04/09/2008 - House prices, interest rates, currency all falling.
by HO
The stars start to line up!
KINDLY SEE MARKET COMMENT AND OPPORTUNITY UPDATE BELOW
Last week the press had a field day as the Nationwide announced that house prices across the UK had shown their first double digit year-on-year decline since 1992. Barely a week later the Halifax produced their figures which ‘bettered’ the headline by announcing record year-on-year falls of 13%.
The press like nothing more than the excuse to use superlatives such as ‘worst’, ‘largest’, ‘biggest’ etc. and the UK housing data for August provided no shortage of excuses for them to do so. For those on the ground, which includes anyone attempting to sell in the current climate, these figures come as no surprise and, if anything, paint a brighter picture than the reality.
In order to understand this market correction, observers are having to look back in time to spot precedent and previous trends. For those who referred back to the early 1990’s (the worst housing crash since the mid 1970’s) they saw that nominal values fell by just 15-20% but, adjusted for inflation and taking in the 5 years or so that the slump dragged on, in real terms values fell by as much as 40%.
Today, as we have observed previously, the correction is far more rapid and we are likely to see average falls in nominal values of 20% at the very least. In the most hardest hit areas the decline will be in excess of 30%. The pace of these falls is catching all by surprise. Putting aside the fact that the data from the likes of Nationwide & Halifax is several months old, the dramatic fall in transactions (70% down on this time last year) means that the vast amount of property listed on Estate Agent’s books remain unsold. The sales data disguises the true adjustment in values which is required in order to see the greater majority of property currently being offered for sale finding buyers.
This market downturn is now moving in to a new phase. The past year has seen a credit freeze resulting in a massive reduction in sales volume, we are now moving towards a more ‘traditional’ economic slump. As the UK enters a period of recession we can expect unemployment to rise, falling wages in real terms and a suspension of house purchases driven by aspiration (trading up etc.). We see prices having already adjusted to a far greater level than the data reported by the likes of Halifax and Nationwide. We predict that the speed with which values are falling will slow significantly and the reasons behind this are as follows;
Exchange Rates
The rapid depreciation of sterling over the past few weeks is attracting the attention of overseas buyers. London will be the primary benefactor but so too will the main University towns and cities throughout the UK
Funding
We are starting to see signs of a more active lending market. This is nothing like the pre-credit crunch era but there are some reasonably attractive offers available for buyers with 20% or more to put down. We have recently been offered 4.99% on a two year discounted tracker deal on 80% LTV and 6.09% for Buy-to-Let funding.
Interest Rates
Expectations are for UK base rates (the highest of all the western economies) to fall by the end of this year. With house prices off by 20% or more, we can expect to see residential property yields exceed the cost of finance and a return to a sound long term investment rationale.
Economic outlook
The past few months have been characterised by a consistent wave of bad news aside from property. Fear of a possibility of recession is being replaced by an acceptance of the inevitable. With expectations of the bad news finally ending, a recession that will be painful but short and political change in the air, we predict that before the end of 2009 there will be talk of recovery and a noticeably more positive outlook.
Finally, I might make an observation on residential property as an asset class. An article in one of the Sunday papers last month ‘announced’ the death of buy-to-let. Their basic premise was that those who had bought in the last two years on 90% LTV had seen their entire equity wiped out. My response to this would be, firstly 90% finance was always a ludicrous level of gearing and secondly, anyone buying buy-to-let over the past two years will have had to ignore the fact that their yield failed to even match the cost of finance and therefore their timing was completely wrong.
As far as property as an investment goes, I would argue that the following remains a pretty compelling argument;
Assume £250,000 invested in 2002 on a £750,000 purchase.
By 2007 the value would have reached £1.5m
Assume the value then falls by 25%
The market value would therefore be £1,125,000
On the above debt : equity split, mortgage interest and outgoings will have been covered through rental income
Based on the above the £250,000 will have returned an annualised 17% per annum (having allowed approx. £50k in transaction costs)
Now compare your stock portfolios!
The following are current highlighted opportunities;
Eccleston Street, SW1 Circa £4.75m plus refurbishment
An extremely impressive period residence in the heart of Belgravia. The house extends to some 5,000 sq ft and its key appeal lies in the width of the property.
The current owner acquired it less than a year ago and has just been granted full detailed planning consent to refurbish the house in to a 4-5 bedroom principle residence.
The owner has personal financial problems and approached Obbard direct to try and achieve a sale so that he can exit with no loss. He bought the house privately off market.
The property needs around £1.5m to develop and has a potential end value circa £8.5m showing a substantial development gain. The market for these type of properties remains strong and therefore the projected end value at £1,700psf looks very achievable.
Cornwall Gardens, SW7 Circa £1.9m plus refurbishment
This low built house (approx. 2,200 sq ft) just off the square gardens came to the market earlier this year at £2.75m. The price was reduced to £2.45m in June.
The owner is extremely keen to sell and Obbard were approached by an intermediary who has told us that this could be bought for as little as £1.9m. The house requires around £550,000 to completely refurbish and has a projected end value at £1,400 - £1,500 psf showing a handsome profit.
Cranley Place, SW7 Circa £2.25m
This is a ground and garden maisonette with its own private garden in an extremely sought after part of South Kensington. The property offers three double bedrooms, three bathrooms and two large reception rooms. It came on the market at £3.25m in May and has now been dramatically reduced to £2.5m. We believe £2.25m may be possible.
Grosvenor Road, SW1 Circa £11m plus development costs
A rare development opportunity on the river in SW1. Plans exist to create 12 apartments with 12 underground car parking spaces. The total internal floor area equals approx. 15,250 sq ft (exc. Car parking). Planning has been granted but an incoming buyer could reconfigure for their own requirements.
Warwick Square, SW1 Circa £1.3m
A classic first floor apartment with a hugely impressive main reception room looking directly over the gardens. The property (approx. 1,340 sq ft) is currently arranged as three bedrooms but would be better configured as two bedroom suites.
The asking price has recently been reduced from £1.65m to £1.495m. This is a classic flat that is so often hard to find, the current market conditions are ideal to buy such property.
The following is an update on properties referred to in the last bulletin (7th July) that referred to market opportunities;
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Address
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Original Asking price
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Revised Asking Price
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Current Status
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Rivermead Court, SW6
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950,000
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850,000
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Sold @ £730,000
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Burton Court, SW3
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3,650,000
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n/a
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Withdrawn & let
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Onslow Square, SW3
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2,950,000
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n/a
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Withdrawn
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Benham House, SW10
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3,500,000
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n/a
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Available was u/o @ £3.3m
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Hyde Park Street, W2
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1,995,000
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n/a
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Available was u/o @ £1.875m
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Beaufort Gardens,SW3
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2,450,000
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2,100,000
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Available
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Campden Hill Gate, W8
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2,000,000
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1,850,000
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Sold @ £1.7m
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Palace Court, W2
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1,495,000
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1,250,000
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Sold @ £1.1m
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Chelsea RiversideSW10
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44,000,000
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38,000,000
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Sold @ £33m
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Suffolk Lane, EC4
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4,150,000
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n/a
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Sold - price unknown
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Old Queen Street, SW1
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10,000,000
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n/a
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Sold @ £7m
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Buckingham Gate, SW1
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7,000,000
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5,000,000
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Temporarily withdrawn
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Chapel Street, SW1
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5,500,000
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4,750,000
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Sold @ £4.75m
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