August 2009

The British love affair with bricks and mortar is back

Lazy, hot days in the sunshine may be the holiday idyll for many but business at Black Brick has remained brisk despite the onset of the UK summer break. Enquiry levels remain high and since the start of the year we have purchased over £40 million of property for our clients, negotiating an impressive average 10.5% off the asking price despite ever more optimistic vendor expectations. We have also noticed a distinct increase in our number of domestic clients who feel that prices have finally come down sufficiently to enter the market.

Indeed, the global financial crisis may have shaken some investors’ faith in equity markets, but if recent UK property industry data is anything to go by, bricks and mortar – particularly when they boast a prime central London postcode, a park view or a concierge service – have a more enduring appeal. As in previous property slumps, it is international investors looking for a solid home for their money, and to take advantage of price falls exacerbated by the weakness of sterling, that have been first in the search for long-term value.

London leads the revival

The most up-to-date UK property data provides further evidence of the stabilisation in prices. The widely-watched Nationwide House Price Index rose 1.3% in July from the previous month, with the rolling three month rate of change posting its highest gain since February 2007 with a 2.6% rise. Another feature of the recent data has been the strength of London house prices in particular. Knight Frank recently reported that prices across London’s prime suburban areas (including Hampstead, Richmond, Wandsworth, Wimbledon and Fulham) rose by 3.7% in the three months to the end of June, while the Land Registry’s most recent report of completed sales showed London prices up an impressive 2.0% for June from the previous month.

£10m+ prime market beginning to stir

We have been seeing an interesting shift in the prime market at Black Brick over the last few weeks. At the beginning of the year our clients, a mixture of international investors and domestic buyers, were almost exclusively concentrating on properties priced between £1m and £3m.

While demand for this sector continues, for the first time in many months the top end of the Prime Central London market, i.e. properties valued in excess of £10m, is starting to see some signs of life. This sector had been virtually moribund since the start of the year amidst the turmoil created by the global financial crisis, but we have had a number of enquiries of late focusing only on this area. We believe that now represents an excellent opportunity for buyers interested in the exclusive top end of the prime London market. Competition is markedly less fierce than in lower value prime sectors and there is currently a good selection of excellent properties both on and off the market.

Buyer confidence may be returning, but remains fragile

Media coverage in the sector can often end up in the realms of self-fulfilling prophecy, and recent articles have continued to trumpet the return of gazumping and best bids.

At Black Brick, our take on recent activity is that confidence in the longer-term picture is slowly increasing, but it is important to remember that confidence is a fragile commodity. Only time will tell whether recent gains herald something more significant for the wider industry than a short-term boost provided by equity and cash-rich buyers in a tightly supplied market.

Camilla Dell, Managing Partner of Black Brick, says: “We are wary of reading too much into price activity based on such reduced transaction volumes. Fundamentally, this is a market still in recovery mode.”

Interestingly, positive newspaper headlines can actually become counterproductive as they encourage unrealistic expectations on behalf of sellers in a market where buyers still expect to be able to negotiate discounts. Although we do not act on behalf of vendors, our experience is that sellers are better served by pricing realistically in the first place to stimulate interest.

Limited supply remains the dominant factor

All the recent surveys and market commentary have highlighted again how the lack of supply continues to be the dominant feature of the UK property market. Simply put, there is a marked imbalance in which basic market forces are driving short-term prices up. In its July update, Hamptons reports a 63% rise in registered buyers at the end of June compared to a year ago. This is set against a 40% drop in properties for sale over the same period, according to Knight Frank.

The short supply scenario is at its most extreme in prime central London, where tightly controlled new build restrictions continue to act in tandem with the area’s intrinsic lack of supply. At Black Brick we believe these structural supports offer a degree of protection from the cyclical factors affecting the wider UK property market, which is why competition for high quality property remains fierce.

We continue to see first-hand the competitive backdrop for prime central London property. It is a market in which first-mover advantage can be absolutely crucial to securing the deal. Our comprehensive industry contacts provide us with the opportunities to view properties before they hit the open market. The time advantage may be small, sometimes only hours, but it can make all the difference to securing a property for a client and underlines the benefits of a well connected and independent buying consultant.

Signs of London rental prices levelling after sharp falls

Rents have fallen steadily in central London over the last eighteen months. The first downward driver was a huge increase in supply as investors unable to sell at a satisfactory price looked to cover their financing costs. More recently, the major factor has been rising unemployment.

The top end of the London rental market in the City and West End is closely connected to corporate fortunes in general and to those of the Square Mile in particular. Widespread redundancies within the financial services sector have therefore hit rents in prime central London hard, resulting in a large number of so-called ‘distressed tenants’. Data from Knight Frank shows rents on properties to let at over £1500/week have fallen over 27% in the year to end-June while at the low end rents have fallen by a more manageable 11.3% on sub-£500 a week rental properties.

There are signs, however, of rental prices levelling out. Hamptons International reports London average rental values fell just 0.3% in calendar Q2, compared to a 4.3% fall in the prior three months. We expect the supply of rental stock to diminish as landlords start selling rather than renting. With the prospect of rising interest rates, we expect rental rates to stabilise from current depressed levels. According to Paragon Mortgages some landlords are adding to their portfolios taking advantage of lower prices and prospects for higher rental income.

Our knowledge of the lettings market and negotiating skills can also help clients to secure above average rental yields, even in the current environment. A recent example was an investment property in Chelsea with a tenant in situ, bought on behalf of an international investor. The discount of just over 10% of the original asking price we secured helped to generate a gross yield of 5.7%, well above the average market rate of 4.0% to 4.5%.

Ellesmere House, Chelsea SW10 Asking Price £725,000. Acquired in February 2009 for £650,000

Our client was delighted with our service and commented “As a busy foreign buyer, Black Brick was perfect for me in finding my ideal property in the UK by providing me with the necessary intelligence and know-how to take the ideal decision”.

Black Brick other news

We welcome Lucy Ennis to the team who joins as Executive Assistant to Camilla Dell. Kate Halls, who joined Black Brick in 2008, will be heading up our Concierge service; ensuring our clients’ moves run smoothly and efficiently.