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London Update April 2008 Microscope on the Money Market Microscope on the Money Market Back in August last year, when the effects of the US sub-prime problems were first beginning to make a serious impact in the UK, it was hoped that while credit problems would affect certain sectors of the mortgage market, and might wreak short term havoc in financial markets, that would be the full extent of their impact.
Since then we have seen Northern Rock nationalised, Paragon Mortgages forced to undertake a discounted rights issue and Bear Stearns, the fifth-largest investment bank in the US, bailed out of trouble by JP Morgan with the backing of the US Federal Reserve Bank. Stock markets have been volatile, but the overall trend has been negative: the FTSE 100 is now trading around the 6,000 mark, in early August it was closer to 6,400. More important, however, has been the persistence of problems within the credit market which were so neatly illustrated on 10 April when the Bank of England’s Monetary Policy Committee (MPC) cut interest rates from 5.25 per cent to 5.0 per cent. This is the third base rate cut since November, and yet it was greeted with the decision, by a number of mortgage lenders, to raise interest rates. This is not because lenders are profiteering but because of illiquidity in the mortgage markets: the gap between three-month sterling Libor and the bank base rate is now around 100 basis points (bps), while the current swap spread is 116bps – compare this to the average of the past 10 years, which has been around 40bp. “The elevated level of spread signals a heightened level of counterparty risk in the money market,” says Chris Iggo, senior strategist, UK, at AXA Investment Management. “It’s another way of saying that banks still are wary of doing business with each other.”
Experts are now calling on the Bank of England to take more radical action – not just by cutting rates more aggressively, but by easing the availability of credit in the market. “We could like to see another base rate cut next month, partnered with more liquidity auctions, over longer terms, and made available to a wider range of institutions,” says Michael Coogan, director general of the Council of Mortgage Lenders. Without such action, experts fear that conditions within the mortgage market will continue to worsen, with potentially serious consequences for the property market and the wider economy. Already we have seen radical changes in the market in a relatively short time. In March, the number of mortgage products available across the residential and buy-to-let sectors fell from 7,726 to just 5,700 - a drop of some 2,026 products – while at the same time lenders have been tightening their lending criteria on those loans that are still available. Credit has become far more difficult to come by: the number of mortgage approvals in February 2008 was 73,000, compared with 120,000 in the same month of last year. The number of approvals from “specialist lenders” – that is, sources other than high street banks and building societies - fell from 32,000 last July to just 9,000 in February this year.
It is clear that the restricted availability of mortgage credit is now having a demonstrable impact on the housing market. The latest figures from Halifax show that UK average house prices fell by 2.5 per cent in March, the sharpest monthly decline since September 1992. This puts annual growth at just 1.1 per cent, its lowest level since 1996. Halifax’s chief economist was at pains to point out that a 2.5 per cent decline is hardly significant when placed in the context of the housing market’s bull run of the past decade. However, even a relatively slight decline in house prices tends to have a disproportionate effect on consumer confidence – and this is bad news for the wider economy. Indeed, Michael Hume, chief economist, Europe, at Lehman Brothers says that given the importance of housing wealth for consumer spending, the recent difficulties in the market “point to an economic slowdown that could last for some time.” His economic growth forecast for this year is 1.7 per cent, and he has revised his prediction for 2009 down to 1.1 per cent from 2 per cent. He puts the chance of an outright recession – negative year-on-year growth – at around 20 per cent. With the spectre of recession looming, the obvious tactic for the Bank of England’s Monetary Policy Committee would be to cut interest rates in order to stimulate economic growth. But high food and energy prices are still having an inflationary effect: the latest CPI figure is 2.5 per cent, - half a percentage point above the government’s target – while RPI is 4.1 per cent. Moreover, a cut in the base rate may not necessarily ease the pain for borrowers in the short term, since Libor rates remain well above the base rate.
However, against all this gloom, there are some positives to note. While national house price figures look weak, London prices have shown greater resilience. Figures from Cluttons show that prime London prices have increased over the first quarter of 2008, while the annualised growth figure is now 6 per cent. Halifax figures also show an increase of 1.8 per cent in the capital in the first quarter of this year. Longer-term, support for house prices will come from the persisting supply problems. The latest figures from the Royal Institution of Chartered Surveyors show that growth in construction workloads are now at their lowest level in more than a decade, which means that fewer new houses are in the pipeline. Last year, the number of new housing starts fell to 166,820. It now looks increasingly unlikely that the Government’s target of three million new homes by 2020 – which would require annual homebuilding to reach 240,000 – will ever be met. There are some good signs for investors, too. Tighter credit conditions have meant first-time buyers face an even greater struggle to get onto the housing ladder, and this is driving rental demand higher. Paragon Mortgages’ February buy-to-let index reveals that national average gross rental yields now stand at 6.3 per cent – their highest level since March 2006. Rental incomes have risen sharply in many parts of the country: in London, the average annual rent is now in excess of £20,000, an increase of more than 22 per cent on the previous year’s figure. Written by Paula Hawkins – Paula writes on the residential property market for a range of national newspapers including The Times, The Independent, The Sunday Telegraph and the Evening Standard. Paula has also written a guide to personal finance, published by Penguin Books.
Perhaps surprisingly given perceived general public sentiment to the contrary, confidence in the buy-to-let sector remains high, at a similar level as at the end of 2007 with almost all investors (95%) intending to hold their property investments for at least the next 12 months, into 2009. Commenting on the latest Young Index figures, Neil Young, CEO - Young Group, points out: “As purchase transaction volumes reduce, it is increasingly evident that the London market is distinct from that of the UK as a whole. Both property and rental values in the capital are cushioned from the cooling in the housing market, buoyed as a result of the inherent disparity between supply and demand.” The same cannot be said for locations outside of the capital and is reflected in the latest Young Index results which show that over the next 12 months, only 6% of investors expect to buy additional UK residential property outside of London, compared to 50% who expect to add a London property to their portfolios. This confidence is mirrored anecdotally by professionals operating in the market. Neil Young, comments; “Dealing with property and land agents, mortgage lenders and the major banks on a daily basis, it is clear that London stands apart from the UK as a whole and almost without exception, the sector is focusing on the capital. It is very much business as usual.” London’s dominance is also reflected when looking at property prices. 86% of investors believe that property values in London will not fall over the next 12 months (and 29% expect prices in the capital to rise). This compares to just 1% of investors expecting the price of UK property outside of the capital to rise and only 38% expecting it to remain static. Of those predicting a drop in prices, a fall in value is expected to be more than four times likely outside of the capital than in London itself. “We always urge investors to take a long term view and ensure that they are financially able to accommodate any short term fluctuations in market conditions that may occur. The Young Index results clearly show that buy-to-let investors continue to have confidence in the sector.” For a full breakdown of the latest Young
Index results, please email: moakes@younggroup.co.uk Editor’s Note: Given the less than positive reports that seems to be the media’s focus at the moment, it’s easy to miss the good news. In this issue, we bring you some nuggets of news that you may have missed! Is the MPC Focused on Inflation? On 10 April, the Monetary Policy Committee (MPC) announced a drop in base rate of 25 basis points to 5.00 per cent, which was welcomed by many property investors, but led Neil Young - CEO of Young Group - to question whether the MPC remains focused on its primary remit of inflationary control. Rental Yields Strong in London Higher tenant demand is benefiting landlords in England and Wales according to Paragon Mortgages, with the highest incomes for February registered in London, the south west and East Anglia. Average rental incomes in the UK rose 2.4 per cent in February to £11,886 compared with January revenues, and by 15 per cent compared with February 2007. The data shows that London continues to lead the field with average rental incomes of £20,574, followed by the south west average of £15,970 and East Anglia, where average rental income was £12,738. Yields were flat in January at 6.3 per cent, but had risen 0.3 per cent compared with the previous quarter. In terms of value, investment properties saw an increase of 1.5 per cent in February to £187,597 compared with £184,908 in January. Unsurprisingly, London enjoyed the highest average property values at £362,197. Buy-to-let remains solid investment Buy-to-let is currently more lucrative than other investment mediums in the current market, according to Hamptons International, whose research found that buy-to-let properties, such as well-located flats, generate high rental yields. Rob Bruce, research manager at Hamptons, said: “Following recent stock market turmoil and the latest downward move in the Bank of England Base Rate, many saving and investment rates have declined in parallel. With rental yields in London pushing 6.76% in some locations, this outstrips the annual return of many conventional investment mediums, with the compounding effect of long-term capital returns.” Immigration Buoys House Prices The House of Lords Economic Affairs Committee has highlighted the dramatic impact that immigration has on the UK’s property market. The average property price is expected to rise to more than 10 times the average wage as a result of the influx of overseas migrants. In 2000, before the record increase in immigrants from Eastern Europe began, the average home cost four times as much as the average wage. Ministers now forecast that net immigration, taking account of emigration, will add 190,000 people a year to the UK’s population. By 2031, it is expected to be 71 million, up from 60.6 million in 2006, which will "exert a significant impact on the housing market." Arla: Buy-to-Let Returns Rise The average return on rental property for buy-to-let investors rose significantly during the first quarter, new data shows. Research from the Association of Residential Letting Agents (ARLA) found the average return for a landlord on a geared investment rose by 0.27 per cent to hit 27 per cent. The buoyancy of the sector when compared to the wider housing market has fostered a mood of optimism among buy-to-let investors, the survey showed - with 46 per cent of respondents saying they planned to add to their property portfolios this year. Meanwhile, 90 per cent said they had no intention of selling their property in the face of house price falls. HBOS Confident of New Housing Demand HBOS has announced that it believes demand for new housing will outstrip supply for at least the next 12 years. The statement of confidence coincided with HBOS’s purchase of a stake in Miller Group, the housebuilding and construction firm. Landlords Happy With Deposit Protection Scheme A year after its introduction, residential
landlords have been found to be “very happy” with
the tenancy deposit protection laws, according to research by the Deposit
Protection Scheme. The scheme, which sees a third party looking after
tenant's deposits after they move into a property, will leave tenants
and landlords £2.5 million better off as a result of the interest
generated on the funds that are held under the scheme. Chelsea Barracks project plans lodged Plans for the UK’s most expensive residential development at the former Chelsea Barracks site in London have now been lodged with Westminster City Council. The Rogers, Stirk, Harbour and Partners designed project is reported to include 319 private flats and a seven-star boutique hotel, two restaurants and a world-class spa. Final Go-Ahead for King’s Cross Arts College Camden Council has given the final go-ahead for the £180 million Central Saint Martins College of Art and Design campus at Argent's King's Cross site. The application covers the area to the north of Regent’s Canal, and Argent plans to redevelop the listed Granary Complex, building a large studio space, mixed-use building and new public space. UAE Towers Tussle for Supremacy On a recent trip to Dubai, Neil Young saw at first hand the battle for hi-rise supremacy. When complete next year the Burj Dubai will stretch half a mile into the sky over the United Arab Emirates, taller than three Canary Wharf towers. The 818m tall, £2 billion tower will feature 160 storeys and the lower 37 floors will house the world's first Armani Hotel. The Burj will include 700 private apartments, an outdoor pool on the side roof of the 78th floor. But it will be dwarfed by the proposed Jeddah Tower which, at a staggering 1609m high, could be the world’s first mile high tower. The £5 billion tower will be fitted with a giant computer-operated damper to prevent it swaying and incredibly, two ‘minitowers’ (both taller than Canary Wharf) will be built on either side of the main tower, acting as stabilisers.
The Burj Dubai Tower (r) could itself be dwarfed by the proposed Jeddah Tower First Base Injects £220m Into Greenwich First Base has submitted plans for the development of a £220m residential scheme at the former Greenwich District Hospital in south-east London to include 645 homes on the 8.6 acre site as a part of the ‘Heart of East Greenwich’ project. The scheme will provide a mixture of 1, 2 and 3 bedroom apartments and town houses, 50% of which will comprise affordable housing. First Base Managing Director Elliot Lipton said the scheme aims to marry affordability with sustainability and ‘act as a catalyst for ongoing regeneration in Greenwich’. Heat and power at the scheme, which is one of the first big zero-carbon projects in London, will be provided on site through biomass and thermal storage. Reubens Get Green Light for Lambeth Scheme The Reuben Brothers have been granted planning consent for a Foster & Partners-designed development on the banks of the River Thames. Lambeth Council has given the go-ahead for plans for a 342,000 sq ft mixed-use development – including apartments, leisure facilities and an apart-hotel at 20 Albert Embankment. The development will see the 1960’s office building, Hampton House, replaced with three towers, the highest of which stands at 27 storeys. Battersea Power Station Treasury, who bought Battersea Power Station
from Parkview in December 2006 for £400m has appointed Uruguayan
architect Rafael Viñoly to remasterplan the 38-acre site. Viñoly’s
plans – which are expected to include a significant number of
houses at the site – replace Parkview’s Arup-designed masterplan.
Parkview had gained consent for a 1.46m sq ft leisure and retail-led
scheme, with just 750 homes. Treasury is expected to submit its new
plans before the end of the year. Wine Tasting & Auction Young Group is inviting Premier Clients to join us for an evening of fine wines at the Lansdowne Club, Mayfair on 14 May from 6pm. Hosted in conjunction with Cadman Fine Wines, a Champagne reception will be followed by the opportunity to taste fine wines from the world's finest producers. As well as mingling with other investors, guests will have the opportunity to participate in an auction of rare wines, conducted by Bonhams’ Master of Wine, Anthony Barnes. The event also offers the chance to catch up with your Portfolio Manager in the auspicious surroundings of The Landsdowne private members club’s historic ballroom. Places are limited, so please RSVP on +44(0) 845 356 1000 as soon as possible. The Landmark Progress on site at The Landmark is firmly on schedule and exterior glazing has now been fitted to the lower floors of the West Tower, and images of the construction site are available on The Landmark microsite, www.thelandmarkE14.com.
Visit www.thelandmarke14.com to view construction progress Although completion is still some time away, scheduled for 2010, Young Group is already thinking ahead to the ongoing management of The Landmark development and is in the process of tendering the contract. The successful estate management firm will be involved early on, working closely with Young Group and Chalegrove, the developer, to ensure that initiatives to facilitate smooth management of the completed site are built into the construction process at an early stage. MyBASE1 With phased completions at MyBASE1 taking
place over the next few weeks, Young Group’s lettings team is
working hard to secure tenants. A number of pre-lets have already been
arranged and the development is proving to be a popular choice with
tenants. The marketing campaign for MyBASE1 is well underway; the lettings-specific
microsite, www.mybase1.co.uk,
is receiving record enquiries and the development is being advertised
in the Evening Standard’s Homes & Property supplement during
the months of April and May. Lettings Manager, Jeanpierre Kalebic comments,
“We’ve seen tremendous interest in myBASE1 over the
last few weeks and the response from tenants that have visited the show
suite has been super. In addition, it’s such a sought after location
that I’m confident all apartments will be rented quickly.”
Young Group specialises in providing Property Portfolio Management services to private investors; offering the best off-plan direct investment opportunities in London, as well as access to indirect, development fund investment opportunities through its development arm, Young Property. Young Group manages the entire investment process. For direct investments this spans from sourcing the opportunities through to financing, furnishing and letting. Young Group owns all the property that it sells, and also retains a number of units in each development for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion and has transacted in excess of 1,700 apartments, with a retail value of £700 million. The Group’s lettings division, Young Lettings, has successfully let the majority of investors’ apartments within a week of completion. Young Group supports NORWOOD and CHILDREN with LEUKAEMIA, two charities particularly close to our heart, donating £50 per property exchange. t: +44 (0)845 356 1000 e: info@younggroup.co.uk |
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