To begin with, here are some stats, facts & points of interest on the London property market:
- Lendinvest a peer to peer mortgage lender has just passed the £500m mark for lending since it was founded in 2013 (City A.M.)
- Over 150 cranes are operating in Zone 1 at the moment (Estates Gazette)
- Banks are putting their faith in real estate with plans to launch more than 1Bn Euros of CMBS bonds in the next three months. Banks include Merrill Lynch, Bank of America, Deutsche Bank and Societe Generale (Estates Gazette)
- Savills reports that £74.8bn is now spent on private and social renting against £73.2bn for mortgages… over the last 5 years, regular mortgage repayment costs have risen by 48% to £44bn, but the amount paid in private rent has risen by 56% to £53.4bn”. (Estates Gazette)
- Savills also claims that slightly more housing equity is owned by private landlords than owner occupiers: £1,077bn compared with £1,067bn. Both figures are dwarfed by the £2,097bn of property owned outright. (Property Industry Eye)
- Property prices are expected to rise by 6.5 per cent this year, new analysis by EY Item Club predicts. “The chances of demand for housing falling back to any great extent look remote,” said the report, with household income set to grow and an interest rate rise looking further away.
- A record amount of money flowed into U.K. commercial property in 2015. For the year, investment totalled £64.3 billion ($91.1 billion), up 4% on the previous year, according to data from property consultancy Lambert Smith Hampton. (Wall Street Journal)
- The supply of homes for sale has halved in the last decade (NAEA)
- London home presales (new developments) drop 19% as sales taxes dampen demand according to Molior Research. (Bloomberg)
Research carried out by Countrywide shows that 25% of the UK’s housing wealth was held by those under 35 last year, compared with a proportion of 35% ten years ago. (Property Industry Eye)Well, January is normally a relatively quiet month as transaction levels are invariably low after the Christmas break. Kids have to be returned to school and for those shrewd people who have yet to have children or who have managed to shepherd them into adult life, there is work to concentrate on not to mention attempts to book skiing holidays where there might actually be some snow. Commiserations to those who had no luck this year.
Nevertheless, there are a couple of points I would like to highlight. Firstly, poor or average properties or properties that have some “baggage” will always take a hit in softer markets. This is what the figures do not show. The qualitative difference.
So, for example, we have been thinking about recommending an apartment to one of our members. It was bought for £3.45m about 18 months ago and has had £300,000 spent on it. We think we can buy it for £2.8m. So if you factor in other costs including Stamp Duty, the owner will have lost c. £1m.
This is despite it being in an excellent building, has genuinely stunning views of London and is obviously trading at a significant discount to the original price.
But this is the problem with new build developments. The original asking prices are often ludicrous, but if you are an unwary investor then you will probably fall for the glitzy sales brochures and show rooms.
Having said this, I quite like the flat and the discounted price gives us a margin of safety especially when one looks at the few resales that have taken place in the building since it was completed. BUT, there is one issue that my team and I deem as too big a risk:
The service charge is £18,000 per annum. Now there are quite a lot of additional facilities including the gym, concierge, cinema, club membership, etc., etc. The question is how many future buyers will fancy paying such a fee for services they may never use?
This is an example of “baggage” and we have decided that at this price level the service charge will deter too many buyers to make it a good acquisition.
Conversely, a client is selling a flat we bought for him a decade ago. This spans the entire first floor of a classic stucco-fronted villa in Notting Hill. It has a large terrace with good views, high ceilings, access to and views over a garden square. It is just a fantastic flat and there are only a handful of these in the area.
It is not on the open market yet, but an offer has already been received which is not far from the asking price. I would be very surprised if we did not achieve a higher price when it is openly marketed.
And this is the key. If you buy an average or poor property (irrespective of price range or area) you will have to accept discounts to fair value in a weaker market (assuming you have to sell). Meanwhile, in strong markets the same properties will go up in price but will not command the premiums that the “best in breed” do.
This is why I pay little attention to the stats that are churned out by the estate agents and property portals. The information is far too general to be of much use. It can give you an idea of buyer and seller sentiment, but that is all.
Anyway you don’t negotiate with the market as a whole, you negotiate with the owners of the property you wish to buy while taking into account what is happening in the market for that particular type of property.
But that is just scratching the surface, because there are a host of other factors and variables that you need to consider when negotiating. None of this shows up in the stats but many are misled by them as they take them as gospel.
Of course, the banks, lenders and agents would be foolish not to release so much data. It’s fantastic PR. It’s also great for the media as property is a topic in which most people are interested, so headlines about crashes and booms lead to higher readership which equals more advertising which equals higher profits which will lead to… you get the picture.
And depending on the prevailing sentiment of the day, a price rise can be seen as further proof that the market has lost all reason and will make the next crash even worse. Or it can be taken as proof that this time it really is different and prices only do go up (this tends to happen at the end of the cycle – see newspaper reports in late 2006/2007).
Likewise a price fall can be seen as proof that the market is about to start crashing and it’s time to batten down the hatches. Or it can be viewed as a great opportunity to buy before the next surge in prices.
The skill is working out which is which and that is easier said than done… especially when a flock of black swans could appear out of nowhere and start battering you around the head.
Indeed the situation is made even more complicated when you realise that there are dozens and dozens of markets within the “London Property Market” – this is why London as a whole is reported to have seen price increases of 20% as a whole while some areas/price ranges have seen prices “crash” by 10% (again these figures are totally misleading …).
In fact if you ask 100 people to describe what they think is the “prime London Property Market”, I guarantee that you will receive several different answers.
Be very wary of the new build developments. Some of these will prove to be good investments, but others are likely to prove to be expensive burdens. Indeed a couple of members have thanked me for talking them out of buying apartments off-plan as prices look to be dropping while the incentives from the developers to buy are growing.
Meanwhile, I think that what we are currently seeing in the traditional market is a natural correction rather than anything more sinister. Firstly, the lending over the last five years has been incredibly responsible and solid. Research by Lloyds showed that from 2011-3013 over 50% of properties over £1m were bought with cash and a further 25% were bought with mortgages of under 50% LTV.
This is a million miles from the reckless lending of the early 2000’s.
Secondly, interest rates do not seem to be going anywhere soon. This means that there are very few forced sellers which is one of the reasons transactions have been so low. Just as many purchases in prime central London are discretionary, so are many sales.
But these are passive reasons for why I think the market will not fall into a death spiral. There are various reasons why I think we will see huge price growth in coming years (please note this growth will not be steady. There will
be years of explosive house price increases while other years will see minor falls). Two of which are:
- Corporation Tax – Osborne announced that Corporation Tax would be reduced to make it the lowest in the G20. This will attract a vast amount of investment into the UK. This has to feed into higher land prices.
- Credit will become more available – The scars of 2008 are still raw which is why everyone is so jittery. It was exactly the same in 1998 after the crash of 1990. Any weakness in the market is seen to herald the “proper crash” as 2008 was regarded by many as a false dawn for a property crash (in prime central London at least).
However, lending as I have mentioned has been incredibly conservative. This will change as some of the news in the Stats & Facts section shows. The mainstream banks will slowly start to lend more. Like young children they will dip their toes in the water to begin. Then with confidence, they will start paddling and finally there will be a massive pool party as the mainstream are joined by all and sundry in a frenzy of lending and consequent steep price rises.
This will be the harbinger of the next crash. However, we are years away from this scenario playing out in the traditional prime London market.
What we are seeing now is a correction in response to the numerous tax changes that have been announced in the last 18 months:
- The increase in SDLT
- The reduction in mortgage interest rate relief for buy-to let investor
- The additional 3% payable on SDLT for investors and second homebuyer
- The proposed changes to the tax regime for Non-Domiciles (the details are still awaited)If the market hadn’t corrected in the face of so many changes and uncertainty then I would be worried as “irrational exuberance” would have taken over.
It is also important to remember that the demand for London property is not just driven by the tax and investment case. For example, the vast majority of Non-Doms choose to buy property in London because not only is it an easy place to do business but also because it is exciting, fun and offers an exceptional
array of shops, restaurants, museums, galleries, schools, universities, etc. while also being politically stable and relatively safe.
The immense tax breaks they enjoyed were the icing on the cake. Yes, some will flee London because their entire focus is legal tax avoidance but this is the minority judging by my own conversations and also talking to various tax advisers and wealth managers.
Are they happy that they have to pay more tax? Obviously not. But it is not a catastrophe either (unless there is a surprise in the final plans).
Of course, you may have other concerns – the effect of a Brexit, for example. However, I am struggling to take a view on this. Both the yes and no camps put forward good arguments. The simple fact is a Brexit will be good for some parts of the economy and bad for others. It is typically crass that the choice we have to make is either yes or no. Surely there are several other options that could work to the benefit of all?
Nevertheless, whatever happens I find it very hard to believe that London and the UK will suddenly change dramatically and become a barren wasteland. Ultimately, the world will keep spinning and London, for now, will continue to be one of the great cities in the world.