February 2020

Confidence returns, but over-confidence brings risk

All the indications are that the decisive election result and the end of the first phase of the Brexit process are working to release the much-anticipated pent-up demand in London’s prime property market. But, with a return to double-digit price growth unlikely, and high transaction costs, buyers are advised to approach the market with some caution.

Estate agency Savills reports the “first growth in four years” in average London residential prices in the last quarter of 2019, at 0.1%, bringing the annual price fall to just -0.5%, compared with -3.2% for 2018. This Q4 growth was despite the impact of the election, which 83% of Savills agents said had hit the market.

The picture was particularly good for the prime market. Volumes of sales of properties worth £5 million or more were up 31% compared with the same period in 2018. Volumes in this segment, at £1.3 billion, are at the highest level in three years. In the super-prime (£10 million-plus) market, prices have now been flat for two quarters, and volumes here doubled compared with the previous three months.  

It appears that the pick-up that began at the end of last year is accelerating as we head towards Spring. According to figures from Rightmove, prices in London increased by 2.1% in January, the highest-ever monthly price increase, while the number of sales agreed was up 19% compared with January 2019. Knight Frank is claiming its highest rate of buyer registration in 15 years.  

But the outlook is not entirely without clouds. Savills warns of the planned Stamp Duty surcharge dampening demand from overseas buyers after the 11 March budget. It adds that “2020 will not be without its challenges as the details of Brexit are negotiated. We are not forecasting a significant bounce in values until 2021 and would expect the recovery to be weaker than in previous cycles due to the higher tax environment.”

“Clearly, confidence is returning to the London market, and not before time,” says Camilla Dell, Managing Partner at Black Brick. “With Johnson’s large majority, there is more political certainty, although we would caution that the Brexit trade negotiations are likely to be fraught.

Certainly, there is currently a mismatch between supply and demand. According to LonRes data, there was only 1% more stock available in January 2020 compared with January 2019 – but there were 59% more properties under offer, and 43% fewer properties withdrawn. 

”Buyers need to remember that last year 38% of the properties we acquired were off market and would not form part of the LonRes data. There will be choices out there but buyers need to be very careful to ensure that they buy the right property at the right price. There is certainly more confidence both from buyers and sellers but, if this trend continues, we are going to see a real issue with stock unless a lot of sellers decide to bring their property to market”, says Black Brick Partner Caspar Harvard-Walls. This could lead to a short-lived spike in prices.

“Buyers need to exercise caution. While we would expect the market to slowly recover, we don’t expect a dramatic sustained rally, and a clear danger exists in paying over the odds, or buying a property with too many compromises due to lack of open market stock,” Dell continues. “This is a particular risk ahead of the Budget, as we could well see a scramble as overseas buyers try to close transactions before the 3% surcharge comes in.”  

More on the Stamp Duty surcharge effect

In last month’s newsletter, we warned that, following the Conservative election victory,  government plans to introduce a 3% Stamp Duty surcharge on purchases of property by non-UK residents are now a near certainty.

The implications on the market of such a move are becoming clearer, and they are likely to be somewhat different to the last increases in Stamp Duty, in 2014 on more expensive properties, and in 2016 on those purchasing second properties.

“In those two cases, over time the market absorbed the increases – vendors gradually accepted lower prices to compensate buyers for their extra tax bill,” explains Dell at Black Brick. “This time, because the new surcharge will only apply to non-residents, the effects are going to be much more localised.”

The government estimates that it will affect up to 70,000 transactions a year – a small fraction of the roughly 1.2 million housing purchases each year in the UK. “Outside particular developments marketed to overseas buyers, it is therefore much less likely that vendors will reduce prices offered to overseas buyers in response to the surcharge,” says Dell.

This will have a number of knock-on effects: it means that areas which are aggressively marketed to overseas buyers, such as Nine Elms in Battersea, are likely to become cheaper for domestic buyers as their pricing is adjusted to mitigate the 3% Stamp Duty surcharge. Conversely, of course, these overseas buyers will find it harder to compete with domestic buyers outside such areas.

It also means that overseas buyers need to take advice on how attractive offered discounts actually are. “Too often we’ve seen developers offer to foreign buyers ‘discounts’ from overly inflated base prices – a 10% discount on a property that is 10% overvalued means the buyer is still overpaying,” notes Harvard-Walls.

And there’s also a case for taking a long-term view, adds Harvard-Walls. “Medium term, we’re likely to see less liquidity in some of these developments as overseas buyers are discouraged from participating. It may make more sense for the buyer to absorb the Stamp Duty surcharge to buy into a part of London that is popular with domestic as well as international buyers.” 


A changing climate for buyers

That the world’s climate is changing is becoming increasingly undeniable. The last decade was the warmest on record, and the trend is set to continue. With the impacts of climate change becoming ever more visible, public concern about the issue is on the rise, and a growing number of governments – including that of the UK – have pledged to cut carbon emissions to almost zero by mid-century.

The rising prominence of the climate issue is being felt in the prime central London market. For example, the Grosvenor Estate, the large PCL landowner and developer, has just appointed its first director of sustainability. Tor Burrows will be responsible, among other things, for ensuring the business is net-zero emissions and produces no waste by the end of this decade.

Grosvenor is, in part, anticipating changing demand. Among millennials, especially, concerns about sustainability are top of mind. Three-quarters are altering their consumption habits to take sustainability into account, according to market research firm Nielsen. And this cohort is becoming increasingly significant in the property market, and increasingly wealthy – it stands to inherit $68 trillion over the next few decades.

“We are seeing concerns about climate change reflected in some of our client requests: air conditioning, which was rarely mentioned a decade ago, is now a common ask as summer heatwaves become more common,” says Dell. “Conversely, off-street car parking is becoming less important, partly in response to environmental concerns making car ownership less of a priority.” She notes that a recent £37 million acquisition went through without any provision for parking, “which would have been unthinkable a few years ago”.

Currently, property owners only have to provide an EPC certificate, which ranks how energy efficient the home is. “In future, we expect buyers to want a growing amount of information about how sustainable a property is,” adds Dell.

On a related note, Dell adds that concerns about local air quality are likely to rise up the agenda for buyers. Some two million Londoners live with air quality that breaches legal limits – and not only in poorer parts of the city. Fashionable Marylebone endures some of the worst levels of air pollution.

“Buyers would be well advised to consider some of these elements. Poor air quality in future could make properties harder to sell, while, conversely, redevelopments or new-builds that prioritise sustainability factors in the materials they use, or in their ongoing operation, are going to be attractive to a growing cohort of sustainability-focused buyers,” says Dell.

Acquisition of the month – Islington Square, N1 – £3,800,000

Our high-net-worth client is looking to build a buy-to-let portfolio in central London to diversify their investments, combining stable rental income and capital appreciation. We were commissioned to find opportunities to buy six or more properties, to qualify for commercial Stamp Duty rates (see above) and to secure discounted prices from developers.

We identified one of the most impressive new builds to come to market in north central London in recent years. Islington Square, formerly an Edwardian Royal Mail sorting office, retains period charm and character combined with the efficiencies of a new build. 

Negotiating aggressively, we secured a 17.75% saving on the asking price for 6 units, resulting in a 4.8% projected net yield on equity, well above the London average of 3.5%. Black Brick will manage the letting of the apartments, providing a seamless service at minimal stress to the client.

Acquisition of the month 2: Eaton Square, Belgravia, SW1 – £6,300,000

Our US client had been seeking a London pied-a-terre for some months, but found the market difficult to navigate, and had concerns over pricing transparency and whether they were getting access to the best opportunities in the Chelsea and Belgravia areas. 

Through our connections, we introduced them to a rare and impressive first-and second-floor duplex in one of the ‘key’ mid-terrace buildings on Eaton Square. The square is widely considered one of the top three addresses in prime central London, due to the attractive period architecture and immaculately maintained private gardens, and the most desirable properties are often sold off-market.

By providing our clients with sales comparables that are not available in the public domain, we helped them secure a huge £1,000,000 or 14% discount from the asking price. We also ensured our clients received the specialist advice needed, due to the complex nature of how property is held and managed on the square, including from a leasehold enfranchisement specialist and building project manager.

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