BUYER CONFIDENCE FUELS MARKET
2013 dawned with a remarkably strong sales market, fueled by keen buyers from the UK and overseas and the tone established in the first two months left a lasting impression on the whole of the first half year. So far in 2013, the sale price of a one bedroom flat in the resale market has risen by an average of £3,000 per month.
Our offices agreed and completed on a high volume of sales across all locations at record prices during the first half of 2013.
From March onwards, we detected a reduction in sales enquires. Buyers in our markets are sophisticated and familiar with the vagaries of investment returns. When the headlines used in the press to announce residential trends become excitable to the point of hyperbole, our typical buyers retreat. It feels overheated. They can bide their time. We see no reason for this change of tempo to translate into a price correction however, since the supply of properties is limited and vendors of second hand properties will withdraw from the market rather than contemplate adjusting asking prices. Equally, when we bring new stock to the market, buyers respond quickly as soon as supply comes through on the website. To that extent, activity levels are stock driven. Our website and online marketing provide the platform to keep buyers informed.
The upshot of such a strong start to the year is that prices rose by between 5% and 6% in City and Midtown and by 2% in Docklands in the first half of 2013.
Several commentators have dared to use the B-word – Bubble – but in our view, this is not a fragile market at risk of bursting. The spiralling prices in the prime market have been driven by a real and long-term desire to invest money in the UK because of its reputation as a ‘safehaven’. Such investors are unlikely to pull out en masse unless there is a dramatic and unforeseen collapse in the UK economy and political system.
A more plausible scenario is that the interest of overseas investors will wane if the exchange rate becomes less favourable or yields become unattractive. UK buyers will continue to invest in residential property within Central London until the point that confidence is dented, possibly when interest rates begin to rise. This would slow capital growth but there is no reason to think it would prompt a race to exit the London Residential Market. Bubbles tend to be fuelled by debt rather than equity and the majority of buyers in the Central London markets today are affluent equity purchasers with deep pockets, who are more likely to sit out any lowering of prices rather than realise a capital loss on these income producing assets. For them, these are discretionary purchases – in other words, they are luxuries (investments) not necessities.
In fact, it is their status as luxuries that has caused so much controversy in the media, with stories of blocks in which almost all the flats are unoccupied despite (or because of) being sold for many millions of pounds. This is not the case in our markets. In Midtown, City and Docklands, many purchasers, overseas buyers included, have a genuine use for a home in one of the world’s leading global centres. Most of our buyers are secure equity investors buying property as pied-a-terres, buy to let investments, or as a home with backing from affluent parents. (See buyer profiles). Homes purchased by parents frequently find their way into the rental market eventually, once they are no longer in use by the owner’s family. Rarely do they come back to the sales market.
It is recognised that overseas buyers are attracted by London’s political stability, well-ordered legal system and economic security. It is ironic that weaknesses in the domestic economies of the Eurozone and strength in the domestic economies of the Far East are both driving capital to London.
The debacle in Cyprus in March, over tax on cash deposits, showed investors that anything is possible in Europe and has served to reinforce London’s brand as a safe haven. The EU’s treatment of Cyprus directly affected many Russian investors and opened their eyes to the fact that deposits of over £80,000 held in bank accounts, may not be secure. It was yet another big wake-up call for investors and a reminder that it may not be wise to leave capital assets in a bank. New York is also a beneficiary of these global forces, while France is excluded by the unsettling shifts in its political and tax regime.
There is no doubt that the Central London residential market has decoupled from rest of the UK and even from London’s own suburban markets. The relationship between average salaries and property prices, often quoted in the press, has little direct impact on markets where almost half of buyers are based overseas. The average deposit required to purchase even the most modest Central London residence is beyond the pockets of most young Londoners – in fact, most Londoners of any age.
UK buyers in City, Midtown and Docklands are generally drawing on capital reserves and the greatest incentive to invest is the low rate of interest available from cash deposits – such buyers tend to have a long term perspective because of the high costs associated with the initial purchase, including stamp duty.
We know from experience, that a downturn in value growth does not result in distressed sellers in City, Midtown and Docklands. Like West End owners, they think long term and hold on to their assets. The reality is that very few existing home owners are forced sellers and when they read that prices are rising above inflation, equities or salaries, the obvious choice is to retain their old property as a rental investment when moving to a larger home. The long run price trends for Central London residential values support that view.
Values have increased by as much in the first six months of 2013 as they did in the whole of 2012.
We are now in the fourth consecutive year of above average growth in the value of Central London residential property. Large segments of the London population are priced out of the market and the affordability gap is getting wider. Nevertheless, as long as there is strong demand from wealthy UK and overseas equity-led buyers, confidence remains high and the integrity of the market is not threatened. Despite rents softening, capital values are also underpinned by reliable demand for property to rent – as we explain elsewhere in the report.
Docklands benefits from greater affordability than Midtown and City and some parts of Hackney, (London Fields, Victoria Park and Hackney Wick) as well as most waterfront locations, have begun to look like very good value in comparison with areas at a similar distance from Central London and with comparable amenity. This is the result of vast improvements to the transport connections, and environmental improvements as well as the opening of Westfield Stratford and the proliferation of restaurants and cafes supported by a changing demographic profile. East London has become ‘more doable’ for many Londoners over the past decade and summer 2012 Olympics has cemented its new profile.
There is a difference however. Prices fell more steeply in Docklands than the other two markets between the summer of 2007 and the end of 2008, (by 19% compared with 13 or 14% in Midtown and City respectively). For that reason the growth achieved, if 2007 is taken as the base date, is significantly lower in the Docklands market. But over a 20-year period price growth has been remarkably similar in all three markets, as it is if 2008 is taken as the base date (see table 2).
In the 19 years since our records began in 1994, the capital value of a one bedroom flat in Midtown has risen by 442%, in the City by 445% and in Docklands by 426%. As ever timing is critical in property and during that period the differential in price between Midtown and Docklands has varied between 27% and 38%. Today it is relatively high, at 34% and the gap has widened over the course of 2013. This data demonstrates the rewards of patience in these markets.
In 1st half 2013, in our markets, the majority of properties priced at £500,000 or lower were sold to buy to let investors and second home owners, while the majority of sales over £1 million, were made to owner-occupiers.
Check out buyers profiles in tomorrows post!
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David oversees the Company residential agency departments and specialises in bespoke marketing and PR campaigns for new developments and individual properties. He is an authority on the London Property Market, regularly quoted by the national press. He heads the research side of the agency which provides detailed analysis of current market trends, sub market activity and the planning pipeline as well as trend markets.