03/07/2008 - A year on from the sub prime meltdown
by HO
UK house builders in dire straits.
KINDLY SEE MARKET COMMENT AND MARKET OPPORTUNITY UPDATE BELOW
As we approach the first anniversary of the sub prime crisis in the US and the ensuing credit crunch, the UK property market has entered a darker period. As banks have withdrawn their funding and confidence in the markets as a whole evaporates, the level of transactions is at a 20 year low and cash backed buyers are finding that they can call the shots in many cases.
The above is however a very generalized statement as it refers to the broad UK residential market and disguises the many regional and local variances. Looking at the UK as a whole, what is of particular interest is the dire situation for UK house builders. Just this week Taylor Wimpey, one of the UK’s larger house builders, failed to raise the necessary extra cash from shareholders and institutions to help bail them out. The Government’s housing minister states that the UK needs to build 240,000 new homes per annum to keep pace with demand and ease the supply imbalance. The reality is that the figure has been running at nearer 80,000 per annum and this looks likely to drop significantly as shares in house building companies nose dive. Ultimately this is good news for cities such as Leeds, Manchester & Liverpool etc. as the mechanics of supply and demand eventually help bring these markets back in to line. However, these locations have seen the height in overzealous speculation and therefore values will have to continue to fall significantly to match owner occupier affordability (or offer yields sufficient to tempt back bruised landlords) and, of course, the banks will have to return to lending along the lines of traditional mortgage lending.
The residential property market is ultimately driven by supply and demand supported by the availability/cost of financing. As has become abundantly clear, the issue today is the availability of, or rather the lack of, finance. Demand remains strong and only in certain areas are there signs of significant over supply. A weakening economy will see demand reduce but with the cost of renting at such high levels, as soon as the banks open the lending taps once more the market will mop up the unsold stock at sensible and the Government will once again be grappling with how to get more homes built to address the supply imbalance.
As mentioned earlier there are many regional and local variances. In the Prime London market that we focus on, this is all too clear when acting for our clients who are genuinely looking to buy for their own occupation or to source quality longer term investments. The summer months are an active time in the prime London market as visitors from the Middle East and Sub Continent chose to spend time in the city, often looking at potential property acquisitions. In June we have spent time with several Coutts clients and I thought I would summarise the experience as a form of case study on what the market offers.
Client NN
The requirement was for a 3-4 bedroom apartment in central London up to around £2.3-£2.4m. Preferably with a porter. The client was initially quite open in terms of location, including Kensington, Bayswater and Westminster, but soon realized he preferred to be near to W1 or Knightsbridge as this was where his family spent most of their time when in London.
In total we identified and viewed 26 available and potential properties in the broader area coverage. From this number we identified 8 properties to show the client in W1, SW7 and W8. From these 8 the client immediately liked 2 and we made low offers on both. A four bedroom apartment in W1 asking £2.25m was eventually agreed at £2m having made an initial low offer at £1.9m. The property was newly refurbished by the owners who were having to move to the US for business reasons. The flat was in walking distance of Oxford Street and had 24 hour porters on hand.
The client had previously met with Property Vision (part of HSBC) and all the properties they had shown this client prior to our meeting we had already rejected for various reasons.
Client SS
The requirement was for a 3 bedroom apartment in Mayfair or Knightsbridge, preferably with a porter. The budget was between £2m and £3.5m. We identified just 6 properties that fitted the criteria. We expanded the area slightly so that we could show the client a selection of 11 properties that might suit his needs.
The following day we revisited 4 of the 11 and the day after that we agreed a shortlist of two properties and revisited these (all in cost circa £2.8-£3m each). As I write, we have started negotiations on one and have submitted an offer at £1.85m on the property which was under offer two weeks ago at £2.1m. By comparison there is a refurbished property in the same building on the same lease available at £2.7m.
The property we expect to agree is on a 44 year lease and in need of refurbishment. As part of the offer we have agreed that the purchase of a 90 year extension is conditional on the purchase (the cost included in the total sum of £2.8-£3m) and Obbard will oversee the refurbishment to the clients agreed specification.
Meanwhile the client also needed garaging for a sports car, we then used our connections to find options for parking at an acceptable cost nearby to both properties.
Client AR
The requirement was for a 2-3 bedroom apartment in Knightsbridge, Belgravia or Chelsea. Ideally with a porter. The budget is £2m to £3m. Only 17 properties would potentially fit this criteria and from these we have identified 5 to view with the client next week.
The above three examples help illustrate perhaps what little choice there still is in prime London. When searching for suitable property we specifically ignore properties on basement floors (and usually ground floor unless exceptional), where there is no lift, short leases (unless an extension is available immediately at sensible terms), secondary locations, poorly managed buildings etc. From the three examples above one can see that the requirements are quite similar, although the locations differ very slightly, and there are probably less than a dozen good properties available to satisfy all these three parties. This is quite a telling indicator in terms of current supply and demand.
The following are highlighted properties this month;
Rivermead Court, Fulham, SW6
A top floor flat in need of some improvement adjacent to the Hurlingham Club. The flat is approximately 1,150 sq ft and has 3 bedrooms and two bathrooms. It is in a popular 1950’s portered block with views over the river Thames.
The flat directly opposite sold in an un-modernised state for £995,000 in January. This flat came on the market in April at £950,000, it was then reduced to £895,000 and now £850,000. The owner is ‘desperate’ and we believe this could be bought for as little as £750,000.
Burton Court, Belgravia, SW1
A stunning fourth floor apartment in one of the most sought after locations in Belgravia/Chelsea. Burton Court is a portered block with superb views over the cricket ground of Burton Court itself and beyond to the Royal Hospital. The property offers 3 bedrooms and 2 bathrooms and extends to approx. £1,715 sq ft. It has share of Freehold.
The opportunity here is the fact that these apartments come to the market very rarely and usually are acquired amidst much competition. The property is currently let on a low yield (gross rent circa £125,000) The guide price is £3.65m and we have been told that an offer might be accepted close to £3m in view of the low yield being shown.
Onslow Square, South Kensington, SW3
This is one of our client’s properties. It is currently let to American Express until end of January 2009. It is an elegant 3 bed apartment (approx. 1,980 sq ft) in a superb address. The property was extensively refurbished by Obbard in 2004. Our client wishes to dispose of it at a fair price and will accept a slight discount to prevailing values.
We had two agents opinions of value this month at £2.75m to ask £2.95m (it was valued at £3m in June 2007) and our client would agree at £2.6m.
Benham House, Kings Chelsea, Chelsea, SW10
Kings Chelsea is a development completed around 2002. This apartment is situated in the best position within the entire development. The property extends to approximately 2,368 sq ft. There are 4 bedrooms, 3 en suite bathrooms, a 25 foot square reception room and separate dining room. The flat comes with two underground garages and the development has 24hr porter & concierge plus gym, swimming pool etc.
This flat was bought off plan for £2.2m in 2001. Based on the market index to the peak last summer the value would have exceeded £4m in simple terms. The owners are asking £3.5m to reflect the changing market but we believe this could be agreed at £3.25m as they want to swift sale.It is a superb apartment.
Hyde Park Street, Marble Arch, W2
An extremely attractive 5th floor flat opposite Hyde Park and just a two minute walk from Marble Arch. The flat has 3 bedrooms, 2 bathrooms and a guest WC. The building has a resident caretaker and parking is available nearby at around a 50% discount to prevailing rates. The property needs refurbishment at a cost in the order of £300k.
The asking price is £1,995m. The owners rejected an offer of £1.8m recently but now are in urgent need to sell. We believe £1.75m could be agreed. In 2005 our company bought, refurbished and sold a very similar property directly adjacent for £1.85m.
The following is an update on the properties in our last bulletin on 30th May;
Beaufort Gardens, SW3 Reduced from £2.475m to £2.25m. Our target price revised back to £2m
Campden Hill Gate, W8 Under offer
Palace Court, W2 Sold
Chelsea Riverside, SW10 Available
Suffolk Lane, EC4 Under offer
Old Queen Street, SW1 Under offer
Buckingham Gate, SW1 Not yet formally on the market
Chapel Street, SW1 Available and still quoting £4.75m (our target £4.25m. No 22 fully refurbished with extra floor totaling 4,316 sq ft is under offer as of this month at around £6.5m)
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