06/05/2009 - Sentiment over economics
by HO
The 'market' chooses the bottom
KINDLY SEE MARKET COMMENT AND OPPORTUNITY UPDATE BELOW
Highlighted opportunities are;
Eresby House. Rutland Gate, SW7 target price £1.75M
PROBATE SALE
A great development/rental opportunity located in a smart portered block in the heart of residential Knightsbridge positioned between two garden squares. Rutland Gate is a prestigious address close to Hyde Park and a couple of minutes walk from Harrods. This 6th floor apartment has both east and west views over Knightsbridge.
The 3 bedroom flat (approx. 1,357 sq ft) is totally unmodernised and offers the buyer the opportunity to reconfigure and refurbish to their own design. Brought to market at the beginning of May, it already has significant interest with a number of lower offers.
Syon Lodge, Isleworth, TW7 target price £3,750,000
REDUCED BY 40%
A genuinely stunning Grade II* listed house literally 40 minutes drive from Piccadilly and 10 minutes to Heathrow. Originally on the market at £6.95m, this glorious mansion set in an acre of grounds extends to over 9,700 sq ft. The famous architect Robert Adam was commissioned by the Duke of Northumberland to build the lodge in 1770. It has more recently been in the same family ownership over five generations. The price has been gradually reduced but has now just dropped sharply to £3.95m to obtain a swift sale.
The house claims too many historical and architectural features to list. Suffice to say that it has an original minstrels gallery, a reception room with original Jacobean panelling, a 16th century Tudor stone fireplace (thought to be the largest in Europe) and a study with 15th century Flemish painted panels. Despite many of these historical features, the property has been comprehensively refurbished over the past two years and this includes the most up to date audio/visual and lighting systems.
The owners, having pitched the price at a very high level, have failed to attract a buyer and this genuinely rare house presents an outstanding opportunity.
Portman Square, W1 target price £3,800,000
DEVELOPMENT OPPORTUNITY
A very rare opportunity to acquire two adjacent 4th floor apartments which would provide 14 windows in total facing south over this prestigious square. The combined area would total approx. 3,500 sq ft of lateral space.
Both flats are currently held on 53 year leases but these could be extended by 90 years for a combined cost in the order of £400,000. The total asking price for the two units is £4.2m and renovations would cost in the order of £750,000 to create a stunning apartment worth £5.75m.
Manson Place, SW7 target price £850,000
CLASSIC FIRST FLOOR
A potentially stunning two bedroom, two bathroom flat with classic high ceilings, period features and balcony. The property needs a renovation at circa £175,000. The GFA extends to 840 sq ft but the efficiency of the space (few internal corridors) makes it feel much larger.
This flat has been on the market for some time, originally asking £920,000 it was recently reduced to £895,000. A similar property in slightly better condition has just sold for £1.1m on the same street.
Princes Gate, SW7 target price £975,000
AFFORDABLE KNIGHTSBRIDGE
A superb pied a terre. This is a bright triple aspect 2 bedroom apartment of 926 square feet. It is situated in a white stucco fronted building located at the preferred Hyde Park end of Princes Gate. It has lovely views down Prince Consort Road.
This share of freehold building currently has common parts that are “tired”. However, the funds have now been collected to refurbish the common areas and these will be completed by September which will add significant value to the property. It is situated close to shops and transport of Knightsbridge as well as Hyde Park. One of the best value apartments in the area which already has two offers on it at £950,000.
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MARKET COMMENT
Forget about economics, it’s all about sentiment.
Try as one might, it is almost impossible not to write about the prime London market in bullish tones. Whilst the economy shrinks, unemployment rises and politicians get exposed for milking the system, the much reported green shoots have heralded a stock market rally that has outperformed even the rosiest of tinted glasses and a property market (in London anyway) that has many estate agents talking about record months.
The bear’s who stubbornly argue the downside (usually because they remain un-invested and this is where it suits them for the market to go) start to look like old curmudgeons. Website’s like Housepricecrash.com silently erase old predictions of a 50% peak to trough correction and surreptitiously remove quotes from the likes of Anthony Bolton when they turn irritatingly positive in their outlook.
Articles in the press by leading economists that have presented arguments for why house prices should fall by 50%, and more in some cases, are now few and far between. Analysts still can’t quite work out how the traditional house price to earnings ratio fits in to the new world of low inflation and low interest rates. 30 years ago the basis for mortgage lending was driven primarily by multiples of salary (it used to be three times the borrower’s salary plus one times the spouse If I remember correctly) but in recent times it became all about loan to value, the mortgage being based on a percentage of the property price. This allowed for the dangerous introduction of self certified mortgage applications. Today, even as lender’s pay more attention to the borrower’s income and ability to service the loan, the LTV still remains a key focus.
As a side point, I might add that interest only payments are now preferred by a growing majority and this is quietly being accepted as the norm. The next generation can look forward to inheriting Mum & Dad’s mortgage!
Savills Research, to whom readers of these bulletins will know that we give most credence to in terms of objective and informed research, believe this is the bottom for the prime London market and they, amongst others, see prices rising this year, something we certainly would not have predicted. Their latest property focus talks of ‘value’ and ‘opportunity’.
There is no doubt that these past few months have been extremely active and prices will definitely show an upward spike when the data starts to come through at the end of the next quarter. Market data on actual transactions filters through on a substantial time lag, we have made this point many times before, and so articles like the one in this weekend’s FT with the headline ‘Rich Londoners top list of house price losers’ are completely outdated. Their index reported on April’s stats which are taken primarily from the Land Registry. These usually record registrations of transactions that are some 4-5 months after an offer is made (arguably the time a market value is ascertained). It is true that prime London fell faster than most, it had also risen far faster than most, but those falls started back in the summer of 2007 and ended in Jan/Feb of this year. To see the real current and future losers one has to continue to watch the likes of the north of England where unemployment is rising rapidly and repossessions are gathering pace as the effects of the shrinking economy bite.
But sentiment is fragile.
Our view is that the level of current activity will not last. We do not however see the recent surge as being irrational in any way as the combination of low interest rates, depressed prices and a weak sterling were a suitably attractive mix for any investor taking a genuinely medium to long term view.
Our expectations are for the stock markets to probably falter at some point. Whether a further round of bad news prompts this or whether it is a simple reaction to the unforeseen strength of the rally of recent months remains to be seen. In such an anxious and uncertain world it won’t take much to reintroduce a sense of nervousness and loss of confidence. After a period of time, things will again pick up as the market’s desire to seek out the good news overcomes the fear of unknown bad news and we will see another surge. The London property market in particular will follow this pattern and we see this being most likely the case for the next few years.
The power of the herd
For all people’s belief that they are investing of their own will and initiative, the herd mentality is all powerful. In simple terms one should buy when other’s are not. Few really do this. With the wonderful benefit of hindsight, the very earlier part of this year would appear to have been the right time as things didn’t really pick up until March. If our prediction is correct, and we see the market check in a couple of months time, that should be the time to be in the market. A buyer’s market is after all a time when few are buying!
Some will argue that prices will fall again……….they may, but we doubt it in any material form. We think price falls are the wrong thing to focus on, the key for an investor is more about the level at which they will rise over the next 5-10 years and how to achieve a meaningful yield. For this I think recent history will be less likely an accurate barometer and we are likely to see average rises at around 5% year on year. Not very exciting possibly but, as we have pointed out before, 5% growth pa on 50% gearing with a 5% yield at 5% rate of interest doubles your money in 8 years and there are not many tangible and low risk investments that deliver that.
The future of Buy-To-Let
As the market tumbled Buy-to-let became a dirty word. In many ways it was the Buy-to-Let market that flamed the fire during the boom years. Unfortunately it was a classic band wagon that developer’s and house builders milked for all they could and many amateur investors were seduced thanks to easy finance. When the wheels inevitably came off, many were left wondering why they had bought such overpriced property that was so reliant on promises made, and not delivered on, by the developers and estate agents who were selling it to them. The banks, having courted these future landlords so competitively, simply wanted no more to do with it. This is no better illustrated by the number of different mortgage products available reducing from 4,384 at the peak to 213 today according to a recent article in the press.
The Daily Telegraph recently noted that the buy-to-let market has collapsed by 95% over the past two years as finance has simply dried up. Meanwhile, and quite significantly, the Times notes that a number of big pension funds are looking to enter the market. Historically pension funds have avoided residential investment whilst often looking enviously upon its superior performance in terms of capital growth.
Both Knight Frank and Savills research commented towards the latter part of last year that the key feature of the residential market’s recovery would be the emergence of residential property funds. It is hard to emphasise how few residential funds have been launched over the years versus commercial funds. This change of view is testament to both the proven performance of quality residential assets and the significant steps forward in professional asset management by specialist residential firms and departments within the large recognised agencies.
For genuine cash backed investors (financed at 50%-60%), this is a significant opportunity to invest as the future is set to favour the power of managed residentialfunds and the individual landlord will find himself potentiallysqueezed out of the game.
Hugh Obbard
Managing Director
OBBARD Ltd
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