While the central London property market…

By Camilla Dell

…has begun to cool, and prices have started to flatten out, the rental market continues to be extremely active, which is good news for buy-to-let landlords and investors. The rental market has significantly changed over the last two years. While 2008 saw an unprecedented volume of rental stock which pushed rents down as a result of ‘forced landlords’ who could not sell, or did not want to sell in a falling market, 2009 was characterised by a far more normal volume of rental property as the sales market started to pick up. The year 2010 has by far been ‘the year of the rental’, with many areas now seeing a severe shortage of supply. At the same time, the volume of prospective tenants has been very strong this year.

A recent Knight Frank report showed that, compared to the last two years, 2010 has seen an increased number of new tenants for most months, which has helped landlords to raise rents through the year. Countrywide, the UK’s largest residential estate agency also revealed that there were a record-breaking 61,000 tenants entering the property market in the third quarter, an increase of 19 per cent from the previous quarter. There is also an average of 5.8 tenants currently vying for every one property in the market—a tempting prospect for any buy-to-let investor.

Another report, by Savills, shows that prime London rents rose by 2.7 per cent over the third quarter of 2010, taking year-on-year growth to 12.3 per cent and leaving rents just 3 per cent off their peak of March 2008. Interestingly, there is a huge geographical variation. Areas of North London, such as Hampstead and Islington have enjoyed the strongest rental growth at 4.2 per cent in the third quarter, an increase of 14.4 per cent in the year to date. The growth is coming from increased demand for smaller properties from city tenants.

At Black Brick Property Solutions, we have recently bought several one- and two-bedroom flats for our rental investment clients, and have secured tenants within a matter of days after completion of the purchase. Void periods are also at an all-time low, with many tenants renewing year on year.

High mortgage deposits

Another explanation for the buoyant rental market, particularly at the lower end of the market, is the availability of finance. With most mortgage lenders requiring a hefty deposit of around 25 per cent, many would-be buyers simply cannot afford to buy and are thus forced to rent. It is not surprising therefore that the lower tiers of the prime London rental market have seen the strongest growth over 2010 as caution among tenants and reduced corporate allowances have concentrated demand.

At the upper end of the rental market, there is increased supply, and static demand for family housing is stalling growth. However, according to Savills, in prime South West London the particularly strong sales market this year has reduced the supply of rental properties as accidental landlords returned properties to the sales market. Additionally, needs based family demand has continued, pushing the rental value of houses up by 11.2 per cent in the first six months of 2010. However, the rate of price growth slowed in the third quarter as demand from young professional sharers, as well as families became aligned with supply over the summer months.

Property investment pointers

Our advice to our investment clients has always been that investment into the London property market should be in prime property, in the best locations, as this will attract the best possible tenant. Options in Mayfair, Hyde Park, Marylebone, Kensington, Regents Park and St Johns Wood will bring in attractive rental yields, while also offering good long-term capital appreciation—an important consideration when buying Central London property. Generally, we feel that two-bedroom apartments in locations near to good shops and a tube station make the best rental investment, appealing to the widest tenant market. One-bedroom apartments, while high in demand, have perhaps less chance for appreciation as there is a limit on what someone will pay for these. We would advise investors to avoid ground or lower-ground floors. New builds are good from a maintenance and management perspective, but investors should remain wary as the potential for capital appreciation is not as good as it is with period properties. High-density developments in
particular should be avoided. As an indication of rents achievable, in the most established areas of prime central London you can expect a two-bedroom investment flat to rent for between £800 (Dh4,740) and £3,000 (Dh17,760) per week, depending on size, location and condition. In the more periphery areas, such as St Johns Wood and Notting Hill, a two-bedroom property will achieve anything from £500 (Dh2,960) upwards.

The future longer-term outlook for the rental market also looks positive, with many would-be buyers adopting a ‘wait and see’ approach, this could provide a further boost to the rental market. Knight Frank predicts that rents are likely to outperform significantly this year and next, but return to a more traditional pattern of growth from 2012. With low borrowing rates in the UK, and a healthy rental market, now is a good time to be considering diversifying into the prime central London property market. But it is important to remember that it pays to take advice to make sure you are investing in the right kind of property, in the right area, in order to attract good tenants and rental returns.

Prime central London holds opportunities

By Vernon Baxter, freelance writer

Scope for capital appreciation and popularity among overseas investors drive demand for units in UK capital’s posh neighbourhoods.

Even the world’s top property markets have their ups and downs. Despite central London’s reputation as one of the safest property markets around, the wealthy residents and property owners of Mayfair and Knightsbridge in July experienced a phenomenon the rest of the world knows only too well: negative equity. When the figures are compared with the rest of the world, however, owners of prime central London properties won’t be expecting much sympathy. Since the London market bottomed out in March 2008, owners have experienced a steady period of recovery, according to the Knight Frank Prime Central London Index. For 15 consecutive months, the market has rebounded strongly until prices dropped by a staggering 0.5 per cent. As property crashes go, there’s been worse. Indeed, Knight Frank is still confident that its forecast of 5 per cent price growth for 2010 across central London remains on track.

Locations advantage

It is a testament not only to the inherent strength of the London market, but to its enduring popularity with overseas buyers. In fact, in its report, Knight Frank attributes the 15 months of strong growth to the continued demand for property from overseas buyers. “There are always international buyers, who are making money and will invest in London, irrespective of general market conditions,” comments search agent Simon Barnes, owner of Simon Barnes Property Consultants. But, there is no great secret to success when buying in London, says Barnes. “I would advise buyers to go for as central as they can afford. It is better in most cases to buy a smaller flat in a prime location, than spend the same amount on a house in the suburbs, but avoid large developments. Prime locations such as Mayfair, Belgravia, Notting Hill, Knightsbridge, Kensington and Chelsea will always do well.”

Rental prospects

The thing about investments overseas, however, is that—by definition— you’re not going to be around to enjoy them all year long. Which is why the majority of international buyers who are attracted to London properties subsequently let them out to high quality tenants. If anything, the rental market is stronger than the property market itself, claims Tim Hassell, director of Draker, a prime Central London lettings agency. “From a landlord’s point of view, London is considered by tenants to be one of the most desirable cities in the world to live and work in,” he says. “This means that, providing they have purchased intelligently, they will always have an abundance of reliable, high-calibre tenants to choose from.” Indeed, letting properties in prime central London tends to be a straightforward process as the majority of tenants are ‘white collar’ professionals. However, these white collar professionals have not been entirely sheltered from the global economic storm and Hassell reminds investors that boom times don’t go on forever. But, sometimes stable can be just as good as spectacular. “Even through the recent economic downturn, the lower to mid-range lettings market has remained comparatively stable with only a slight drop in rents,” says Hassell.“But, it is, in fact, the stability of the lettings market combined with low interest rates that have enabled many investors to keep hold of their property portfolios. This is especially true with developers who have not normally been involved with the lettings market. When things get tough in our city, people turn to a more temporary solution—they rent rather than buy.” Still, as with any market, the London rental sector can ebb and flow and it is worth bearing this in mind when deciding when to enter the market.“The rental market is always relatively fast paced, with things reaching fever pitch in September and early October,” Hassell adds.“That is the best time to let out a property as demand seriously outstrips supply.”
Expected yields

But, what sort of returns should investors expect from the London market? Hassell says that values of central London properties have historically risen by between 8 and 9 per cent each year, but he points out that — even in this remarkably stable market — there are no guarantees. “The return is not a straight line and can consist of a great many years of flat prices followed by one or two years when prices increase by 20-30 per cent per annum,” he says. Which is why the long-term letting of properties is a good way of ensuring you don’t sell in a fallow year, he argues. “As long as you are able to hold the asset over a market cycle, then central London property should be a good investment. Importantly, the asset could provide a yield of 4-5 per cent per annum as long as you have a good lettings agent involved who can find the right tenants and manage the property for you.” Camilla Dell, from independent property search agency Black Brick Property Solutions, agrees that letting out a London investment can be the most effective approach for overseas buyers.“It is very active,” she says.“As well as the corporate tenant market, London also has a large private tenant sector, consisting of people who would ultimately like to buy but can’t afford to get onto the property ladder.”

Agent costs

Of course, letting through an agent is going to cost money. But due to the competitive nature of the London market, the agent costs are not prohibitive, says Dell.“Typically, you are looking at paying between 8 and 11 per cent per annum of the total annual rental income received on the property to a lettings agent to rent the property for you and then an additional 5 to 6 per cent to a managing agent if you decide to have the property professionally managed,” she says.“Many of our overseas clients choose to have their properties professionally managed.”

Expert opinion counts

So, if London is the market for you, how do you get started? The London market is clearly no stranger to international buyers, but it is always worth seeking advice, says Hassell.“Purchasing property in a foreign country is never easy. However, as long as you have a good solicitor acting for you, then the process should run smoothly,” he says.“There are no restrictions on foreigners buying property in London but, dependent on the purchaser’s country of origin, there may be certain benefits in buying in a company name rather than an individual name.” It is also preferable to arrange finance in the UK—or at least in UK sterling —rather than a foreign currency as it will remove the risk of currency fluctuation. “Large international banks should be able to provide sterling finance in any country and, therefore, it depends on the purchaser’s preference and the interest rates available,” says Hassell. Buyers should beware, however, if they plan on getting directly involved in the property search, warns Dell.“Remember, estate agents in the UK act on behalf of the sellers. So, without seeking a source of impartial advice elsewhere, buyers have little way of knowing whether they are getting a good deal or making a sound investment,” she says. “At Black Brick, we have witnessed the fallout from several misguided purchases where the buyers failed to seek independent advice on their investment. One West African client came to us having significantly overpaid for a property, on the premise that it was located in a prestigious area in central London—St John’s Wood —when in reality it was located in the less sought-after adjacent neighbourhood of Kilburn. He experienced no growth in this asset and is now seeking our advice on his next property purchase. “Likewise, many foreign buyers invested in a new build development in Fulham, south London, which experienced a 20 per cent decrease in price during the downturn. We advised our clients not to buy in this development as in our view, high-density apartment blocks in secondary areas do not represent good investment.”

Nevertheless, Dell insists that canny investors should have no problem with the market.“With the right advisers, it’s very straightforward,” she says.“The most common mistake foreign buyers make is not to seek proper advice before making a purchase, which can end up being costly.”

An investment for life

Even then, there are very few investments in London that time can’t heal. And once you buy in London, you won’t be in any hurry to leave the market, says Gary Hersham, director at top-end London agency Beauchamp Estates. And an investment in London can be an investment for life and beyond.“In terms of safety of assets and capital, there is nowhere safer in the world,” says Hersham. “No one can or ever will take your asset away from you. If you have ownership or title of a property, effectively it is yours forever, unlike other countries were such entities as ‘tax police’ or ‘the State’ can come along and appropriate your property.” It may sound dramatic, but given that many London investments from overseas buyers stay in the same family for generations, it is certainly reassuring. “We have the best and most secure property title in the world,” says Hersham. “Once a property is conveyed and title deduced, no one can claim thereafter that they, not you, own it.”

London becoming a global hub for the rich

By Camilla Dell

The London property market has long attracted buyers from around the world. If we take a look back to when the market last crashed in the 1990’s, the crash was much more drawn out than the price falls we have witnessed this time around. UK house prices started falling in 1989 and the market finally bottomed out in 1995, resulting in a 13.2% fall in UK house prices over six years. Back then, the fall in the market attracted foreign buyers, particularly from the Middle East, who saw the drop in prices as an opportunity and hence began to buy a large volume of property in London.

Fast-forward 13 years and the crash of 2008 has been much more acute. Prices fell sharply between September 2008 and February 2009, as much as 20 – 25% in central London, but from February 2009 onwards the market suddenly started creeping back up, and hasn’t stopped since. Prices today are almost back to where they were at the peak of the market, and in some parts of London, we have even begun to see evidence of transactions taking place back at record levels. Motivated in part by a 30% devaluation in Sterling, foreign buyers have started pouring back into the London market. According to a recent report by Knight Frank, between December 2008 and March 2009 the international buyers’ share of the £5m+ market soared from 39% to 48%. By June of this year it had hit 68%. So what is it about London? Why does it attract buyers from around the world?

For many investors, the recent turbulent financial times have resulted in a fear of investing in the stock markets or funds. With interest rates so low, keeping money on deposit in the bank also makes little sense. At Black Brick, many of our clients make their wealth in high-risk regions and so seek to diversify and look to acquire assets outside of their own countries. The London property market has long been viewed as a safe haven by many investors. In addition, the enduring attractions of London’s excellent schools are a real pull to the international elite. The relatively light regulatory burden on companies wishing to gain a public listing in London, in comparison to New York, means that London is the stock market of choice for many international corporates seeking capital. Meanwhile London’s geographic position enables access to Asian markets in the morning UK-time and American markets in the afternoon and evening – an important factor for many companies.

The combination of these factors has resulted in demand for London property becoming truly global. If we look at our own client base at Black Brick, we now look after clients from Nigeria, Ghana, Uganda, Kenya, South Africa, Zambia, Russia, India, Pakistan, Malaysia, Singapore, Hong Kong, Greece, Cyprus, Italy, Saudi Arabia, Dubai, Egypt, Lebanon, US and Australia. India and the rest of Asia are particular hotspots at the moment in terms of expressions of interest – reflecting the area’s fast-growing high net worth contingent and strong historical links with the UK.

So where are people buying and are there any trends? It’s difficult to generalise, but we have begun to identify certain trends amongst different nationalities of buyers. Buyers from the Middle East and India tend to favour Knightsbridge, Mayfair and Belgravia as their preferred locations. They prefer to buy lateral apartments and like buildings that have a porter, good communal parts and an impressive entrance. Buyers from Asia tend to prefer the modern, new build, purpose built blocks in prime locations such as Kensington. African buyers like to buy in areas such as St John’s Wood, Hampstead and Regents Park and like gated developments with high security.

One of the biggest challenges in the London property market today is finding a good deal, and this is something that all our international clients ask for. London is currently experiencing a huge imbalance in the supply/demand ratio, a direct result of the globalisation of the London market. As many existing owners are not British, domestic changes such as the recent rise in income tax have little effect, and most property purchases by the overseas contingent are viewed as long-term commitments that will pass down through the generations. If there is no pressure to sell, then foreign buyers tend to keep hold of their property indefinitely.

The supply and demand imbalance is most acute in prime areas such as Kensington and Chelsea, Knightsbridge, Mayfair, Belgravia, Regents Park and St Johns Wood. With choice so limited, finding the right property has become increasingly difficult. This has led to the rise in popularity of buying agents, the most reputed of which will have prior access to properties before they hit the open market, and are even able to source properties entirely off-market, through direct liaison with vendors. For instance, at Black Brick, we currently have over 50 properties on our own internal database where we are in direct contact with the vendor. In such a competitive market, choosing the right buying agent to represent you in your search can really make all the difference.

The big question on everyone’s mind is “is the London market sustainable”? Surely prices cannot rise any higher, and with the global outlook still looking shaky, surely London cannot be immune? Looking forward we would not expect prime central London property to remain completely untouched by the potential storm clouds gathering over the broader domestic housing market, and more generally fears of a fresh downturn in the global economy. But we believe that there are separate and stronger long-term supports to the London and South East housing market that will allow it to weather a so-called ‘double-dip’ better than the wider UK housing market and the majority of other asset classes. Indeed, there is an argument that heightened risk-aversion among high net worth investors only increases the attractions of prime central London as a relative safe-haven.

An unusual boost in the downturn

By Camilla Dell

Looking back over 2009, despite the huge economic downturn, it was an unusually strong year for property prices. Prices rose substantially across the UK and recent Nationwide figures show the annual rate of growth has now risen to 8.6 per cent, up from 5.9 per cent in December — the highest rate of growth for two years.

In London, Knight Frank reported prices in the more expensive parts have actually risen 15 per cent since last March. They are now just 12 per cent below the market peaks. What has caused this growth to take place? There are a number of key drivers. There is the supply side—properties coming onto the market were extremely weak throughout 2009 with very few sellers willing to sell in a tricky market. Many sellers were under the impression they would be selling into a falling market and were concerned they would receive ridiculously low offers from the frenzy of investment buyers who were active at the time. At about the same time, demand started to pick up dramatically, particularly from foreign buyers looking to invest or own that once-in-a-lifetime pied-à-terre they had always dreamed of.

The currency-property correlation

A third factor has to do with the currency effect. Sterling’s weakness made London property even more attractive for dollar- and euro-based buyers, effectively giving them up to a 50 per cent discount off the price. This greatly contributed to demand. And a final factor came in the form of low interest rates, which in the UK are still at a record low of just 0.5 per cent. As a result, many owners who otherwise may have been forced to sell were able to hold onto their properties, contributing to the supply demand imbalance. What’s next for property prices? We have a general election just around the corner and many buyers and sellers are holding off until this has passed. The Conservatives have the city vote and are ahead in the polls, and as the party in power, they are more likely to cut spending rather than raise taxes any higher. However, many are concerned the outcome will be a hung Parliament, which would be the worst possible outcome. We think this scenario is unlikely.

But there is certainly uncertainty over how robust the economic recovery really is. There are concerns over rising taxes, cuts in public spending and, not least, interest rates. The timing of when interest rates go up will be crucial. At Black Brick, we see this is a huge influence on property values. It is therefore no surprise that there is a huge discrepancy between forecasters, with the most bearish predicating the market will fall five to ten per cent, and those bullishly inclined forecasting prices will rise ten per cent. Interestingly, some forecasters have revised their forecasts upwards. The Centre for Economics and Business Research recently put out forecasts that now predict home prices should go up by six per cent in 2010 and 20 per cent higher by the end of 2013.

At Black Brick, we don’t forecast, but we do have a view. We are encouraged by the fact we have already got 2010 off to a good start, signing in excess of £30 million (about Dh165.4 million) of new client mandates, mainly from foreign buyers. Our view is one of caution. With all that 2010 has to bring, it would be unwise to be bullish at this current time. We do see prices in prime central London, which is where we specialise, will continue to be supported throughout the year.

Market has touched bottom

This is primarily due to a shortage of stock and what appears to be a never-ending continuous demand among foreign buyers. We feel quietly confident that the bottom of the market in prime central London has been reached and the continued weakness in sterling makes property an attractive proposition. As long as investors are realistic about their timeframe, a minimum five to ten-year view, now is a good time to buy if you can find the right opportunity.

For owner-occupiers, we always advise that it’s much more about finding the right property and prices should always come second.


Buyers need to seek professional advice when planning to buy in London

By Camilla Dell

As a professional consultancy, our role is to guide our clients and managing expectations is an important part of this process. Some of our investment clients have a clear focus and vision of what they are trying to achieve; others are happy to be led and guided by us.

During the boom years of Dubai’s real estate market, clients would regularly ask us why they should be investing in London, with a 4 to 5 per cent yield and a 5 to 10-year hold period, when returns from Dubai property were so much greater. We would, from time to time, lose potential clients to the Dubai property market, and there were times when I wished we could offer our services in Dubai as well.

But something told me not to enter into a market I didn’t understand. When clients would tell me about the wonderful returns they were seeing and the flipping of properties, I would shudder. I didn’t understand the dynamics of the market.

Who was going to live in the tens of thousands of apartments that were being built and kept on being built? Where was the demand coming from? What was supporting the huge rise in prices? I decided that I simply couldn’t advise on a market I didn’t understand, but more importantly, was not an expert in.

Post the credit crunch and debt situation, the stories are still flowing out—investors who risked everything, even the roof over their heads, on betting the market would continue to go up and up. This isn’t to say that some investors haven’t done extremely well out of Dubai. There have been many success stories by those who got in and out at the right time.

Timing is everything. Even now, there are developers re-entering the Dubai property market, confident that the market will turn around. One developer recently unveiled a three-year plan to build The Heart of Europe Resort, a sixisland development on The World cluster of islands. He is betting on both a market recovery and also that interest from overseas buyers will be strong.

And Dubai should be congratulated. Recognising that one day the oil will run out, they have created a financial centre and a huge tourist destination from scratch, a feat I doubt we will ever see repeated anywhere else in the world. And while we don’t see Dubai as the place to make a quick return in a short space of time, over the long term, investors should do well.

At Black Brick, we firmly believe that diversity is the key to success when it comes to investing in property. Our investment approach with clients is very conservative on the whole. For investors looking to buy just one property, we keep it simple and stick to only the very prime areas of London. Here we know property will rent easily and stand the best chance of capital appreciation.

For clients looking to buy multiple properties, we expand the search areas, we may acquire one or two properties in secondary areas where the yields will be higher, but make sure we balance this with acquisitions in prime areas.

London is an attractive investment opportunity for non-residents of the UK seeking capital appreciation. The combination of a drop in London market values and the weak sterling, effectively provide dollar and euro buyers as much as a 50 per cent discount on previous levels in this assets class. In addition there is no UK capital gains tax for foreign investors.

We believe that it is important to take professional advice in the search and acquisition of London real estate as there is fierce competition for the best properties in the range of £500,000 to £3million. We were recently asked to source a prime property with a tenant in situ.

We sourced a suitable investment property in a prime location with a tenant already paying £721.61 per week. We negotiated aggressively and saved our client £75,000 off the asking price securing a gross yield of 5.7 per cent, above the market average of four per cent.

London, unlike Dubai, has limited space and very tight planning restrictions. We can’t just build and build, and if you believe in London and that it will recover and come out of recession, then it is a good place to own property.

In addition, London also attracts the globally wealthy, and people choose to own property here as a second home, as a base for children going to school in the UK and as an investment.

One thing, 2009 showed London’s resilience to the economic downturn. While property prices tumbled more than 50 per cent in Dubai, prices fell more moderately in London and actually rose 9 per cent during 2009. Prices in prime central London stand at just 13 per cent below the peak of the market today.

To conclude, it is important to take advice when investing property in any market, not just London. Markets differ greatly from one another and it’s never a good idea to pile everything into one location, no matter how tempting the returns may look. Diversity, timing and specialist knowledge is the key to success.

Now is the time to opt for short leases

A large proportion of the client base of Black Brick Property Solutions, one of London’s leading independent buying agents, comes from the Middle East, and one issue the company regularly comes across is the fact that these buyers tend to have a total aversion to buying property with a short-lease, and will usually only consider properties that are freehold or a share of freehold.

The reason for this is mainly due to the fact that most property in the Middle East is owned freehold, and therefore leasehold is an alien concept, as it is to many foreign buyers. But ruling out properties with a short lease cuts off a huge section of the market, particularly in sought-after London areas such as Knightsbridge and Mayfair.

With the current market in prime central London so short on supply, ruling out these properties makes trying to secure the ‘ideal’ property even harder. The company naturally advises its clients on both the benefits and potential pitfalls of buying a property with a short lease, but in a market that is short on supply as the current one, it can be a sensible option.

As one would expect, a property on a short-lease is cheaper to buy than it would be with a long-lease, or held freehold. This may enable a buyer to acquire an asset that would normally be above their price range. There is then the opportunity to either extend the lease, or hold the property for a time before reselling. In most cases it is advisable to apply for the lease extension – or enfranchise – in order to retain the value of the asset and remove any ground rent that may be payable. Depending on the circumstances, there can also be a valuation advantage to purchasing a short-lease property with the view to immediately pursuing either of these options, rather than buying a property that already has the freehold or a long-lease.

The common misconception that foreign buyers have is that they will be refused the right to a lease extension. The Leasehold Reform Housing and Urban Development Act 1993 is legislation which entitles the tenant of a flat to an additional term of 90 years, at a peppercorn rent. The additional 90 years is added to the present unexpired term. For a house, it might be possible to enfranchise and purchase the freehold interest. In both cases, any ground rent payable under the existing lease is removed.

Within Prime Central London, where short-leases are commonplace and mortgage finance is not normally required, buyers are more familiar with the concept of leasehold, and sales of leases with fewer than five years unexpired are not unusual.

Elsewhere in the UK, particularly where mortgages are required, the perception is different. There are also fewer funding products available for shorter leaseholds. The legislation makes an important distinction between leases that either have more or fewer than 80 years unexpired. Once a lease falls below this marker, the calculations become more complex and the costs can increase considerably.

Black Brick Property always suggests that its clients obtain independent advice from a firm of chartered surveyors who specialise in leasehold reform and who can advise and guide its clients through the process.

To conclude, buyers shouldn’t be put off buying a property with a short-lease. There can be advantages, particularly in a falling market, where the cost of obtaining the extension will be less than in a rising market, and also in a highly competitive market, such is the current situation in London, where competition for the best properties is fierce. Considering properties with short-leases may mean you get a better deal as there will be fewer buyers competing for the same property. As with any complex transaction, seeking good advice is crucial.