1st September 2012
The gold standard
Well, no-one can argue that London doesn’t know how to put on a show. With the Olympic games still fresh in our memories, perhaps it is a little too soon to consider objectively whether the Olympics will have a lasting impact on international investment in the UK in general and London in particular. Even still, the games’ resounding success can hardly have harmed perceptions of London globally. For any international business considering the relative merits of Europe’s leading business centres for a new regional or global headquarters, the games were a perfect advertisement for the UK’s large scale project management skills, London’s infrastructure strengths and the capital’s many cultural and leisure attractions.
Indeed, in the wake of the Olympics a number of recent industry reports have rightly focused on London’s global business credentials – emphasising the capital’s enduring attractions to wealthy foreigners with diverse international business interests. For this increasingly influential buying group, setting up home in London is not about wealth protection but about the opportunities for continued business growth that exist within the capital’s established and diverse business community.
In terms of activity, the last few weeks have been understandably quiet. Prices have continued to rise, but at a slower rate than has been the case for many months. The Knight Frank Prime Central London index rose 0.5% in August, the smallest monthly increase since October 2010. Prices are up 9.9% over the past twelve months and have now risen 49% since the post-credit crunch low of March 2009. Recent market data also shows the slowdown in transaction volumes with total exchanges across the PCL market between May and July down 11% over the same period of a year ago. In the wider UK housing market, the latest figures demonstrate some welcome stability. The Nationwide House Price Index posted a surprise 1.3% rise in August, leaving prices down 0.7% from a year earlier.
Post-Olympic demand pick-up expected
Knight Frank says there is emerging evidence that the stamp duty changes announced earlier in the year are starting to have an impact on the market but we put this marginally more subdued market tone down to a number of seasonal factors. But with both the holy festival of Ramadan and the Olympics now over, we expect transaction levels to pick up in the coming weeks. Crucially, we see little reason for international demand for PCL homes to diminish significantly. Interestingly, a recent report by Savills makes reference to the fact that there were more than 100 sales of £5 million+ property in London during the second quarter of this year, which further goes to demonstrate that appetite for high value property in London remains strong.
Looking ahead there are a number of critical dates looming for the Eurozone debt crisis and we are about to find out how robust the recent rise in investor confidence really is. European Central Bank president Mario Draghi’s much quoted promise to do “whatever it takes” to save the euro has been warmly received by bond and equity markets. However, in light of the discord among euro members about the best way to address the situation, further volatility seems inevitable. We therefore expect safe haven buying to continue to be a supporting factor to prime central London property prices.
Further down the line we have recently been reviewing the new development pipeline in prime Central London and the potential impact of this new supply on prices. The long and short of our deliberations is that we do not believe these developments are of sufficient size to have a significant downward impact on prices. Given the on-going reluctance of banks to lend against property it appears unlikely that new supply will grow materially from the funded schemes that we already know about.
Short-term softening in rental prices
Over recent weeks we have started to see signs of weakness in specific areas of the prime central London rental market. Letting agents across the capital are reporting higher stock levels with one major agent reporting rental prices in prime central London falling 0.8% in July. Our own take on recent market developments is that while demand for one and two bedroom apartments generally remains very well underpinned, we have seen a growing imbalance between demand and supply in larger three and four bedroom properties for rent. The net result has been downward pressure on rental values, particularly on properties which are on the rental market for over £1500 per week.
Part of that supply increase is capacity coming back to the long-term rental market from landlords looking to exploit a short-term hike in rents during the Olympics. Given the impact of void periods on returns we have always viewed the chasing of short-term rental spikes as a dangerous game. But this increase in supply also comes at a time when overall corporate demand is in a state of flux. Due to the economic backdrop corporate demand as a whole is not strong and relocation budgets generally are diminishing. Meanwhile, London’s financial sector, a major source of corporate tenants in PCL historically, has been shedding not adding jobs in recent months.
There are some other short-term factors at work here too. The scaremongering about the impact of the Olympics on London’s transport infrastructure has resulted in delays to both corporate relocations and to the return of London’s large international student population. We believe this will reverse in the coming weeks.
Longer-term we see underlying conditions for the prime London rental market as relatively robust. Affordability remains a big issue for many would-be buyers in PCL. With the availability of finance still constrained by the reluctance of many mainstream banks to grow their mortgage books there is a growing tenant base simply priced out of the sales market.
And while corporate relocation budgets may be under pressure, London is becoming home to an ever greater number of international businesses. According to a recent industry report over a third of Fortune 500 companies have their European head office in London and over 20,000 foreign-owned businesses operate here. We therefore see the recent cooling in market conditions as temporary rather than a structural shift.
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