30/06/2010 - An age of austerity
by HO
The new loalition looks to balance the books as overseas buyers still hold an advantage
MARKET COMMENT JULY 2010
AN ‘AGE OF AUSTERITY’ IN THE UK STARTS WHILST OVERSEAS BUYERS STILL HOLD THE ADVANTAGE
We left a deliberate gap between our last update during the run up to the UK general election in April and this bulletin. The election result, whilst intriguing, initially provided few clues as to which direction the country was headed. In the immediate aftermath of the result (some 5 days after the polls closed) the question mark over the viability of a Lib Con (left/ right) coalition hung heavy in the air. Barely had the polling booths packed up their banners before a scandal hit with the resignation of the Chief Secretary to the Treasury, one of the key coalition players tasked with the job of reducing the massive deficit. Despite this, over the past couple of months there appears to be a general mood of support and goodwill towards the UK’s first coalition Government since the second world war. Most Governments of course enjoy a honeymoon period and the first real test and opportunity for this government to show its true colours came with the emergency budget on 22nd June.
The budget was the first real chance to understand what exactly this coalition meant for the country. It would seem clear that, however the Government’s enemies may wish to spin it, this budget was both cleverly pitched to the UK electorate and broadly supported by the markets. Since the budget sterling has strengthened beyond £1.5 to the dollar and £1.23 to the euro, the G20 have recently acknowledged the UK government’s ‘lead’ in tackling the debt crisis that affects all the richest western nations and even the Euro leaders are feting eurosceptic David Cameron following Barrack Obama’s ‘pat on the back’ in response to the measures taken in the UK budget.
Capital gains tax
Putting aside the broad detail of the budget, for our clients and the market sector that we focus on, all eyes were on Capital Gains tax and any attempts to alter the position for non domiciles or non residents.
The Labour Government’s slightly bizarre decision to reduce CGT to 18% in late 2007, then announcing a 50% top rate income tax last year, was inviting investors and businesses to skew their earnings in a particular direction and undoubtedly the property market was more active over the last year as a result of this. In increasing CGT to a flat 28% for resident high income earners, the new Government have chosen a compromise position well short of the full equitability with higher rate income tax that had been anticipated by many. Meanwhile, the exemption of any CGT for non residents and non domiciles remains and so one of the UK’s key attractions for property ownership continues.
As an aside, the Government are clearly looking to try and simplify the tax situation, as they had promised, and this means that the old taper relief system on CGT has not been brought back. In practice this is not so harmful as in the old tax system of 2-3 years back when CGT matched the top rate of income tax (then at 40%) as CGT was only reduced to a minimum 24% once taper relief had been fully applied to high income earners.
Stamp Duty Land Tax
The government made no attempt to abolish Labour’s April 2011 increase in SDLT from 4% to 5% on homes costing over £1m. Transaction costs in the UK are nudging those of our European counterparts but thankfully the conveyance process remains reasonably swift and lacking in complexity enabling our market to be relatively liquid. However, the increase in SDLT is likely to see the number of properties owned via SPV’s grow. With so many overseas investors/owners, accounting for around 50% of transactions at the £1m plus price bracket in central London, we can foresee many more corporate transactions taking place. Already this is very commonplace and of course these transactions are not included in most property market data and so remove quite a chunk of market evidence at the upper end of the market from the statistics.
With no CGT on principle homes or for overseas owners, coupled with the ability to offset all outgoings including mortgage interest against rental income for income tax purposes, the UK continues to be relatively tax friendly for property owners.
Interest Rates
Having handed over responsibility for economic forecasting to the newly formed Office of Budget Responsibility, the previous growth projections of the last chancellor of the exchequer have been revised down ( from 3.25% to 2.6%). The budget contained important changes to corporation tax and encouragement for small businesses and it is a stated aim of this Government to see a private sector led recovery. It appears evident that interest rates are going to have to be maintained at these very low levels for some time yet in order to help nurture the planned recovery.
With base rates remaining at such lows, we see much of the same over the next 12 months in so much that over the last year and a bit we have seen an aversion to holding cash and a desire to invest in assets that are seen as real and offering both medium term growth and short term capital preservation.
Housing supply
The UK faces a long term problem of a critical housing shortage. A fast growing population and more single parent families are creating a major problem. With few new council houses being built (council housing now accounts for 18% of UK housing, down from 26% in the late 1980’s) and mortgage lenders courting only those with sizeable cash deposits, the problem is being greatly exacerbated.
An interesting new addition to the Governments statistics, courtesy of the Office for Budget responsibility, is a Government forecast for UK house prices. The next four years projections are as follows, with inflation figures in brackets;
2011 1.6% (1.6%)
2012 3.9% (2%)
2013 4.5% (2%)
2014 4.5% (2%)
The current year is expected to see growth at 5.9% with inflation running at 2.3%.
The budget offered nothing significant to address the supply problem and with a continued imbalance of supply versus demand, it is not hard to see UK house price growth year on year running well ahead of inflation. The broad nature of these statistics does of course disguise huge regional variations. One only has to compare the public sector dependent North East to the London linked South East to see where such variances can be quite dramatic.
Regional differences aside, the reality is that the divide between equity rich home owners and those priced out of the housing market is likely to grow exponentially. To a large extent we have already been experiencing this in London for many years. As London has grown as an international base and financial centre, the massive influx of foreign buyers from South East Asia, Europe, Middle East and the Sub Continent have seen property prices grow far in excess of earnings and well ahead of the UK national average. Leading commentators predict on average 7.5% growth per annum for prime central London over the next 4 years.
On the back of this, aided of course by the introduction of buy-to-let finance in the late 1990’s, a very sizeable private rented sector has developed and evolved. Gone are the Rigsby type landlords and tatty private homes rented whilst the owner does a stint abroad, and in its place is a broad selection of quality presented and managed investment flats servicing both local and international tenants.
We believe, as we have said before, that the broad UK residential rental sector is going to grow rapidly to meet the demands of the equity poor but salary secure. The average age of a first time buyer now stands at 37 years old and new entrants to the market are doing so primarily thanks to the ‘bank of mum and dad’ most of whom have been able to pay off their mortgages and have equity to pass on. The main players in the growing private rented sector are likely to be large corporate house builders as they focus on ‘build to let’ schemes. They will be looking to the institutional market to raise capital. Meanwhile, the prime areas of central London and certain pockets in the South will continue, as they have done for decades, to act as magnets for spare capital as they offer relative safe havens with little in terms of downside.
The immediate outlook
In the run up to the election and through the summer, there has been steady but modest increase of new stock coming to the market. As ever there is a dearth of real quality property at sensible value but the market is definitely in less of a critical supply drought. Savills research puts prime central London house price growth at around 12% up on this time last year but predict that that this may fall back by around 4% between now and the end of the year.
Meanwhile, the rental sector has seen a strong improvement over the year and rents sub £1,250pw are back to the levels last seen in 2007. There are also signs of bigger budgets returning but the £2,000pw to £5,000pw bracket is still well down on the peak prices achieved. Gross yields are typically around 4% for sub £1m properties and 3.5% in the £1m to £2.5m range. Shortage of rental stock in prime areas, with little new supply coming on stream, bodes well for yields in the foreseeable future.
Despite the generally positive response to the budget by serious commentators (IFS, CBI, Economist etc.) and leading broadsheets, certain elements of the ‘popular’ press have tried to stir up negative feelings and they may well continue this line with the upcoming VAT rise to 20% and other bitter medicine announced in the budget being felt in the latter stages of the year. If sentiment turns in the broad domestic market, we may well see more choice on the market across the board which means more competition amongst sellers and therefore the next 12 months could well present an opportunity for the canny buyer.
Herewith example target acquisition opportunities;
Queensgate Gardens, South Kensington,SW7 Target Price £1.75m Guide Price £1.95m
Off market - penthouse
With views over the garden square and a glorious terrace, this 2/3 bed apartment is a gem. It requires updating and is best reconfigured as a large 2 bed, 2 bath apartment. The building itself is very grand with well presented common areas. The owner is looking to sell off market. The GFA is approx 1,300 sq ft and the flat has a share of freehold.
Holland Park, W11 Target price £925,000 Asking price £995,000
Close to 5% potential yield
A very smart block on Addison Road within a short walk of all the excellent shops and amenities on Holland Park Avenue. The flat would achieve a rental of around £875pw showing a potential gross yield of 4.9%
Vicarage Gate, Kensington, W8 Target Price £1.35m Guide Price £1.45m
Off market – great volume
A beautiful First Floor 2 bedroom apartment with large south facing balcony/terrace running along the full frontage. The flat is in need of updating and is in a very well presented building. Once refurbished, the expected rental would be in the order of £1,150pw.
Arlington Street, St James’s, SW1 Target Price £5.25m Asking price £6m
Family apartment next to The Ritz
A genuinely rare chance to acquire a large (approx. 4,000 sq ft) apartment adjacent to the Ritz Hotel. The property offers 4 bedrooms, 5 bathrooms, 2 reception rooms all on one floor in an impressive block with 24 hour porters.
Boltons Place, South Kensington, SW10 Target Price £2.65m Asking price £2.695m
Period conversion, with porter, parking & access to gardens
Just reduced from £2.95m, this 3 to 4 bedroom maisonette requires refurbishment to create a beautiful family apartment behind a secure gated entrance adjacent to some of London’s most expensive private homes in The Boltons. The price has just been reduced and offers have already submitted close to our target price of £2.65m.
Queens Gardens, Bayswater, W2 Target Price £1.15m Guide price £1.25m
First floor with balcony & garden views
A newly refurbished first floor 2 bedroom apartment with views over the square gardens. Queens Gardens is one of the fastest changing locations just north of Hyde Park and values are fast catching up with those of Kensington, Chelsea & Notting Hill.
The Bromptons, South Kensington, SW3 Target Price £1.35m Asking Price £1.35m
Priced for quick sale
A great two bedroom flat on the 3rd floor with a stunning 600 sq ft terrace in this very sought after period block which was converted by Northacre in the late 1990’s. The development has superb 24 hour porters/concierge, gym, swimming pool and the flat comes with its own parking space. The flat has a share of freehold.
Lancaster Gate, Hyde Park, W2 Target Price £4m Asking price £4.75m
Family apartment with parking and stunning views across Hyde park
Placed on the market earlier this year at an ambitious asking price, there is now the chance to agree this beautifully refurbished 4 bedroom, 4 bathroom flat extending to approx. 2,670 sq ft with its own designated car parking space by the main entrance.
Queens Gate, South Kensington, SW7 Target Price £5m Asking Price £5.75m
Breathtaking apartment
A first floor lateral apartment of extraordinary scale with stunning views of the National History Museum. Originally built for the Prince Regent around 1840, these buildings offer some of the grandest space in London. The apartment offers 6 bedrooms and 6 bathrooms. Extending to approx. 3,670 sq ft. The main reception room, as grand as you would see in a stately home, has 18 foot ceiling heights and leads on to a 430 sq ft terrace. The property is now in need of updating but offers a wonderful opportunity to create a stunning home.
Regency Street, Westminster, SW1 Target Price £8m Asking Price £8.5m
Freehold block of 14 apartments
Comprising 11 two bed flats and 3 three bedroom flats with secure underground parking, this freehold block is currently producing an income of £344,000 pa. It represents a rare opportunity to acquire a strong income performing residential block in a very central location.
Hugh Obbard
Managing Director
OBBARD Ltd
The Yacht Club
The Belvedere, Chelsea Harbour
London
SW10 0XA
Direct Line: +44 (0) 207 349 8921
Mobile: +44 (0) 7774 981 071
Switchboard: +44 (0) 207 349 8920
Fax: +44 (0) 207 351 6702
Obbard Concierge Service Tel: 020 7479 3508
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