FEBRUARY 2010 Newsletter

MARKET PLACE

Residential Sales

Our statistics for the last quarter of 2009 are quite startling. For example, despite a fall in the number of properties on our books, we arranged 35% more sales than in the previous quarter and an unprecedented 300% more than in the same quarter of the previous year (which covered the Lehman Brothers collapse and the universal ‘sitting on hands’ response that followed).

From our own perspective at least – and a recent major comeback of the UK buyer notwithstanding – it has to be said that our independence from the Euro bailed us out. Back in February / March last year, only those who had to, were selling and, even at prices of sometimes 25% below peak, few UK buyers were brave enough to step forward. Continental buyers, however, could add to that 25% cut, a fall in sterling (over much the same period) from, broadly, €1.50 to €1.00. Thus the London property that would have cost €1.5M in, say, summer 2007, could be had (if you could find it), for €750,000 in March 2009. The Sterling / US dollar story was very similar.

Purchasers from all over the globe contacted us (and, presumably, our competitors), especially from the Middle East and from Italy, where a tax amnesty provided an additional incentive to invest overseas. Driven by this and an intense shortage of stock, prices steadily rose. This encouraged British buyers, now with the prospect of being able to sell their existing property at a fair price, to return to the market, gradually restoring confidence and boosting values further still. Indeed, on several occasions we managed to get an asking price offer, only for the seller, seeing the recovery in prices, to demand more money. Handling client/buyer negotiations in such often emotional circumstances is a highly delicate matter, though it did at least provide a series of opportunities for us to demonstrate our diplomatic skills to the full.

Remarkably, British buyers, having been absent for much of the first half of the year, still accounted for almost half of all our sales in 2009.

Today, the shortage of quality property in prime areas continues to put some upward pressure on values, though it is not as great. In some instances – especially where a genuinely special property comes onto the market – the competition is such that prices close to the 2007 peak are being achieved. Most commentators, meanwhile, are forecasting that Sterling will not ‘bounce back’ against the Euro anytime soon. This is encouraging the steady stream of overseas buyers to keep flowing. We expect 2010 to continue to suffer from a shortage of stock and thus anticipate further growth in values, if not at the pace of 2009.

Residential Lettings

Economy Comment

Characterised by turmoil, last year began with the ‘How bad might it get?’ recessionary fear that flooded the market with properties to rent, but ended with a shortage of stock. How did this happen, and what is the outlook for the months ahead?

The perfect storm

The first quarter of 2009 saw something of a ‘perfect storm’, as City redundancies, the recall of some ex-pats, the putting-up for rent of properties that wouldn’t sell and – the biggest factor of all – the postponement of corporate commitments, combined to raise the level of available stock to its highest for at least four years. Add to this the fact that many companies reduced their rental allowances for the ex-pats they did keep in London, and it’s not surprising that rents declined and end-of-tenancy terminations (as opposed to renewals), increased markedly. But the worst fears were not realised and, importantly, the sales market came back to life, encouraging individuals and companies to reinstate, at least in part, plans that had been put on hold. Demand gradually recovered and the supply of available stock was eroded to the point at which, by the end of the autumn, we were enjoying the strongest rental market since the summer of 2008 (and set to notch up what proved to be Beaney Pearce’s most successful lettings year ever).

Welcome stability

Happily, that active market continued right through the year-end and has got us off to a cracking start to 2010. Rents have stabilised, terminations have returned to typical ‘natural wastage’ levels and renewals now involve much larger increases. Yields, too, have stabilised at, in the main, around 4% to 5% gross within Kensington & Chelsea.

Who is renting?

Amidst much talk of continuing recession and bankers threatening to leave the UK, it is worth reflecting upon the diversity of rental demand, at least within Kensington & Chelsea. Of course the financial sector features heavily, but none of our banker tenants has yet announced that he or she is leaving London for tax reasons. Furthermore, of the lettings we agreed in the last quarter, more than half (55%) were either to non-financial sector professionals or to families, primarily for use whilst one or more family member studies at a London university or language school. Better still, this often under-appreciated ‘academic sector’ demand is not reliant upon any one international region. Our lettings are to families from around the globe, including noticeable recent increases to those from Turkey, Greece, Brazil and Italy. Often coming to us through word-of-mouth recommendations, these tend to be wealthy families with friends renting through us and impeccable references.

Spring awaits

Given this positive start and the feeling that the stability enjoyed for a few months now is set to remain, we expect the traditional spring increase in demand to materialise this year (unlike last). This will add to the modest upward pressure on rents and help to ensure that, when terminations do occur, we can continue to re-let very quickly.

Developments & Investments

Eager cash buyers, ultra-cautious lenders and huge prime/ secondary differentials generate mixed messages about when to make your move

The long credit boom was one big seller’s market, at all levels. Even projects without planning permission were selling unconditionally and with little discount, such was the eagerness to buy in London. The difference today is not that we have been cast into an across-the-board buyer’s market, but that there is intense competition within some categories, and next to none in others.

Mopping up the back-log

Many developers entered the UK recession with worrying levels of unsold stock. Happily – for those with prime central London developments – the dramatic increase in sales activity here in 2009 meant that they were able to sell, leaving them with cash and an eagerness for new schemes. For developers vested largely in non-prime areas, life has been much harder, made worse by a general reluctance of the banks to lend on property development anywhere.

Financing new projects

The criteria set by the banks for funding development schemes remain so stringent that very few large transactions have been able to proceed. Despite their lip service to government and public alike, well over half of our banks’ new loans in 2009 were refinancing old debt. Thus, whilst De Montfort University reports that 74% of banks say they are lending against prime property (and 44% against secondary stock), the volumes involved are tiny. Even on ultra-prime schemes, banks are demanding extraordinarily tight debt/equity ratios and other assurances. As a result, cash-rich large developers have been unable to operate in their traditional market of schemes typically involving finance of £60M+. Instead, many are looking at smaller deals – where they face competition from a different type of investor altogether.

The private money funds

The majority of deals being done now are happening without bank money. Investors and developers are coming to us with either just their own money, or with a JV partner’s backing. A few have successfully secured the backing of a private equity fund. Overseas money, sometimes a great deal of it, is almost always involved. What all have in common is an ability to invest somewhere between five and twenty five million, with a cluster around the ten to fifteen mark. They are fussy about the type of scheme they will go for, some favouring, for example, mixed over single use, and won’t go for anything that doesn’t have the appropriate planning permissions for what they want. All say they want prime, but what they mean by that varies significantly.

Outlook

Given the recently highlighted debt exposure in Dubai (and beyond) it seems unlikely that the banks’ attitude to UK property lending will change much this year. Indeed, latest reports from the CBI and PwC anticipate a setback in business volume. This means that private money is likely to remain the main source of funding.

So, whether you wish to sell an investment / development opportunity or to develop it yourself, should you make your move now, or later? The early signs are that 2010 will see a significant increase in the number of deals done in central London, because the market is responding to the likelihood that private money will stay in the driving seat. Thus, for example, much of our time at present is spent on new concepts and planning permissions, adapting opportunities to fit what those with the money, want. Any decision to buy or sell a particular scheme should look closely at that fit, because it will make all the difference. The time to act, is when the fit is right.

Where might the bankers go?

For rather obvious reasons, we are positively fond of London’s bankers. Our Mayor’s warning that 9,000 of them might leave the UK "in protest at the controversial and ill thought out tax raid on their bonuses" has thus prompted a little self-interested concern – and conversations with those we know as clients and business contacts. Most stress that, these days 'we could work anywhere'. So why are they in London now?

Much, it seems, is down to relationships. Day-to-day activity can be done from a laptop on the beach. But new ventures, deals and bargains depend upon contacts you can rely upon, who are likely to offer opportunities, who know the word on the street – and in the boardroom. The same goes for knowing which trusted colleagues, rivals and journalists might be about to stab you in the back. Amongst our contacts at least, this means that they want to be able to get to London or, in some cases, another major European city, pretty quickly, shortening the list of potential tax havens drastically.

Having narrowed the field to Europe, another factor rears its head: most of the bankers are rich, but not super-rich (and those that are have non-dom status anyway) . According to globalpropertyguide.com, property prices in Monaco are, per square metre, almost 2.5 times those in London. So you have to pay a great deal more – and you'll be surrounded by people much richer than you are. Much the same is true of the Channel Islands, if you can get in, and which are far from tax-free: Jersey is currently promoting the slogan "20% means 20%" to its would-be tax evaders.

So, bearing in mind that you’ll have to live there, where else would you want to go? Liechtenstein appeals to few and Malta might be lovely for a family holiday, but it hardly has the infrastructure to which the families of the wealthy have grown accustomed.

All of which leads us, predictably, to Switzerland. Some niggles about its tax laws and the business impact of one or two EU directives aside, within Europe it looks like the only remotely attractive alternative, having a strong international financial community, excellent transport links and, er, lovely scenery. Beyond that, though, it does struggle. As we see every day, wealthy people come to stay and live London for its variety of businesses, its universities, culture, nightlife and fun. Will all that be enough to persuade our bankers to 'take the hit' and stay? We hope so.

ON A LIGHTER NOTE ...

Newly-completed South Kensington traffic system a real success

Finally, a welcome opportunity to heap a little praise on our Royal Borough. The new road system around South Kensington Underground Station, completed just before Christmas, is bringing real benefits. Traffic is moving more easily, previously unoccupied shops have been opening for business and the whole area feels a lot smarter.

This bodes well for the overall Exhibition Road project of which these works are merely a part. According to the Council, the project seeks to recognise that "the Exhibition Road area is one of the most important cultural destinations in the country with over 11.5 million visitors to the area every year" by "improving road safety and make people’s experience of Exhibition Road more enjoyable – whether they are a driver or a pedestrian."

So far, so good.