11/03/2009 - Transactions return
by HO
Some commentators looking to call the bottom for the London market?
KINDLY SEE MARKET COMMENT AND OPPORTUNITY UPDATE BELOW
This month we have slightly altered the format by putting the target opportunities first. The properties we highlight each month are selling, as the updated attached list shows. Not always at the price that we target but this simply underlines the fact that demand exists for rare and quality opportunities. The general comment follows but for those short on time, the key information is now at the beginning.
Highlighted opportunities are;
Egerton Gardens, Knightsbridge, SW3 target price £2.8m
A large lateral penthouse extending to approx. 2,675 sq ft. in one of Knightsbridge’s best addresses offering superb views over communal gardens and the London skyline. The property requires refurbishment to create a stunning home.
Originally on the market at £4m. The flat has been withdrawn from the market having failed to sell at this high level. We have been told it could be bought for £2.95m and we believe a quick sale could be achieved at around £2.8m. The property is leasehold with a term just over 100 years remaining.
Elm Park Gardens, Chelsea, SW10 target price £1.25m
An excellent spacious 3 bedroom apartment (approx. 1,410 sq ft) in a popular Chelsea address. The flat needs some cosmetic improvement to achieve a rental in the order of 1,250pw.
The current asking price is £1.5m for the 107 year lease.
Rutland Gardens, Knightsbridge, SW7 target price £5m
An opportunity to combine two top floor maisonettes to create a fantastic 3,800 sq ft apartment within this private enclave. Rutland Gardens is approached through a 24 hour manned security gate and is one of Knightsbridge’s most exclusive addresses.
The completed property would have a projected end value in the region of £7.5m. The cost of the works would be in the region of £1m.
Old Park Lane, Mayfair,W1, target price £2.45m
A genuinely stunning apartment on the 6th floor of this smart, period portered block with far reaching views over Green Park with Buckingham Palace and the Houses of Parliament all in view.
The property offers two double bedrooms and a large reception room (approx. 1,440 sq ft). The asking price is a competitive £2.55m. There is currently much interest in this apartment.
Lowndes Street, Knightsbridge, target price £2.25m
A well laid out 2/3 bedroom apartment in the centre of Knightsbridge in a smart modern block with 24 hour porters. The property is well laid out with very little wasted space and therefore feels larger than the 1,238 sq ft that it offers.
The asking price has just been reduced from £2.6m to £2.495m for the share of Freehold.
Hyde Park Gardens, Bayswater, W2 target price £3.25m
A superb lateral 3rd floor flat with far reaching views over Hyde Park. Hyde Park Gardens is an impressive terrace of period houses set back from their own private gardens.
This apartment requires modernising but would create an exceptional 3,116 sq ft home. Anticipated end value would be in the order of £4.85m. The cost of refurbishment would be in the order £700,000.
Southacre, Bayswater, W2, target price £840,000
An excellent two bedroom flat on the 8th floor of a smart modern block (approx. 1,000 sq ft). The flat has superb views and offers well laid out accommodation.
Originally on the market at £950,000, a sale has just fallen through and we believe an offer just below £850,000 could be agreed for the share of Freehold.
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TRANSACTIONS RETURN
It is just over a month since the last bulletin. Back then I was holding back the urge to apply the headline ‘Buy London, because others are!!’. OK so it’s only 4 or 5 weeks on but the noticeable flow of activity last month has become a bit of a surge. We are seeing this ourselves on the selling front in that the two projects we have just completed in early 2009 (not truly expecting that a sale could be achieved at an acceptable level therefore assuming we would be holding them for some time) have been agreed at prices well above expectation. We have this week been brutally outbid on two apartments. We thought we were the ones who could spot opportunity in challenging environments, it turns out there are many others who have seen this emerging just as quickly.
Before I risk attracting the label of a being a deluded optimist, let me make it clear that in general terms I firmly believe that the broad UK property market is overpriced, further falls are going to happen and recovery will be a long time in coming. I am on record through these bulletins for predicting 30-40% falls across the board and I have even more pessimistic views on certain areas where urban regeneration invited mass speculation. UK INC is very sick having gorged on cheap credit and the property market has no immunity from the illness which has infected the stock market, financial services, car manufacturing and the rest.
However, For 15 years we have stuck steadfastly to a belief that prime London is a market that is driven by global fundamentals and, whilst very much connected to the UK economy, its unique appeal attracts funds and investment from all quarters of the globe for reasons beyond pure investment or typical economic rationale.
Having just spent a week with clients in the Far East, I am all too aware of the desperate house builders traipsing through key Asian cities looking to offload their overpriced offerings to ‘dollar rich’ buyers. When reading sales ads on arrival that start with ‘There has never been a better time to buy London property’ I was tempted to take the next flight home! What is clear however is that there are extremely good opportunities if one seeks them out and the list that I update each month (attached) proves that when these arise they sell come good times or bad.
WHERE ARE THE DISTRESSED SELLERS?
Unfortunately for those who have played a long waiting game and who feel the market is finally coming to them, the market appears woefully short of distressed sellers in the areas they want to buy. Whilst the papers are full of data reporting record rises in repossessions and job losses, the simple truth is that GOOD property sells in pretty well any market. Distressed sales come about when there are no buyers interested or able to buy or a sale is required in the shortest possible time frame.
In the early 1990’s spiralling interest rates resulted in many sellers looking for a fast exit. Today, low interest rates are not providing that extreme pressure. Without doubt there are many who need to sell and for those who bought badly in the first place, they are finding that the true value of their property is nothing like the figure they had in their head.
If Auctions are an indicator, then the results from the leading auctioneers such as Allsops, Barnard Marcus & Savills would show that buyer appetite is healthy and strong with over 80% success rate at their sales. Compare this to the early 1990’s when properties constantly failed to meet their reserve price.
Today’s low interest rates are easing pressure on sellers and stimulating interest from buyers with sizeable cash deposits. There is no shortage of buyer interest in the prime London market for the right property in the right locations.
WHY ARE PEOPLE BUYING?
The outlook for the global economy has hardly improved, stock markets have had several mini crashes since the start of the year, Governments are desperately pumping money in to the system to artificially inflate the economy, unemployment is set to spiral upwards and banks still aren’t lending……..and the good news?
Sentiment is nervous at best and generally remains negative for the short term. This increase in buyer activity is unlikely to herald the rumble of the approaching herd and therefore the beginning of a nice and steady upward curve. What I believe we are seeing is a spike in activity driven by factors discussed below. This will no doubt ease off to be followed by a period of low activity, followed by another spike, and so on until normality returns to the world’s markets.
It isimportant to point out that the properties that are selling are primarily GOOD properties at fair value. Fair value I would term as being around 25-30% off peak values and where a yield of 4.5% (against cost of finance at around 3%) is readily achievable. At certain higher price levels the yield is less of an indicator and the value is assessed more in relative terms of historic prices and rarity of availability. Quite rightly there is no demand for mediocrity or for property that quote prices that reflect yesterday’s boom.
Previously we have highlighted the 25% fall in nominal values together with the 25% devaluation of sterling. There is no doubt that prices effectively halving has had an impact in attracting overseas buyer interest. In addition to this would be the very low costs of finance and the noticeable appetite very recently for UK banks, and certain others, to lend to non UK resident buyers.
Further to the above and in talking to a broad cross section of clients etc. there are other newly emerging drivers. Whilst cash may be King (or God as some might say) it gives little in return. There is a growing consensus that we areheading towards an era of high inflation within the next few years. Cash will look vulnerable and property is one of inflation’s only true friends.
Finally, those who have looked at London over the years as a place to own a property, either due to children’s upcoming education, increased visits for business or as a straightforward investment for the longer term, can now see the opportunity to find the sort of property that meets their expectations. Anyone who knows the central Londonmarket at all realises that GOOD property is woefully short in supply. Today’s market is offering up such property and at fair value, and whilst others focus simply on nominal price falls sometimes it is the actual availability of the opportunity that is in fact the opportunity.
OUR OWN STORY
In discussing the property market, one cannot help but be drawn into broad generalisations in attempts to sum up a market which has such a broad range of sectors and sub sectors. Sometimes it helps to pick out one element, trend or area which serves to provide some form of barometer as to what is going on. In doing so it is best to focus where the evidence is known to be accurate rather than rely on third party data and the inevitable propaganda widely distributed.
To this end, we have conducted a review of our own business activity over the past 15 years or so. We obviously were feeling the surge in activity that the graph below illustrates but we wanted to see how this related to previous peaks and troughs. The basis for the graph below was to record both levels of transactions and appointments of new clients, i.e people appointing us with the stated intention to buy over the next few months.
The years are broken down into quarters and Q1 2009 is yet to fully run its course (time of this bulletin being early March) which further underlines the situation that we are experiencing.
This graph tells the story of our own fortunes over the years. I might make the point that it ignores various key areas of the business such as lettings, management, design, refurbishment and consultancy so it is not necessarily an insight on our P&L! However all the aforementioned do spring off the acquisitions we make and general market activity.
Our recognition that prices had overshot at the height of the market in 2006/2007, when prices went through the roof and buyers all around us seemed to completely lose their heads, shows in the significant drop. One of our consistently better periods was post the dot.com crash when there was a fair degree of nervousness in the market but we fervently believed that falling interest rates were the opportunity at that time. Many investors disgusted by the way they had been lured in to investing in to worthless new companies returned to property as an understandable and tangible asset.
Looking ahead we see a significant upturn based on the messages being received from our clients and those approaching us, the following is the feedback from my recent Far East visit (for those whom I met, I apologise for the paraphrasing however I believe this reflects the essence of our conversation!) ;
‘I think the market will be right for us in the second half’
‘I know one can’t call the bottom but I think 2nd half of 2009 is right’
‘We are sitting on $xxxm in cash and do not want to be holding such cash in 2 years from now’
‘The world is going to get a lot worse, cash is the only sensible thing to be in’
‘I see few opportunities in the world but London makes me comfortable’
‘I will be over in April and look to buy in the next six months’
‘I want to see the bottom before I buy, I know that may mean I pay more, but it may not!’
‘We have been waiting for years to buy, prices just kept going up. I don’t know how far they will now fall but I am not prepared to be priced out again. Thanks to the currency, 50% off is reason enough, as long as it is the right property’
‘We have no gearing on our property and we need to see it working better for us. Finance deals are now too attractive to ignore’.
‘The question for us is London or Hong Kong?’
‘We have been talking for years, looks like the time is about right finally’
‘I can’t see any reason to hurry’
‘If we can sell the investment flat in London, I would buy again for myself’
‘I will definitely buy this year, are you sure I can borrow at 3.5%?!’
‘I will sell one of the flats and probably look to trade up’
‘I will have cash by the end of the year and am keen to buy another’
‘I don’t see any end to this current crisis but inflation around the corner worries me. I am very heavy in gold and am thinking either HK or Singapore property in mid 2010’
‘We sold everything in London a few years back, we are coming over to look at opportunities this month’
‘I regret selling when I did as I know I will find it next to impossible to find the same again’
‘Where are the distressed sellers, surely there are distressed sellers? We are constantly being offered commercial buildings, what is it with the residential market in London?!’
‘We sense the second half of 2009 but will more likely have funds early next year’
‘I don’t see prices rising very quickly, but I said that six years ago. If we can get what we want we will buy this year’
‘London is a very tight market, we want to invest but we need you to find the right opportunity’
What is becoming abundantly clear is that there is this fairly recent consensus that the market will be at or near bottom by the end of 2009. If this proves correct then the buying opportunity is in the first half of 2009. Just this week we received Savills latest research bulletin and they would appear to be the first to predict a bottom in the prime London market.
In their words ‘It is arguable that most of the anticipated falls in prime London have already occurred’.
For those who are rightly wary of Estate Agents bearing good news, I would reiterate that Savills Research is broadly respected as the most objective within the industry and not simply a mouthpiece for their sales teams. They too draw the distinction between prime London and the broad UK market, the latter not expected to start its recovery for a further few years. Even the press are looking to switch the theme of their reports as the Evening Standard today illustrates with a heading ‘Buy, Buy, Buy’ as they focus on the surge of buyer interest.
It is tempting to start to talk about the world economy and hopes of recovery, but who knows the real answer and anyway the world is not short of opinions! We all agree I think that we are currently in a deep mess. What I detect however, similar to the time following the dot.com bubble bursting, is that there is for many people an instinctivereturn to assets that are easily understood and, ideally, tangible. There is the cash under the mattress brigade and then there are the forward lookers. The world will turn around, growth will return and London will again be ridiculously expensive (according to the Economist’s cost of living index, currently standing as a lowly 27th most expensive city in the world, thanks no doubt to the currency) Today the fortunate ones can buy a chunk of GOOD London property at prices that others, as well as ourselves, are clearly seeing as fair value…….or better.
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