Enquiries on the rise as market bottoms out
As the first signs of spring emerge so too, traditionally, do prospective house buyers. This year, despite Brexit uncertainty and depressed prices, the numbers of those prospective buyers approaching us at Black Brick are up considerably on last year – providing one of a number of data points that suggest the market could be on the turn.
In January and February, we saw more than three times as many enquiries from potential buyers compared with the same period in 2018.
“There is, without doubt, a lot of pent-up demand in the market,” says Black Brick Managing Partner Camilla Dell. “The big test, of course, will be whether these enquiries translate into transactions.”
Those applicants are also bringing more money to the table. This year, they have average budgets of £6.8 million, compared with just £3.7 million last year – clearly showing greater confidence to commit to the London market. And Prime Central London’s attractiveness to investors also appears to be returning: almost a third of enquiries have been from prospective buy-to-let investors.
These numbers chime with the view from London agent Chestertons, which claims the bottom of the London prime property market “may be in sight”, after activity picked up in the second half of 2018 and given a “dramatic imbalance between supply and demand”.
After two years of substantial price drops, the firm notes in its latest London residential report that: “Latest data from the Land Registry suggest that average prices across London are stabilising against a backcloth of sustained buyer demand and shortages of properties available to buy.”
Chestertons notes that, as well as local buyers, overseas investors are also looking to take advantage of low prices and weak sterling. Among Black Brick’s enquires, around 60% are from UK-based buyers, while most of the remainder are US-dollar denominated.
“We are seeing two camps,” says Black Brick Partner Caspar Harvard-Walls. “The first are domestic buyers who have been waiting for some certainty in the market but now feel that prices have come down so far that they want to take advantage. The second are dollar-based buyers for whom weakened sterling compounds the lower capital costs, providing such a significant discount compared with the peak of the market.”
Meanwhile, other investors are taking the long view, and looking beyond Brexit. Norway’s $1 trillion state-owned sovereign wealth fund, which already has substantial holdings in UK stocks, bonds and real estate, said it plans to increase its investments in the country: “With our time horizon, which is 30 years plus, current political discussions do not change our view of the situation,” its CEO Yngve Slyngstad told Reuters.
To be sure, Chestertons is far from forecasting a rapid return to price appreciation. It says that “we do not expect much growth over the next 12 months.” However, prices are unlikely to suffer any dramatic falls, “barring a major shock in the wider economy and if demand continues to outpace supply”.
There are a number of potential bumps in the road. The biggest concern, from the point of view of London’s prime market, is political risk: whether from a substantial delay to the Brexit process, or from a general election. “Either of those events would prolong uncertainty and would deter buyers,” adds Dell.
Another concern is the government’s proposal to add a 1 percentage point surcharge on Stamp Duty to be levied on non-resident buyers. That proposal, announced in last year’s budget, is out for consultation until 6 May. “If the government decides to proceed, that additional tax would likely put downward pressure on prime London prices,” Dell says.
“However, there is clear evidence that a growing number of buyers are preparing to commit to the market and are waiting for the right time to take the plunge,” she adds. “There are things that prospective buyers could be doing to make sure they can move quickly when they feel the time is right – and, as we’ve said before, the market will move quickly when the uncertainty lifts.”
The point of capitulation?
Financial markets investors are familiar with the point of capitulation in a bear market – when even the most optimistic investor throws in the towel and sells out of its position at a heavy loss. This point – usually only visible in hindsight – is when the market begins to turn.
Certainly, recent months have seen minor capitulations within London’s prime market. We have written before about Red Lion House, bought out of receivership for £15 million – £10 million below its original asking price. At a price of £1,748/square foot, it went for some 32% below the average of £2,567/sq ft for which Mayfair houses in good condition sold in 2018.
A recent sale involved a first-floor, south-facing apartment on one of South Kensington’s most sought-after garden squares. At the end of last year, it sold at £1,608/sq ft. At the peak of the market, a nearly identical property changed hands at £2,496/sq ft – some 55% more.
“These kinds of discounts are at the extreme end of the spectrum – and are extremely hard to find,” says Black Brick’s Harvard-Walls. “They suggest two things: first, that the pendulum may have swung too far towards the buyer, and the market is likely to begin to correct; and second, they show that discounts are available that provide buyers with a substantial buffer against ongoing uncertainty.”
“For a buyer that plans to be a long-term holder of London property, we advise that discounts of 10-15%, for the right property, represent good value,” says Dell. “However, finding the ‘right property’ is critical.” The risk that poorly advised buyers face is that, in a market characterised by limited supply, they are seduced by discounts on compromised stock, that will continue to be valued at a discount when the market recovers, she adds.
The other challenge buyers face is wasting time on unmotivated sellers. “With continuing low interest rates, relatively few sellers are distressed,” says Dell. “Securing that discount often relies on finding sellers that really want to transact. A recent search for a £10m – £20m family house in prime St John’s Wood revealed almost 20 potential houses for sale on just two streets, but of these, only 2 or 3 were seriously motivated vendors. And therein lies the problem – transaction volumes would undoubtedly improve if there were more motivated sellers.”
A revival in the rental market
As noted above, we are seeing a revival of interest from buy-to-let investors, reversing London’s fall from favour, since moves by the government to discourage the investment market in favour of owner-occupiers. This growing interest is supported by reports, from a number of agents, that rents are on the rise on declining supply.
Knight Frank reports a rise in rents in prime central London of 1.3% in the twelve months to the end of January and calculates that the total number listings fell 20% in 2018 compared with 2017. In Marylebone, average rents jumped 7% over the period.
Savills paints a nuanced picture. It finds that, overall, rents in central London fell 3.2% over 2018; however, smaller prime central London properties, where tenants pay less than £500 a week or less, rents had risen 1.9%, with the steepest falls – of 4.8% – for those properties costing more than £3,000 a week to rent.
Nonetheless, it found “encouraging signs” for the market, with “a distinct slowing in the rate of annual falls”.
Certainly, we are seeing investors beginning to return. Almost a third of the enquiries we’ve seen this year have been investment-driven. “The market is still potentially attractive for private landlords,” says Dell, “especially those buying mostly or entirely with cash, and in the context of a diversified portfolio.”
She adds that, in addition to taking advice about the rentability of specific properties and the robustness of their local rental market, it is important to take into account changes to tax relief on mortgage interest payments; by April 2020, owners will no longer be able to deduct finance costs from rental income, but will instead qualify for a basic rate tax reduction.
Rental acquisition of the month: 55 Victoria Street, SW1 – £3,000 per week
Our clients were relocating from Belgium to London and, although they are planning to buy, wanted to find a rental property to allow them to familiarise themselves with London before deciding where to purchase. Their brief was for a lateral apartment, with at least three bedrooms and a minimum of 2,000 square feet. Our clients travel frequently, so easy access to Heathrow and a good-sized lift were important requirements. Their budget was a maximum of £4,000 per week.
As our clients did not have a specific location in mind, we previewed and shortlisted options all over prime central London. However, we identified a ninth-floor apartment within a new development in the heart of Victoria which ticked all the boxes. The three-bed property is 2,695 square foot, with two large terraces, and it benefits from a concierge, underground parking and a large lift. We negotiated an 8.3% discount to the asking price, securing the tenancy for £3,000 per week – well within the clients’ budget.
Managed sale of the month: Henry Moore Court, SW3 – £5,250,000
While we typically act for buyers, we occasionally market properties for sale on behalf of our clients. We are currently offering a rare opportunity to purchase a newly refurbished apartment in one of Chelsea’s most prestigious residential developments.
Located on Manresa Road, a quiet turning just off the Kings Road, the three-bed, 1,988 square foot apartment has three bathrooms, two underground parking spaces, as well as a storage room and 24-hour concierge and security. It also benefits from a 991-year lease.
For more information, or to arrange a viewing, please contact Caspar Harvard-Walls on +44 203 141 986 or email: firstname.lastname@example.org.