Always look on the bright side of life

By Martin Skinner,

"Martin Skinner"

Martin Skinner

The last few weeks have been frantically busy and while lots of big deals are on the horizon, fundraising and transaction setbacks are still frequent and frustrating.

On the personal front I’ve just returned from a trip to New Zealand and best man duties at a close friend’s wedding.  In fact I wrote most of this on the long flight back, having written my speech at the last minute on the way over.  The big day was fabulous and was followed by a tour of the North Island together with Ben and Anna the newlyweds, their daughter Trilby (hats off to them for that name) and Ben’s family.  Some honeymoon! I was there when we heard the terrible news from the South Island and my heart goes out to everyone in Christchurch.

Ben & Anna take their vows led by Captain Barnaby

Ben & Anna's Wedding in New Zealand

While I was out there corrupt leaders were falling like dominoes as people harnessed the power of everyday web tools like Google, Facebook and Twitter.  The debate rages as to whether the situation will deteriorate without the ‘regional stability’ these leaders used to provide.  Personally I believe increased transparency and accountability will lead to better government in the long run and that must be a good thing.  Short to medium term the instability will increase the flow of capital out of regions like the Middle East and into safer environments such as prime and fringe prime London property.

In terms of the UK economy, discussion is finally turning towards growth. While the downside surely has to include rising interest rates, there is also much to be positive about.  David Smith recently published another superb piece describing how the ‘feel good factor’ was lost when consumer price inflation overtook wage inflation, an event that paradoxically contributed to higher employment and lower interest rates.  He also highlighted a report forecasting a return of the feel good factor next year, when broad inflation is expected to fall back below wage inflation once more.  At the same time, development luminary Mike Slade listed many more reasons to look on the bright side of property life in his recent Property Week article.

I’m sometimes accused of being optimistic as if that’s a bad thing.  Yes, I underestimated the credit crunch and agree it’s important not to get too carried away with wishful thinking.  At the same time, it’s also important to recognise the positive signs that are beginning to appear.  When I was playing a lot of tennis, we were always told to focus on where we wanted to hit the ball and it clearly improved results.  With timing and location critical to success in the property market too, I’m looking forward to some excellent years and returns ahead – particularly for investors in London residential.  As real estate emerges from the downturn, London’s diverse, much vaunted and ultimately proven strengths will continue to draw both investment and human capital in ever greater numbers.

Having just gone through a recent batch of reports from the big UK residential agencies, I thought the following key points and charts on London residential property were worth sharing:

“…an astounding 70% [or £2.9 trillion of the £4.1 trillion total market value of UK residential property] is held as equity”.

“…it is London’s status as a world city that sets it apart in value terms from the rest of the country.” Yolande Barnes, Savills, Residential Property Focus Q1 2011
Savills are now forecasting a rise of 33.4% in prime central London house prices over the next 5 years.  See the full report here.

How low levels of available housing stock have historically supported house prices

Available Stock vs Price Growth | Savills

“Outperforming their national markets, the cities of London, New York, Moscow and Hong Kong are sought after by the world’s richest households and are at the forefront of a truly global market ~ the residential sectors of these global cities have more in common with each other than they do their domestic markets” Yolande Barnes, Savills, Spotlight on Four Global Cities, Feb 2011  Read the full report here.

5 year performance, cities (executive unit) versus countries (national house price index)

5 Year City Performance | Savills

“Global economic growth is now running at pre-recession levels contributing to wealth creation around the world which is pouring into London again. ~ London’s reputation as a ‘safe-haven’ investment location, combined with geo-political concerns elsewhere around the world, most recently for example in Egypt and Tunisia [and now Libya], have helped draw buyers into the market”  Liam Bailey, Knight Frank, The world’s most desirable residential market: The Super-Prime London Report 2011

P.S. Check out www.beek.co This is recently married Ben Knill’s new and innovative technology venture and it’s shaping up to be a huge success!  I’m proud to say that we incorporated early versions of his interactive 3D walkthroughs on our consumer website Nice Room as early as 2003.  Prospective tenants loved it and we got a lot of remote bookings as a result.  As consumers increasingly shop online and seek comfort in online research before buying or travelling, its potential is enormous.

Buyers hamstrung by high deposits

By Yolande Barnes

Residential prices have bounced in recent months but on the back of very low volumes and very low — although rising — levels of mortgage borrowing. Demand is being stoked by investments by those with cash

This year, very low rates of interest on deposit accounts mean that even the relatively low rental yields provided by residential property can look attractive to equity-rich buyers.

There is more activity from those with cash seeking improved income returns (graph 1), not to mention first-time buyers funded with large equity slugs from parents. They are buying the sort of long-term family homes that are not being built any more — for example, Georgian rectories — as well as letting properties, student flats and first homes.

Such buyers want good quality, and new builds only sell if the site and product meet the now more discerning criteria. There is a relatively low number of equity-rich buyers driving the market, which is still suffering low supply and abnormally low levels of transactions. This will change if and when interest rates rise, perhaps in 12 months’ time.

It is not the cost of debt servicing that is discouraging first-time buyers from entering the market, but the high levels of deposit now required (graph 2). Even at the height of the boom, from 2005 onwards, the number of mortgaged owner-occupiers was falling because high prices made a 10% deposit for 90% borrowing unattainable.

At this time, the average first-time buyer deposit was 40% of annual household disposable income.

Despite house price falls, it has now risen to around 100% of a year’s income and is at similar levels to the deposit paid by movers with previous home ownership, and capital appreciation, behind them.

The market is dividing into the “equity-haves” and “equity have-nots”. More than 40% of owner-occupiers now own their home outright. These older “equity-haves” will seek to release equity for care in old age, while younger “equity have-nots” will have to rent for much longer than their predecessors, unless they have equity from bonuses, inheritance or the “bank of mum and dad”.

An increased demand in the private-rented sector seems inevitable. This will require flexibility in the construction sector and will create opportunities for the investment sector.

(Yolande Barnes, Property Week/Savills Research) http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3150259

You’ve got to be bidding

By Yolande Barnes

A residential property shortage has given rise to a boom in auction sales

The residential market is characterised by a severe shortage of properties in many locations.

Even though demand is limited by a lack of mortgage funding, prices are increasing on the back of very thin turnover of properties.

It is hardly surprising, therefore, that auctions are growing in popularity this year, having experienced a period of relative inactivity in 2008. Here, too, lots are being bid upwards and success rates are consequently high.

Savills’ analysis of auction buyers has revealed three themes that show auctions to be a microcosm of what is happening in the wider market.

Cash is king
In the market as a whole, 40% of transactions are cash purchases but, in the auction room, the proportion is 67%. Those with the biggest cash reserves are developers and ‘professional’ investors with large portfolios, 80% and 70% of whom, respectively, were using 100% cash to fund their purchases.

The credit crunch has pushed these buyers towards smaller lots and plots, which they can fund with capital instead of commercial borrowing (graph 1). Purchasing power is enhanced by those able to pay with cash, and cash buyers are well placed to buy at auction. Even first-time buyers, who constituted a surprising 6% of those buying in the auction, are still primarily cash funded: half using 100% cash and the other half using no more than a 60% mortgage.

Developers are back
The number of developers looking for small-scale plots is increasing (graph 2). One-third of those buying at auction in July were property dealers and developers, compared with only 12% in June. This is despite the fact most of the lots were neither plots nor billed as development sites.

It would seem that developers are being opportunistic and looking for more unusual propositions in a market where anecdotal evidence suggests that ‘oven-ready’ plots are selling like hot cakes before auction.

Stock shortages prevail
Although most auction buyers are looking for value, several are attracted by a ready source of suitable property unmatched by many high street agents.

In addition, the speed of sale and certainty of purchase are again unmatched by more conventional means of sale.

The pressure of stock scarcity appears to be attracting people hitherto unfamiliar with auctions. Just more than half – 51% – had never bought at auction before (graph 3). There was a significant divide between those with greater experience who were looking for medium- and long-term ‘holds’ and those buying at auction for the first time, who had a higher proportion of short-term ‘flippers’ among them (graph 4).

Overwhelmingly, buyers were looking for vacant possession – even those buying long-term letting investments – and buyers favoured smaller flats and houses. (Yolande Barnes, Savills Research/Property Week) http://www.propertyweek.com/story.asp?sectioncode=530&storycode=3148126