06/02/2009 - Buyer enquiries and busy lawyers
by HO
The new year heralds a the return of activity after a moribund 2008
KINDLY SEE MARKET COMMENT AND OPPORTUNITY UPDATE BELOW
In getting my thoughts together for this bulletin, I had a nagging feeling that I was at risk in attracting reactions of disbelief from some quarters. In looking at what to report, I couldn’t help but see a growing number of positives, whilst being all too aware that the media meanwhile is full of negativity. To be fair such reporting is understandable as we read about 250 year old names such as Wedgwood going bust, Honda and Nissan closing or mothballing its factories and Linklaters axing 270 of its associate partners and support staff. There will undoubtedly be much more to come and I think everyone is in agreement that the UK economy is going to get far worse before it gets better.
Stock markets are often prone to false dawns or ‘dead cat’ bounces but it is rare that property see such phenomena. In certain parts of the world property seems to trade more like a share and can therefore see sharp rallies and dips, but in the UK there is a cumbersome process of conveyance due diligence, landlord consents and licences. This means that property transactions take time and are less prone to spontaneous movement.
Before turning to the positives alluded to above, it is important to be reminded that these bulletins are focused primarily on activity and expectations within the central London residential market. The press, for whom most rely on for their information on current market conditions, refer in the main to data either from Nationwide or the Halifax. These two make up the bulk of the UK mortgage market and therefore their statistics are a pretty fair barometer for the broad domestic housing market. We have drawn on them ourselves to comment on the market as a whole towards the end of this commentary. Beyond these two, the most referred to industry commentators are the RICS who canvass their members and Savills who have the closest thing to a truly objective research department within the industry. In addition are of course all the various economists, analysts etc. who present a truly mind boggling set of differing theories!
So to the positives;
Transactions
Aside from central London estate agents who have most definitely started the year with a smile, the most relieved parties in January appeared to be conveyance lawyers. The back half of 2008 was truly dire and we detected a palpable sense of relief from the lawyers with whom we have been speaking to as they reported that transaction levels were quite clearly improving and deal flow returning.
Our own experience supported this with transactions in January on a level last seen in 2004.
Enquiries
It is very obvious that the weak pound is stimulating significant levels of interest in the London market. Estate agents talk excitedly about Italians popping over on a weekend and US investors enquiring about expected levels of rental income. We even have an offer on one of our projects from a Japanese investor and the last time I saw that was in 1986!
Our own experience has seen a dramatic spike in both enquiries for our services and new clients formally engaging us. It has been most pleasing to be hearing from many past clients who have been getting back in touch with the intention of ‘doing it again’.
Finance
There seems to be a myth that bank finance has disappeared. This may be true if you want a 90% mortgage on a new build unit in Salford but certain lenders are actually keenly touting for quality business. The one caveat I would add is that the banks are taking a long time to check and process all the paperwork! In general terms 70% is the maximum LTV but then we have never advised borrowing more than this at any point over the past 15 years.
The following gives details on one example of what is on offer and available to UK residents, expats or non residents.
Fees & Cost of Finance
The average Lender fee will be 1% of the loan with an extra 0.25% if the property is to be bought in an SPV.
The interest is generally charged 1/4ly in arrears and will be from 1.99% above base.
Applicants
Minimum age 18.
The age of the borrower at the intended maturity date of the loan should not exceed 70 years old (or, if lower, the official / intended
retirement age).
Loan Purpose
Purchase / remortgage for the following purpose:
• Second or holiday homes for the applicant's own use, secured by the same property.
• Remortgages to uplift existing mortgage borrowing with another lender.
• Buy to Let / Investment
Loan Size
The minimum loan size for all new applications is USD150,000 or currency equivalent.
The minimum loan size for all Further Advance applications is USD50,000 or currency equivalent.
**No maximum stated
Income
Acceptable sources of income include: Gross basic salary, mortgage subsidy, guaranteed shift allowance, guaranteed allowance, guaranteed
overtime, guaranteed bonuses, pension, 70% of annual gross rental income and interest from deposits, securities.
The main applicant must have been in the same permanent, salaried/waged, full time employment for at least 12 months.
Applicants who hold a shareholding of 50% or more in a public/private or family business will be treated as self employed.
A fully completed income and expenditure analysis must be completed for each application and forms part of the application form.
The following commitments are all taken into account: all mortgage payments, mortgage related assurance, mortgage repayment insurance,
rent, hire purchase, loan(s), credit card / store card / mail order balances, alimony and any other regular credit repayments.
All monthly financial commitments must not exceed 50% of net monthly income (40% for Dubai)
Sole Applications Joint Applications
5 x Sole income 5 x Joint incomeFlorida, Nevada, Or
roperties
Security
First legal charge or mortgage over the security. Properties must be freehold, fee simple, strata title (or equivalent) or leasehold.The Property must
• Within selected areas of London, the lease must have a minimum of 30 years remaining on
maturity of the loan
• Be in a good, marketable condition
• Be used solely for residential purposes (No business use)
• Be of traditional construction
• Be made of traditional materials
• Be recommended by our approved valuers
Other Information
Letting / renting the property: No additional charges or increase in interest rates apply, however, tenancies or lets beyond certain terms will
require our formal, written authorisation and lower loan to value limits may apply.
Loan Term: Up to a maximum 30 year term subject to age requirements.
Repayment: Quarterly in arrears.
Growing consensus on where the bottom lies
We all know that calling the bottom is a mugs game. However in reading the various press articles and research data being produced, one starts to see a merging of opinion pointing towards the UK residential market falling 30% from peak. As I write the general view is that UK house prices are around 20% off from their peak of Q3 2007. Nationally, long term house price to earnings ratios have stood at around 4x. As of December they stood at 4.44x (last seen in April 2003) having peaked at just under 6x in July 2007 (source – Halifax) . A further 10% fall in prices will see price falls overshoot their long term price earnings ratio.
In listening to expectations of longer term investors, and taking in to account the views of those making enquiries and our existing portfolio investors, there seems to be a degree of comfort with gross yields at 5% and cost of finance at around 4% in central London.
The year ahead
I suspect that by the middle to third quarter of this year the attention will start to turn away from the question ‘how much further can prices fall?’ to ‘when will they ever get back to their previous high?’. Psychologically this already lies behind much of the angst surrounding house prices. The former I believe will cease to be the pressing question because we will see prices regularly reported to be off 25% at the very least and in areas where speculation was rife and values grossly over inflated at the outset, examples of values off at unprecedented levels at maybe 40-50% discount to peak (I am thinking urban regeneration projects in the north and parts of east London - be prepared for developer’s promises of guaranteed 7%-8% yields and be very wary!). Price falls will slow sharply and projections of further catastrophic falls will reduce to a trickle. Journalists and headline seekers will start to turn away from thrashing a tired old line and look for a fresh story.
The second question concerning prices recovering to previous levels is of course fairly irrelevant for those looking to enter the market. I believe banks will start to feel a bit more comfortable with valuations as they see historical price to earnings ratios return and pressure to start lending following the various government bailouts will begin to translate in to a noticeable pick up in mortgage lending. 2009 will be seen as the year when first time buyers returned but broad sentiment throughout the UK will remain very weak in to 2010 due to prevailing job insecurity.
As the levels of repossessions start to subside, the press will turn their attention to the next level of victims of the boom, those who bought at the peak but have managed to hold on. I can clearly imagine that there will be predictions of people having to wait half a generation before they are able to climb out of negative equity. As ever things may not be as bad as the worst predictions but the climb back up could be long and arduous.
Prevailing poor sentiment in the City will continue to temper domestically driven demand for London and the South East but this will turn around quite rapidly at some point and I envisage a fairly sharp initial spike in prices when the bottom has been reached. This will be followed by a more gradual upward curve whose shape will ultimately be dictated by the nature of the recovery for the UK economy. I have no doubt that when the curve does turn upwards, price rises will be more modest than the average 12% pa experienced through the last 10 years or so (or possibly even the 8% pa since the mid 1970’s).
However an average growth of 5% per annum on a 50% geared investment showing a 5% yield on 4% finance, will provide a return on cash invested in excess of 150% over 10 years, and in times like those we are facing now, a return on such a solid tangible asset should not be ignored .
Meanwhile, For London and possibly a few other specific locations where overseas buyers are historically active (such as some leading university cities), the weakness of sterling should not be underestimated and this alone could precipitate a surprising rally in prices in the short term as illustrated by one of the leading articles in last Friday’s Evening Standard and the jump in ‘under offer’ signs appearing in January.
Highlighted opportunities are;
Kensington Court, W8 target price £1.6m (inc lease extension)
A large lateral apartment extending to approx. 2,306 sq ft. Currently on a 27 years lease but available with a 90 year extension.
This apartment is a probate sale and a buyer was found before the property was formally marketed. The buyer is not performing and there is an opportunity to acquire this magnificent apartment and create real capital gain. Properties sell for over £1,500psf in and around Kensington Court, we have done our figures on a resale of £1,250psf and this shows an IRR over one year of 40% on gearing at 70%.
For those who believe prices may soften further, buying just the short lease (circa £950,000) could be a hedge against further price falls as the cost to extend the lease (circa £650,000) could reduce if prices do slip further.
Kingston House South, SW7 target price £2.2m
A 7th floor apartment with superb west facing views over the adjacent garden square. The property extends to approx. 1,612 sq ft and offers two bedroom suites, superb entertaining space, attractive balcony looking over the gardens and a small study. Whilst well presented, it has been lived in for a number of years and therefore would benefit from refurbishment. The asking price is £2.5m.
Kingston House is an extremely popular portered block in Knightsbridge close to Hyde Park with underground parking available to lease.
Seymour Place, W1, W1 target price £600,000
A perfect central pied a terre being sold by a bank in repossession. Currently arranged as 3 bedrooms it works best as a two bedroom apartment. This is an attractive period block just to the north of Oxford Street. The lease is 107 years and the flat extends to just over 800 sq ft. The asking price is £625,000.
There is much interest already in this apartment.
Blenheim Crescent, W11 target price £2m
This house came to the market last year for sale and rental and it received three rental offers. The owners agreed terms with a tenant who has now given notice.
It is an extremely well presented house with the possibility of adding a further floor. Asking £2.85m for the freehold, the owners now need to sell.
Lansdowne Crescent, W11 target price £1.6m
A well presented third floor apartment with a glorious roof terrace and conservatory. Lansdowne Crescent is one of Notting Hill’s premier addresses and the stunning views from the terrace makes this property stand out. The original asking price of £2.25m was reduced in November to £1.975m. The GFA is 1,451 sq ft exc the terrace.
Park Gate, NW1 target price £1.35m
An attractive small development of 9 units just north of Regents Park, close to Primrose Hill. Two three bedroom units remain asking £1.55m reduced from £1.85m. Both are circa 1,550 sq ft. This is a private gated development with secure underground car parking. We believe the developers are keen to take offers.
Lower Belgrave Street, SW1 target price £675,000
A 1,450 sq ft maisonette in the heart of Belgravia being sold by the Grosvenor Estate on a new 125 year lease. The property is in need of a complete refurbishment (cost circa £450,000). The maisonette is above an estate agency and next to a small local pub, the opportunity here is for a rental investment.
Once refurbished the rental would be around £65,000 pa gross and show a NET yield after costs around 4.5%.
FOCUS ON WANDSWORTH
As mentioned in earlier bulletins, we see a very compelling opportunity in this specific part of London, particularly for investors with smaller budgets or preference to spread their investment over several properties.
The Borough of Wandsworth, along with central Docklands, assumed ‘Prime London’ status a few years back when they both started to be included within the Prime Central London indices of the likes of Savills and Knight Frank. Both areas saw property values rise sharply as a direct result of the financial services boom and growth in the City. Whereas Docklands catered more to ‘young professionals’ Wandsworth attracted the family market as well as singles and young couples. Often referred to as “Nappy Valley” because of the high concentration of young families, the area is singled out for its very high standard of local and private schools and in recent years the opening of an international school.
Communications to the City are excellent and the area now has a feel more akin to places like Notting Hill in view of the large number of up market restaurants, specialist shops and the growing international make up of owners and tenants, most notably European. The other key draws are the two large Commons (Clapham & Wandsworth) which provide acres of open space.
Unlike traditional prime areas (Kensington, Chelsea, Westminster etc.) where much of the stock is owned by cash rich foreign buyers, Wandsworth is exposed to the cold winds of the domestic slow down. Owners are typically quite heavily mortgaged and therefore pressured/distressed sellers are easier to identify. Wandsworth offers an opportunistic buyer a degree of choice and an environment where genuine cash/finance backed buyers hold the cards.
Looking beyond this current credit crisis, Wandsworth is set to rebound strongly. Particularly at a time when schooling is ever more an issue. It is no coincidence that the up market agents like Savills, Knight Frank and Cluttons all opened offices in this area in the last couple of years and predict these offices to be up with their leading fee earners in the years ahead.
Occasionally property in the area presents the opportunity to add square footage by converting a loft, digging out a basement or filling in a side return. It is increasingly rare to find property in more central locations where planners will permit you to add further square footage and thus create clear additional value.
Attached, are some indicative examples of interesting opportunities (not forgetting that asking prices are always to be negotiated!).
Flats
1) Longbeach Road SW11 Asking £450,000. 1020 square feet. 3 double bedrooms, terrace, own front door, lateral space. Short walk to Clapham Junction (mainline) and Clapham Common.
2) Shelgate Road SW11 Asking £475,000. 820 square feet. 2 double bedrooms, spacious reception, roof terrace, short walk to Clapham Junction (mainline) and the amenities of Northcote Road.
3) Harbut Road SW11 Asking £415,000 854 square feet. 3 double bedrooms, 2 bathrooms, 2 terraces. Short walk to Clapham Common and Junction (mainline).
Houses
1) Alma Road SW18 Asking £935,000 2135 square feet. 4 beds, 3 baths (2 en suite), study, off street parking. Excellent schools nearby. Wandsworth Town Mainline Station.
2) Rosehill Road SW18 Asking £1.1m (Reduced from £1.5m) 2468 square feet. 5 beds, 3 baths, built 8 years ago by leading house builder (in period style). In the catchment area for one of the best local schools. Short walk to Wandsworth Common and Wandsworth Town Mainline station.
3) Gorst Road SW11 Asking £1.75m but openly would take £1.45m (was under offer late last year at £1.9m). 2787 square feet. 4 beds, 2 baths with potential to add another room. One of the most desirable streets in the area, just opposite Wandsworth Common and a short walk to Wandsworth Common Mainline Station. Excellent Schools nearby.
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