Will the London Property Market be Awash with Cash this Bonus Season?

Thursday, October 22nd, 2009

Posted by liambailey in London Property, UK Property

We are a nation obsessed by house prices, we are obsessed when house prices are rising, and we are even more obsessed when prices are falling.

Once again it is the season to be jolly, and none more jolly than the big-city bankers who receive multi-million Pound and Dollar bonuses if they have done well. This has been known for having a very positive effect on the central London prime property market, as the bankers spend their fortuitous fortunes on lavish homes. The question is, with so much regulation on the horizon, and so little supply on the market, will this year be the same?

When times were good the city banks paid millions and millions of Pounds in bonuses at the end of their financial years, and millions of the money was spent on lavish city property by the lucky bankers. There was gazumping, bidding wars and prices were pushed up in the capital, though they were rising at an alarming rate anyway.

One could’ve been forgiven for thinking that this effect would’ve been sorely missed this year, especially with the talk we heard of banks being banned from giving bonuses and the rows RBS had with the government over last year’s bonuses.

That was until Goldman Sachs announced an incredible £3.03 billion profit for the third quarter, along with an announced $5.4 dollars that has been set aside for (bonuses) rewarding staff. Goldman Sachs’ staff have already earned well over £300,000 in pay and bonuses this year, and the reward pool that is mounting up could see them receive bonuses of the same again at the end of the year.

It has also been revealed this week that Royal Bank of Scotland has set aside £1.8million for staff bonuses. This is the same RBS that almost had to sell its soul to the government to stop its necklace of toxic debt pulling it under. The estimated £90,000 per head for its investment bankers doesn’t compare to the £300,000+ per head for those at Goldman Sachs but it is still sickening for the thousands of Brits struggling to make ends meet. while still paying a portion of those bonuses. It is even more sickening for the RBS workers who have been laid off to cut costs.

The simple fact is that the city bankers, the ones that get the big bonuses make a lot of money for their respective banks. So obviously the banks will want to retain their services, which means paying bonuses. If they don’t they will move to a bank that does.

For example, last year when the government limited the amount RBS could pay in one-off cash payments, despite the fact that £1bn was still paid out in deferred bonuses and new-style bonds, many of the top staff were still poached. Since an estimated 15% of British GDP comes from the financial services sector, the government doesn’t want this anymore than RBS does.

Since then RBS has become known for its aggressive recruitment tactics; paying multi-million Pound signing on fees to lure the top bankers. Merrill Lynch superstar trader Antonio Polverino is reported to have received £7m to join RBS.

After the Goldman Sachs announcement came a somewhat unsurprising revelation from Rightmove that asking prices are up again. This time though the portal revealed that asking prices in the capital rose an incredible 6.5% in under a month (September 13 – October 10). This put asking prices in the capital higher than at the 2007 peak, but is not an accurate indicator of selling prices.

The Times has put the asking price jump down to the fact that it is bonus season. However it is widely thought that many of the banks will be paying out deferred shares, while even the cash bonuses may never materialise as real benefit to the property market.

The last time the banks paid out big bonuses the property market was booming, and prices were going through the roof. Now most analysts are expecting a second dip in house prices. So the question is: will the type of hardcore investor who receives a multi-million Pound bonus, invest in an asset likely to fall in value within a year, given their expert knowledge?

The answer: quite possibly.

Yes, it is entirely possible that London and UK property prices will endure a second dip, as unemployment continues to grow and the Pound begins to strengthen sending the foreign bargain hunters back home. But at the same time UK property, especially prime London property always grows over the long term, and the prices on prime city centre pads were growing as fast as or faster than any emerging market during the last boom. Of course many will buy simply as a status symbol to live in.

So the real question on the tongues of London property owners and potential sellers is over just exactly how much the government’s tough stance on bonuses was bravado. Will we see any lump sums paid out in cash, or will it be deferred shares and bonds?