £1 million property) on the back of higher taxes, weak income growth and a continuing difficulty in accessing mortgage finance which will weaken demand as the supply of properties increases. Looking further out they forecast a return to long term growth in 2012 of 7.5% followed by a further strong performance of 9.75% in 2013. This is echoed by others who have the resources to analyse their market sectors. After a weaker market in 2011 the longer term trend is likely to be upwards, but turnover may remain subdued as owners do not feel the urge to dispose of an asset they have had to fight hard to find and finance. As demand rises, there is no likelihood of an oversupply of new build stock in the Prime London postcodes to dilute values significantly.

No boom but no bust either

The Financial Times recently reported that countries such as the UK which have recently seen sharp increases in property values have not endured the property booms and busts experienced by Spain, Ireland and Dubai because "most people who bought houses bought them in order to live in them not to sell them". It is this reluctance to sell which has led to a noticeable drop in transaction levels. As Savills most recent market report states "The trajectory of house prices will, wethink, be upward due to the inflationary pressures created by an undersupply of the houses people want in the places people want them." This is as true in Leeds as it is in London, but it is only the supply constrained streets and squares of Prime London which appeal to the growing numbers of wealthy overseas buyers.

This fairly benign mid/long term scenario is not without its critics. Capital Economics (always bearish on house prices) released a report in July predicting that UK house prices will crash by over 20% in the next two years as a result of Government spending cuts and a surge in unemployment combined with tighter mortgage lending criteria and the likelihood of higher interest rates. They predicted that London will be hardest hit by the second leg of this correction, but they sweetened the blow by adding that this forecast is highly uncertain. Their views are echoed by PriceWaterhouseCoopers, who have also taken a gloomy view, predicting that UK house prices have a 70% chance of being below their peak 2007 levels by 2015 in real terms, despite recovering in cash terms due to inflationary pressures and rising interest rates.

The effect of global money

Despite these and other well reasoned reports our own long term forecast for Prime London remains that there will be higher real values in five years' time after a period of values dipping slightly or at best remaining flat. One factor which makes us more confident of the future of this market sector than some commentators is that, while Prime London is most definitely not shock proof and has been more volatile than most other prime residential markets around the world in the recent past, it looks to continue to be supported by the global discretionary spending of those high net worth individuals who aspire to a London home for occupation or as an investment. London has become a true global market, as UK occupiers and investors, suffering from low levels of debt availability and the possibility of higher interest rates, are outclassed by clued up Asian buyers who have put Prime London properties back at the top of their shopping lists, at least while the pound looks cheap and interest rates remain low. The Central London estate agents, Hurford Salvi Carr, have written of their recent experience of an Australian bank lending to an Asian investor on the purchase of an apartment block in London on the back of a pre-let to a US serviced apartment operator. Only the asset itself is in London, and the ownership of that may well be held by a company in the British Virgin Islands. It is no exaggeration that the highest turnover in the London residential market throughout 2010 has taken place not in the offices of London estate agents and solicitors but at property exhibitions throughout South East Asia.

Looking ahead

Back in the UK, the recent bearish reports (which always receive copious press coverage during quiet news periods) will probably turn into self fulfilling prophecies and cool market sentiment. This will mean more choice as well as greater buying power for those with a serious intent to buy. Although we expect to see a flatter market through into next year, we believe that the investment buying cycle still has a long way to run due to the overriding international belief in London residential property as an excellent long term investment, as well as a safe haven in bad times. The challenge head for investors and owner occupiers is finding the right properties in those locations where people want to live. The best way to do this is to be well advised; this is what we are here for, wherever in the world our clients may be

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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