16/02/2010 - Uncertainty brings opportunity
by HO
2010 likely to be bumpy but this will throw up opportunities in London
MARKET COMMENT February 2010
Fear of the past replaced by fear of the future?
As 2009 slips out of our consciousness and the inevitable year end reviews and new year predictions are consigned to the bin, we can now start to get a feel for what 2010 really has in store and the key word seems to be uncertainty.
In September of last year we referred to ‘nervous optimism’ as the fear of past history was replaced with a sense of relief in the world at large having secured a narrow escape. As the specter of a 1930’s type depression diminished, the fear of the past was gradually overcome. Attention turned to the opportunities that the governments’ stimulus provided (cheap finance for those who could get it) and advantages to be taken from post Lehman market corrections and major shifts in currency values.
However having seemingly shaken off a repeat of 70 years ago, it seems fear is creeping back and this appears to be more about the future and heading in to the unknown. It doesn’t take much to find a bearish view on any part of the world these days. Whether this be on the anemic recovery in the US housing market, to expectations of defaulting PIGS in the euro zone, or finding similarities in China to Japan of the 1980’s…………..and that’s before we even get around to the UK budget deficit!
Much has been written about the surprising recovery in UK house prices in 2009. However, this recovery has been based on vastly reduced turnover. As ever, the data that is jumped upon attempts to apply a ‘one size fits all’ approach and therefore the Nationwide, for example, reporting that UK house prices rose by 8.6% gives a very generic view. Compare this, for example, with a recent Estates Gazette feature which splits the UK by region and shows house price movements between 2007 – 2009;
Edinburgh -1.9%
Glasgow + 0.1%
Manchester -17.9%
Leeds -17.9%
Newcastle -6.4%
Cardiff -19.1%
Bristol -7.0%
Southampton -13.7%
Tower Hamlets, London - 5.1%
Westminster, London + 5.5%
Anyone who is aware of the massive buy-to-let charade played out in the likes of Leeds and Manchester (as well as other parts of the country) and referred to in these bulletins, may not be surprised where some of the disparities lie.
In addition to sounding the warning sirens for off plan buy-to-let in urban regeneration areas of north England (and East London) we have also been consistent in our view of a stuttering recovery. Two steps forward, one step back was our phrase, some might call it ‘double dip’. Whatever term is applied, from an investment viewpoint, such fluctuations are where money can be made.
QE/Low base rates keep the plates spinning
There is no denying that quantitive easing and inter government efforts, for now, have kept the global economy afloat. If nothing else it has allowed time for the world to take stock, avoid outright panic, and hopefully adjust to new horror stories (Greece today) without running screaming for the hills. Although current fears of sovereign debt contagion starting in Athens could see the Greeks start smashing the plates.
One of the key by products of the Government’s stimulus has been the complete aversion to holding cash. The result being an appetite for holding assets that show some chance of providing a reasonable return over the medium term. This has clearly stimulated a new potential bubble in many markets. However, base rates appear set to remain at these extraordinarily low levels for some time and it is unlikely that cash and gilts will come back in favour for a while yet.
The rich/poor divide which our ‘socialist’ government of this past 13 years has overseen, indeed engineered, is likely to become further pronounced. The housing market of the past has been dependent upon extremely high loans to value of 90% plus (not to forget self assessment mortgages!) but today the opportunities are realistically restricted to the equity rich. A quick glance at this weekend’s best deals in the Sunday papers sums this up;
Type of loan Rate range Deposit required
Tracker Discounts 2.39% to 2.49% 35% to 40%
Fixed Rate (3 & 5 year) 4.19% and 4.64% 25% and 40%
First time buyer 4.69% and 5.39% 10% and 15% * the 4.69% being a bank rate tracker and the 5.39% a 1 year fix.
Economists and journalists may argue where housing affordability should be but the reality is that the average age of a first time buyer has been growing exponentially over the past 30 years as the baby boomer era saw large chunks of equity from mortgage free homes get passed on from one generation to the next. The current average age for a first time buyer is around 34 years old. Rather than see house prices collapse so that a 25 year old can afford his or her first flat, we are likely to see property ownership becoming more of ‘a rich man’s privilege’ and the private sector stepping in as professional landlords as buy-to-let evolves within the institutional world. The term ‘build to let’ has already become entrenched and house builders are likely to focus much of their activity in this direction (particularly in north England) and no doubt courting various REITS to partner with them. An example of this is British Land’s recent announcement of a £300 million residential fund, 10-15 years ago you would never see a commercial property company such as this consider residential.
Tax and other advantages in a high tax country
Looking beyond the broad UK housing market, we pointed out last year that prime London would lead a recovery, as it has done coming out of previous downturns, and this clearly appears to be the case. Prime London property was a significant benefactor last year from sterling’s decline against the dollar and most notably against the Euro. On the back of sterling’s decline Goldman Sachs chief economist Jim O’Neill was widely reported some weeks ago in predicting extremely robust growth for the UK in 2011 (even higher than Alistair Darling dared suggest), faster than the US and most of Europe. This coincided with a report from the Regional Development Agency which showed a healthy increase in London, as opposed to the rest of the country, in their closely watched PMI Index (Purchasing Managers Index) which is an indicator of growth based on a poll of 1,200 manufacturing and service sector firms in the capital.
Meanwhile, in just a few weeks time the UK’s top tax rate will rise to 50%. Add in national Insurance and someone on a relatively modest £150,000 a year will soon be paying Gordon Brown (or George Osborne possibly after May 6th) close to 60 pence in the pound. Much has been reported about companies moving out of the UK (notably Hedge Funds) but the truth is that this has been limited to a vocal few and more on a point of principle as tax payments from such entities are rarely anything close to where the Government would want them to be.
As the UK citizen takes it on the chin, the UK offers non residents a complete tax haven through property ownership. Free from Capital gains tax and able to offset all legitimate costs against income (mortgage interest, service charges, management fees, letting fees, furniture depreciation, maintenance etc.) property ownership in the UK does in fact present quite a compelling argument from a tax point of view for a non resident buyer. Add to this the long standing appeal of a politically stable environment, education opportunities, cultural and social opportunities, language etc. it doesn’t take much to see demand pick up when the further ingredient of a weak currency is added to the mix. The result this past year has been a noticeable influx of buyers from Europe (in particular Italy and Germany) the Sub continent, Far East (in particular Malaysia & Thailand) and South Africa.
The UK, and therefore London in particular, has come in for quite a bit of stick recently. High taxes, crippling budget deficit, rising unemployment, bloated public sector etc. Read the Daily Mail and you can add in a far more salacious list to go along with the ‘broken society’ headline. However, it was refreshing to read an independent report recently undertaken by Oxford Economics commissioned by Savills. Accounting for 19% of UK GDP, the study focused on London and its future prospects.
Whilst recognizing that certain cities around the world will grow and develop faster as certain emerging economies motor ahead, the report focused more on London as it was placed amongst comparable cities in the western world. Within the report it spoke of a ‘virtuous circle’ that was ‘the existence of a large, well-resourced and talented ‘cluster’ of financial and business services – and the associated pool of capital – which (sic) makes for a highly-productive economy attractive to business of all kinds.’ Alongside this were the long standing attractions that has helped London become the city it is today; ‘a regulatory system allowing flexibility, a moderate tax burden by west European standards, connectedness to the EU and other markets, the English language, the respected legal system, relative lack of corruption and time zone amongst other things’. Just as importantly it goes on to highlight the importance of cultural factors, ‘the entertainments and heritage on offer, the welcoming cosmopolitan atmosphere, its physical, cultural, historical and linguistic links to other countries around the world’.
In looking at the rise in Asian markets, the report points out how London and London based firms specifically stand to benefit thanks in large part from the UK’s historical and cultural ties.
In summary the report predicts that growth in London will, in the medium term, return to the ‘very strong performance seen over the past decade or so prior to the recession’.
The only certainty is uncertainty.
I started by dismissing reviews and predictions for this year and last. However, one has to look ahead and 2010 is likely to be a rocky road. It is quite likely, indeed more than likely, that UK house prices will stagnate if not fall back this year and we do not expect anything like the growth in prime London that we saw last year, although we definitely see the year ending in positive territory, albeit just. Along with the research departments of Savills and Knight Frank, we can see a sharp improvement next year and beyond. This is based on a very obvious pent up demand for prime residential (although the prime market has shrunk back to more recognizable locations) and an improving rental market showing a gradual yield recovery. Meanwhile, we are seeing very clear signs of more supply coming to the market and this bodes well for a sensible balance of supply and demand and opportunities to buy well in a nervous and competitive market. What is certain however, and this has been the situation ever since I started in this industry 25 years ago, is that there will never be enough really good properties in the best locations. How many of these come to the market in a more buyer friendly environment remains uncertain.
Herewith example target acquisition opportunities;
Please contact us for information on live opportunities.
HAPPY NEW YEAR TO ALL OUR FAR EAST CLIENTS AND WE WISH YOU ALL THE BEST FOR THE YEAR OF THE TIGER
Hugh Obbard
Managing Director
OBBARD Ltd
The Yacht Club
The Belvedere, Chelsea Harbour
London
SW10 0XA
Direct Line: +44 (0) 207 349 8921
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Obbard Concierge Service Tel: 020 7479 3508
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