April 2010

UK property prices rebound strongly in March

After a brief weather-related pause for breath, the UK residential property market returned to a more familiar pattern as a more temperate March was the backdrop to a similarly warmer pricing environment. Confidence that interest rates will remain low for some time and the customary ‘Spring bounce’ saw UK house prices swiftly recover the falls from the previous month.

According to Nationwide Building Society, residential house prices rose 0.7% in March after February’s 0.8% drop. The annual rate of house price inflation at the end of March was running at a relatively robust 9.0%.

More homes for sale suggest broader market gains limited…

Meanwhile, rival Halifax reported a 1.1% gain in house prices during March, with values rising 5.1% from a year earlier and 9.1% from the Halifax low point of April 09. Halifax noted: “There are signs that an increase in the number of properties available for sale is beginning to reduce the imbalance between supply and demand. This should help to contain the upward pressure on house prices.

The Royal Institute of Chartered Surveyors (RICS) continued this theme in its widely-read monthly survey. According to RICS, buyer interest stabilised for the first time in some eighteen months in March with the net balance of surveyors reporting new buyers falling from +7 to 0. Significantly for house prices in the wider UK market the net balance of new instructions rose to its highest level since May 2007.

Overall though RICS says house prices continue to rise but at a slower pace. The latest balance of surveyors reporting rising prices was +9, down from the previous month’s +18 balance. Like both Nationwide and Halifax, RICS highlighted significant regional variation in pricing trends with London and the South East the clear outperformers. However, overall transaction levels remain muted and well down on previous highs.

…but supply situation still constrained in prime central London

In contrast, the supply situation in prime central London remains extremely constrained relative to demand. This is particularly the case in the £1m to £5m segment that continues to be the focus for the majority of both international investors and potential owner occupiers. With less competition and proportionately more supply we believe that market dynamics look significantly more attractive for buyers above £10m.

At Black Brick business is brisk and we have completed on a large number of properties in recent weeks on behalf of a growing and increasingly diverse international client base. Of particular note has been the increase in enquiries from India and from Greece as nationals in the latter country look to repatriate money into what they clearly believe is a more secure long-term asset.

According to Savills prices rose 3.0% in prime central London during the first three months of 2010. This equates to values 17% higher than 12 months ago and just 10% down from their peak of September 2007 in sterling terms. However, sterling has dropped by around 25% against the euro since September 2007 and by around 17% against the US dollar over the same period- reinforcing the significant currency benefits to international buyers and investors.

Some market commentators have suggested a cooling off is in prospect for prime central London property citing reduced bonus payments, higher taxes and the generally poor state of the UK economy. However at Black Brick we believe that for the right property in the right area competition remains extremely fierce – and see few reasons why this should change dramatically in the coming months given the major support for prime property comes from international investors to whom the vagaries of the UK economy matter little.

As Liam Bailey, head of residential research at Knight Frank, explains: “Residential investment makes a lot of sense over the long-term. In most locations supply of property either keeps pace or falls short of demand. Most high-net-worth investors tend to cluster around the best locations in the world, which provides its own support.

This view is backed by a number of recent deals in which fierce competition has resulted in sealed bids. Camilla Dell, Black Brick Managing Partner, says: “This remains a market in which first mover advantage can often be key and we continue to add value to our clients by exploiting our industry contacts and experience to facilitate property viewings before properties hit the open market. A wealth of experience and expertise in negotiation has also proven crucial in securing properties for our clients in recent weeks despite strong competition.

Prime rental market prospects look good

According to the Association of Residential Lettings Agents (ARLA) there are simply not enough rental properties to meet demand. According to ARLA 59% of its members reported more tenants than properties available in the first quarter of 2010. This compares to 41% and 24% for the last two quarters respectively.

Meanwhile the rental market in prime central London continues to be very well supported. Savills estimates that rents in prime central London rose 2.8% in the first calendar quarter of 2010 – taking rental values some 5.1% higher than twelve months ago. Yields may not look extravagantly high by historical standards but in the context of low bank deposit rates and artificially low gilt yields there are clear benefits. Importantly, rental rates are now rising.

The stock of available properties to rent in prime central London is still extremely limited. With private sector demand increasing due to the continued difficulty in raising mortgage finance and with the corporate rental market boosted by the return to profitability in the financial sector in particular, the outlook for potential buy-to-let landlords over the mediumterm certainly looks promising.

In further good news for potential prime central London landlords the government has undertaken to quadruple the threshold of annual rental income covered by assured shorthold tenancies (ASTs) to £100,000. ASTs provide a legal structure for the protection for both tenants and landlords.

Politicians play football with property

Elsewhere, the incumbent Labour government announced in its last budget before the May general election that the nil stamp duty threshold would be extended from £125,00 to £250,000 and that this would be financed by a hike in stamp duty at the top end from 4% to 5% on house sales over £1m effective April 2011. Such populist showboating will do virtually nothing for residential property within the nation’s capital where the average house price is £243,000. Should the increase in the higher rate of stamp duty become law the most significant impact is likely to be no more than higher transaction volumes in the run up to the cut-off date at the expense of the period immediately after its inception.

Indeed, the general election is likely to impact property decisions for domestic buyers of prime central London property to a far greater degree than the international buyers who are the market’s major buyers and who are taking a long-term view. Short of a prolonged cancellation of flights into UK airspace due to the Icelandic volcanic eruption preventing viewings – there appears little on the immediate horizon to suggest that international investor’s desire for prime central London will cool.

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