UK Property

Estate Agent vs Analyst

If anyone, either in the U.K or the U.S.A needed an incentive to look overseas for their next property investment, recent reports released in both counties should provide it.

Rightmove, an online U.K estate agent recently released a report that shows UK asking process have dropped for the third month in a row.

In the last month, the average asking price for a house in the UK dropped 0.8 per cent to £230,428, bringing the annual rate of increase down to 3.4 per cent – the lowest since December 2005.

London once again defied the skeptics and remained on target for a 17% increase in value in 2007 despite falling prices in much of the rest of the country.

The Royal Institute of Chartered Surveyors reported that “house price growth remained negative for the second month in succession,” and “new instructions declined for the fourth consecutive month at the fastest pace since June.”

Having said that, London was the only region in their monthly survey to experience a rise in instructions, and according to the Financial Times House Price Index, “prices in London rose 1.1 per cent in August compared with July and the annual rate of growth accelerated to 17.6 per cent, from 17 per cent in July. This was almost double the pace of growth of the south-east, the area with the second-highest increases, where prices were up by 9.4 per cent over the year. The cost of the average home in the capital is £363,364, compared with the national average of £225,826.”

The FT index suggests that overseas demand, rising immigration and City bonuses are fueling the London price increases.

Some areas around the country were less fortunate with price drops reported in the North, East Midlands and Yorkshire & Humberside and stagnant prices in the North West, South West and East Anglia.

Whether or not London can maintain this continued growth in the face of credit squeezes, reduced mortgage lending and dropping prices in much of the rest of the country remains to be seen and many analysts are predicting a slow down or reversal before the end of the year. For the moment though, it looks as though London is shoring up the whole market.

Links:

The Financial Times

The Royal Institute of Chartered Surveyors

The Halifax House Price Index

The Land Registry House Price Index

New Star International Property Fund Performance

It’s now almost three months since we last wrote about the New Star International Property Fund. During time it has exceeded its original (launch phase) target of £200m, reporting that £206m was actually subscribed. However, the same period has seen turbulence for investors in the new fund’s big sister, New Star’s Property Unit Trust, with lower returns sparking a rush to get out.

What’s certainly not open to question is New Star’s thoroughness in stating case through advertising in good times and bad. The group launched a new campaign in the personal finance press specifically to deal with the bad publicity arising from the switch to ‘bid basis’ pricing when the volume of ‘sell’ instructions threatened to undermine the model that a property fund like New Star’s works on.

Beach Huts on Brighton & Hove
Beach Huts on Brighton & Hove [Photo credits to Rollinho on Flickr]

With more evidence and general agreement that property price rises are set to stall in the UK, the Telegraph has published an article suggesting that Brighton and Hove are diverging from other parts of the South East of England. The reasons given for the strong recent growth are chiefly the attractions the town has to relocating Londoners. These not only include Brighton’s interest and seaside location but the quality of the train services to London.

Not only is the train service relatively good but commuters have a choice of London termini (Victoria, Charing Cross, Blackfriars and London Bridge) so a swathe of central London is walking distance from the train. However, it needs to be remembered that the train journey takes 80 to 90 minutes and won’t be cheap. The local council says that 4,500 Londoners relocate to Brighton every year.

Continuing with our periodic series on REITs, we take another look at how the UK REITs have fared since the start of 2007.

Generally speaking, progress has been less than impressive but whether this is down to the new legal framework or general conditions in the UK real estate sector remains to be seen. The article ascribes the weakness, including substantial discounts to the new REITs’ net asset values, to the traditional priority given to asset appreciation over cash flow generation on the part of UK property companies.

UK commercial property prices rose steeply in the last few years and continued to rise through to May this year but the Bank of England has warned that this was not in line with rental incomes. Asset value appreciation looks likely to be more difficult to achieve from now on and, in particular, there is a lot of prestige office development in the pipeline in London due for completion around 2010. Commercial property bears were already reckoning the implications of the high ‘crane count’ in the City of London last year.

It could be the stuff of World War III: Arabs, Americans and Russians trying to outfox each other and seize control of valuable land. A new terror crisis? A stormy session of the United Nations? No: this is a typical scene from central London’s super-wealthy and overheated housing market, where the rich and famous compete for the rarest of commodities – a perfect property in a prime location.

The whole of the London property market may be hot at the moment, with the average asking price nearly £379,000, according to property website Rightmove, but central west London – from Kensington and Holland Park in the west, through Bayswater to the north of Hyde Park, past the mews of Mayfair and Knightsbridge and down to Belgravia and Chelsea in the south – is at melting point.

According to Rightmove, in Kensington and Chelsea average property prices have soared by £120,000 to £1,329,878 in the past month and by £620,000 in a year.
There are two reasons for this extraordinary increase: the first is pure economics: there are far more wealthy buyers than there are homes for sale. The second is status: when the world’s wealthiest buyers want to add another prestigious address to their real estate portfolio, they look to Pimlico rather than Paris, to Marylebone instead of Manhattan.

‘London has what the world’s richest people want – security,’ says Charles Peerless of Winkworth estate agents. ‘It speaks the new universal language of English, has an easy air hub at Heathrow, good schools, a welcoming tax regime for foreign owners, and the world’s financial capital in the City.’

In the past year Peerless has visited Singapore, Dubai, the US and (three times) Shanghai, to explain London’s property market to wealthy would-be buyers.

‘The number of high net-worth individuals (HNWIs) is expanding more rapidly in North America than in Europe for the first time since 2001, while Singapore, South Africa, Hong Kong, India and Australia have seen the highest growth in HNWI numbers,’ explains Liam Bailey of Knight Frank, an estate agent that at any one time has about 300 of London’s most expensive homes on its sales books.

The saying ‘One man’s riches means another man’s poverty’rings truer than ever in today’s international real estate market. Price fluctuations, along with changes in demand and supply in different parts of the world are creating interesting representations of the value of money. Take for instance, what one million pounds sterling approximately $1.9 million in US currency can purchase.

In Edinburgh, you could buy an enormous town house boasting multiple reception rooms with expensive crown mouldings and chandeliers. Likewise, Oxfordshire offers you seven bedrooms, over six acres of land, and gardens.

Just east of Oxfordshire places you in London, where purchasing a home is an entirely different story. Because of a 28.6% growth in prices due to a combination of increasing demand and diminishing supply in prime real estate, the best locations in London could only give you 600 to 1,000 square feet. This increase in property value is largely due to wealthy foreign buyers from countries such as China, Russia, India and the Middle East. Instead of exchanging one piece of London real estate for another, these buyers come from outside the country, meaning the purchase of one property does not release the availability of another which ultimately drive prices upwards.

Despite this drastic difference in the UK, the value of the British sterling is not to be underestimated when taken overseas to the American continents, where foreign buying is not as rampant. Prices of apartments with dazzling Manhattan skyline views are down by a startling 34% from five years ago, giving you over 1,000 feet of luxury for $2 million. Prime locations in South America offer breathtaking island retreats with more rooms and luxuries than can be imagined.

In Angra dos Reis, a Brazilian city south-west of Rio de Janeiro with a beautiful coastline of over 300 islands, luxury villas are also a target for investment because of standard features like 8+ bedrooms, two saunas, swimming pool, waterfall, jacuzzi, barbecue, private beach and an ocean front pier. Like Brazilian broker Judice de Araujo Esteves says, “buying outside of traditional European and North American real estate markets is certainly more risky, but if they invest correctly, they can have better profits. This happens in all developing countries.”

The end result shows that moving out of the popular well-known areas of real estate and looking into carefully chosen emerging markets, opens up opportunities of high returns in the long run, which would only be a matter of time for parts of South America, Eastern Europe, and the far east set to become the next ‘London’ in real estate.
Read more about this over at Forbes.

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Demand to rent homes in the U.K. rose in the fourth quarter at the fastest pace in nine years, the Royal Institution of Chartered Surveyors said.

A balance of 30 percent of surveyors reported tenant lettings increased in the last three months of the year, the highest since the survey began in 1998, the institution said today in London. Demand for houses outpaced apartments, with the balance reaching 34 percent, the highest since 1999.

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London’s ultra-high-net-worth individuals (UHNWIs) are driving house prices up the roof. These 4000 UHNWIs who are predominantly bankers, lawyers, traders, 23 billionaires and super wealthy non-domiciled foreigners have taken London property prices to yet another level.

Four Hyde Park facing penthouse apartments located on the exclusive address of Number One Hyde Park are reported to have been sold at an off plan sale price for a record £84m (US$164m) each.

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Bowoter House before demolition

The Lord Rogers-designed penthouse apartments will each boast a staggering 20,000sq ft in floor space and would be amongst 86 other apartments that will span over four glass and red weathered steel apartment blocks replacing the now demolished hideous 16-storey 1950s building – Bowater House. The cheapest apartments are still said to command £4m (US$7.9m) each, making the development the most expensive dwellings ever sold in London at a shocking £4,200 (US$8,200) per square foot.

Purchasers including Arab princes and Russian oligarchs need to make an up front 20% deposit to secure the very highly demanded apartments that are due to be completed in 2010.

The project’s developers, Project Grande have contracted both interior design and development management to Luxury property developers ” Candy & Candy. The two brothers from Surrey, domiciled in Monaco behind the Candy & Candy, Nick and Christian Candy, currently hold the record for most expensive flat in London, which is a £27 (US$53m) million luxury Chelsea pad.

While only the four penthouse flats would feature bullet proof windows, the entire development will have as standard an SAS developed security system, “panic rooms”, specially purified air conditioners and each complex will have a spa, squash court and private wine-tasting facility. Exclusive concierge service will be provided by the Mandarin Oriental hotel through a tunnel that will link the hotel and the development.

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This record asking price is a reflection of the London property market which has out performed the UK market this year. In central London, the area that has experienced the most rapid growth, house prices have risen by 20 per cent in 2007 alone as compared to a 0.5 percent increase in London as a whole where prices average £260,140 (US$508,000).

What do you think about the London property market? Is it sustainable? Do you think the interest rate hikes will help slow growth down a bit? Or is a crash eminent?

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Predictions of cooling UK housing markets are driving investors to look to international property opportunities. Economists and analysts have recently warned of a cooling housing market due to increasing UK interest rates set against a global economic slowdown and concerns of a UK property market correction. Justin Modray, investment adviser at Bestinvest, says Germany, Australia and possibly Japan are currently thought to be good value.

There is also a natural bias from investors toward the US property market because of the country’s strong Reit structure, he says. The UK property market appears to be running out of steam, with the issue of yield compression affecting returns. These market conditions mean it is a natural progression for investors to look overseas, particularly because of the cyclical nature of commercial property, he says. Funds with a global mandate can look at where the country’s economic cycle is placed and take advantage of favourable global market conditions. However, it is important for investors to consider how their property fund works, Modray notes.

“Many investors like property as a way of diversifying their portfolio away from shares into bricks and mortar investments,” he says.”However, the risk is that many Reits invest in property companies linked to the performance of the stock market. This negates the benefits of diversification.” David Coombs, director of multi-manager investments at Barings, says he is currently looking at the German property market. His property fund, the Barings Multi Manager Property portfolio only invests in commercial property and currently has 30% invested in opportunities outside the UK.

Coombs’ interest in international property growth is driven by his belief that high returns achieved in the UK commercial property market in recent years are unsustainable. In the past, commercial property was undervalued but future returns will need to be driven by value-added management and rental growth, he believes. The German commercial property market has potential for growth, and strong demand from overseas investors over the past six months supports this, he says.

Commercial property in France and Spain offers similar opportunities, he adds. Simon Ward, economist at New Star, believes the German and Japanese markets could be in the early stages of sustained recoveries. “Foreign housing markets offer mixed opportunities. Further weakness is likely in the US and frothy conditions in France and Spain could unwind on the back of tighter ECB policy,” he says. Meanwhile, Ward believes the MPC interest rate rise will lead to a cooler UK housing market for 2007, but not outright weakness. “Market activity and price gains will slow progressively during 2007, but the main downside risk is further interest rate rises,” he says.

“I think there is a reasonable chance of another 0.25% rise early next year. Factors likely to limit any weakness include stable to firm labour market conditions as economic growth remains. “Confidence may prove more resilient on this occasion, partly because the wider economy is doing well, but a slowdown in buying interest is likely in the New Year.”

Source: Investment Week