24/07/2009 - A story of two contrasting quarters
by HO
2009 has seen both a buyer's and a seller's market in the first half of the year.
MARKET COMMENT
A market of ups and downs presents opportunity….but the smart money moves on the downs!
So far, 2009 can be split in to two neat quarters. Q1 a buyer’s market and Q2 a seller’s market. The buyer’s market was created by a number of factors, primarily these were as follows;
1. The depreciation of sterling (the pound dropped by nearly 35% from its 2008 peak of 2.10 against the dollar and adjusted similarly against the Euro)
2. Substantial price falls in the prime UK property market (a 25% + drop in nominal values over a 12 month period vs 15% fall over a 4 year period in the early 1990’s crash) *in some instances we were finding things closer to 40% off from peak during this brief window
3. Cheap finance for those with sizeable cash deposits (funding at sub 3% on the back of base rates bottoming at 0.5%)
The seller’s market was then created by the following key factors;
1. Buyers reacting belatedly to the above and the subsequent rapid take up of available supply in the prime markets, primarily from overseas dollar/euro denominated buyers, leaving a critical shortage of stock.
2. A sharp bounce in global equity markets and the much discussed ‘green shoots’ encouraged active investment over the ‘cash is king’ view which offered such derisory returns.
3. Media reports of a stabilising property market giving rise to the belief that the bottom has been reached and thus encouraging the ‘index tracker’ investor back to the market.
As we now enter the summer lull, the general consensus is that prices have bounced back by about 10% from their late 2008/early 2009 low point. In general therefore one is looking at prices at around 20% from their peak values. Given the huge growth seen in the latter stages of the credit boom, 20% is far from being a painful adjustment. However, assuming we see prices hold at their current levels for the next 12 months, the 20% fall coupled with a 3 year timeframe (peak Spring 2007 to Spring 2010) will start to feel somewhat painful for a highly geared owner/investor who bought at the height and expected to see positive returns on their asset.
Signs of recovery but volumes are low.
Despite the apparent recovery in the market, the reality is that this has been seen primarily on the back of low volumes and the aforementioned supply shortage. One thing that many observers and commentators have completely underestimated, is the amount of cash still washing around and also the strength of belief in property as an asset class.
This became apparent due to the various factors highlighted above. In the first half of this year, for many, the stars appeared to line up. A sharply depreciated currency combined with a weak seller’s market were sufficient to attract investment in an asset class that was never going to go out of favour and was effectively 50% cheaper than 12-18 months previously. At this point I must make the customary distinction between prime central London (the market I am referring to) and the broad UK residential market (still with a few years to go before we can talk of a turnaround in my view). PCL has increasingly become a truly international market and therefore sterling’s performance is as influential on the market’s fortunes as any other key factor.
For many the investment decision was helped in having a dual purpose. Typical would be an overseas buyer who acquires a property for a son or daughter going to a London college or university, or a regular visitor on business fed up at £500 a night hotel room rates offering little in terms of size or service.
Meanwhile, as the papers talk about the implosion of the buy-to-let band wagon, many more informed investors have seen the value return in terms of a positive gap between yield and cost of finance. Others see opportunity when property that is rare in any market, comes available and competition is minimal.
The pain is not over……….which is good news for an investor eyeing opportunity
It seems the world is divided in to two main camps. There are those who believe in the green shoots theory but accept that growth on the back of the recovery will be slow, and there are those who see a definite second wave to this global downturn and expect another round of bad results, shock revelations and tumbling asset prices.
Then there are those who see the strengths in both arguments but really don’t know how it will play out (dare I suggest the majority?!) The result being a nervousness of equities as markets seesaw and apparent stalwart companies continue to go to the wall, a disillusionment at the meagre returns their banks offer them for the cash deposits they so desperately need and uncertainty in sustained returns from the bond markets. For many therefore property offers an investment where the downside is more identifiable and confidence in the upside comes through a basic understanding of the continued and long term imbalance of supply and demand.
For our part, we feel there is a strong likelihood that we are set for a period of mini cycles such as we have seen in the first half of this year and therefore we are set to see ‘two steps forward, one step back’ as the pattern for a stuttering recovery. This stop & start scenario will be due in the most part to the fickle nature of sentiment and will present opportunity for those who can identify real value.
Looking ahead for the remainder of 2009, our feeling is that we are likely to see quite a bit more supply coming on to the market. This will be prompted by a number of factors, including the following;
1. Perceptions and the reality of a stronger than expected turnaround in the market will encourage owners who have been hanging on to place their properties on the market
2. Those that were made redundant in the first round of cutbacks and who were unable to walk back in to another job, even at a reduced salary, will be seeing their reserves depleted. You often hear people say ‘I will give it a year’ and the latter part of 2009 will be the first anniversary of their redundancy for many.
3. Borrowing rates will rise, standard variable mortgage rates have already been increased by some lenders in recent weeks.
4. A continued reluctance by lenders to add to their lending book will limit the equity release option that many have used in the past.
Conversely, we expect buyer appetite to be much more subdued as the apparent turnaround in the market implies the buying opportunity no longer exists. The principle driver that gave the market such impetus, sterling’s depreciation, is still relevant even though sterling has recovered some ground against the dollar.
The pendulum swings
The second half of 2009 could therefore see a noticeable increase in supply and a noticeable decrease in buyers, the ingredients for the market to return sharply in the buyer’s favour.
At Obbard we believe above all in first identifying the opportunity. We are not index tracker’s nor do we believe in the absolute theory of timing. We deal in an asset class that is driven by aesthetics, emotion and usually a fair amount of common sense. It is however a market like many others being driven by sentiment. By spotting an opportunity and understanding where value can be added or gained, we have little fear of the pendulum but we certainly like to take advantage when it swings in our favour.
The following are some example transactions this year, for current opportunities please contact us on the numbers below.
HYDE PARK GARDENS, W2 Purchase Price £2.95m (£1,017psf)
A stunning 2nd floor apartment with far reaching views across Hyde Park in need of refurbishment. Approximately 2,900 sq ft, the property has been bought on a 38 year lease with a current negotiation to extend by 90 years at a cost around £750k. Refurbishment costs will be circa £600k with an all in investment in the region of £4.45m. This will make a stunning home providing 4 bedrooms, 4 bathrooms plus staff accommodation. At a completed cost equating to around £1,550 psf in W2’s premier address this stands up well to the nearby Lancaster’s development being marketed circa £2,500psf.
ONSLOW GARDENS, SW7 Purchase price £1.26m (£1,272psf)
A classic first floor apartment with direct views over the gardens. The flat was totally off market and has two bedrooms, two bathrooms and is need of cosmetic improvement. Sold on a 90 year lease. The refurbishment costs are circa £200k. An all in investment therefore circa £1.525m. The GFA is just under 1,000sq ft however the flat is extremely efficient in layout with no wastage and in the opinion of our client’s valuation surveyor this was an excellent price to pay.
CHELTENHAM TERRACE, SW3 Purchase price £3.075m(£1,568psf)
A classic Chelsea house which had a special aspect looking over the grounds of the Duke of Yorks barracks. Located off the Kings Road a few minutes from Sloane Square, the house was bought as an initial rental investment on a 3% yield with a tenant in situ, but with the potential to reconfigure and add square footage when vacant possession is regained.
BLANDFORD STREET, W1 Purchase price £1.147m(£851psf)
An excellent 3 bedroom flat with bright open views in a small well managed period block. The flat was in very good condition. Having first gone on the market at an ambitious £1.495m, the price was gradually reduced before being agreed at £1.147m. Bought for private use, the anticipated rental is in the region of £950pw showing a gross 4.3% on purchase price.
PONT STREET, SW1 Purchase price £5.75m (£2,508psf)
A classic first floor apartment within the favoured terrace backing on to Cadogan Square. The flat had been under offer at £6.5m but the purchaser failed to get his finance together. Our client owned another first floor apartment nearby which they had acquired many years ago and which we are now completely refurbishing. The property on Pont Street had been meticulously refurbished by two developers, one of whom recently died and therefore there was a need to achieve a swift sale. An indicator of the special appeal for these rare flats was the competition we had with another two buyers to secure this very special apartment which had a stunning 28’ x 25’ drawing room with 14’ ceilings.
CORNWALL GARDENS, SW7 Purchase price £3m (£1,017 psf)
A bank repossession. This triplex apartment had been beautifully refurbished by a private developer but the bank called in the loan. Offering 3 double bedroom suites, a large terrace and superb entertaining space, the apartment was offered on the market at £4.35m and had been under offer close to that level but the deal failed to happen. The bank, on repossessing, slashed the price to £3.25m. A three year rental offer has since been submitted at £3,000pw to an employee of a leading investment bank showing 5.2% yield on purchase price.
WETHERBY GARDENS, SW5 Purchase price £6.25m (£801psf)
A house currently used as a language school with potential to convert to 3 large maisonettes and the addition of a lift. Approx 7,800 sq ft the house backs on to 3.5 acres of communal gardens. End values for the three maisonettes circa £11.25m showing an 18% return on GDV or 35% IRR.
STANFORD ROAD, W8 Purchase price £1,281m (£879psf)
A probate sale of an un-modernised 4th floor flat with superb west facing views in a well managed 1930’s block. Located in one of Kensington’s most appealing residential areas, the apartment offered great scope to develop and create 3 beds, 3 baths and generous reception space. GFA approx 1,500 sq ft. The apartment has share of freehold and the service charges at £4,500 are low for a fully portered block.
ENISMORE GARDENS MEWS SW7 Purchase price £1.55m(£1,230 psf)
In Knightsbridge’s most attractive Mews, this pretty Freehold mews house has three bedrooms, two bathrooms and a large open plan reception space plus an integral garage. Although in good condition, it is to be freshened up to rent at around £1,150 pw.
ROSEHILL ROAD, SW18 Purchase Price £1.1m(£445psf)
A wider than average house that is situated in a very quiet residential street in the catchment area for some of the best schools in the area. Approximately 2,468 sq ft, the property is in excellent condition and ready to let for about £900 pw. This is a stunning home providing 5 bedrooms, 3 bathrooms plus a 50 ft garden that is not overlooked. Originally on the market at £1.5m last year, it was withdrawn and was under offer at £1.2m. That offer fell through due to finance difficulties and as the vendor had another property purchase agreed, our client was able to agree a sale at £1.1m for a quick exchange. At £445 psf for a house of this standard in this well regarded neighbourhood in Wandsworth it represents excellent value.
Rental market foot note
The past 6-8 months have probably been the most challenging for the rental market that we have known. The market was suddenly swamped with supply at a time that the number of tenants was dramatically falling. Rents below £1,500pw fell by 15-20% and rents above this level by as much as 30%. Part of this was offset by base rates falling to a 300 year low point at 0.5%!
However, as ever the key is less about the level of rent but far more about occupancy. In order to be assured of a tenant, quality is as key as a competitive rent and location, a bad property in a good location will still under perform. Overall we have seen our rents in our portfolio drop by an average 16%, but more importantly we have a fully let portfolio as I write and have been in this situation for some time.
Looking ahead, we see reasons to be cautiously optimistic that rents have bottomed out. We are already seeing some big rental offers returning (as was seen at the Cornwall Gardens flat above) and we have had a few competitive bidding situations on our flats in the past weeks. We will continue to stress to our clients the need to maintain standards and meet market expectations and remain thankful that we never were seduced by the new build story which focused almost exclusively on time poor investors.
Hugh Obbard
Managing Director
OBBARD Ltd
The Yacht Club
The Belvedere, Chelsea Harbour
London
SW10 0XA
Direct Line: +44 (0) 207 349 8921
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Obbard Concierge Service Tel: 020 7479 3508
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