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London Update July 2008 Young Index - Q2 2008
State of a Nation:
The Credit Crunch, One Year On Britain stands on the brink of recession. So says the British Chamber of Commerce which reported on July 8 that conditions in the services sector, which accounts for three quarters of the UK economy, are now at their worst since the early 1990s. Service businesses are of course not the only ones suffering: in late June, UK retail institution, John Lewis, said that its stores had their worst sales week in more than a year. Meanwhile, the news from house builders goes from bad to worse: Persimmon, the UK’s second largest homebuilder, reported this week that it has cut 1,100 jobs as sales in the first half of this year fell by more than a third. Taylor Wimpey has announced plans to cut 900 jobs, while Barratt Developments is cutting a further 1,000. The deterioration of the economic outlook is being reflected in the performance of stocks and shares: the FTSE 100 has now declined more than 20 per cent since last autumn, which means that we are now officially in a bear market. The housing market has also cooled, although the decline in value is nowhere near as great as experienced by the stock market. The Nationwide house price index fell 0.9 per cent in June, giving an annualized fall of 6.3 per cent, while Hometrack, which bases its figures on data from 3,500 estate agents across the UK, said average prices across the UK as a whole fell by 2.5 per cent in the first half of 2008.
The rising price of oil, as well as the Credit Crunch, is being blamed for the current state of the economy The cause of the downturn, both in the wider economy and the housing market, is being attributed to two factors. First; the credit crunch, which is now a year old, has driven the cost of borrowing higher while constraining the availability of credit. Second; rising costs, primarily the higher price of oil, which as we go to press has risen to $138 a barrel. The coincidence of these two factors presents policymakers with a dilemma. Under normal circumstances, the contraction of output and demand should lead to a cut in interest rates. But rising costs have driven the rate of inflation to 3.8 per cent, well in excess of the government’s 2 per cent target. And high inflation demands rate hikes rather than cuts. What is perhaps even more worrying is not just that inflation is high, but that it is rising at its fastest rate since the Consumer Price Inflation (CPI) measure was introduced in 1997. What good news there is comes with qualification. Mervyn King, the Governor of the Bank of England, says that inflation will fall back to below 2 per cent – but not before it has risen above 4 per cent. In a statement to the Treasury Select Committee, King said that the economic slowdown would ensure that inflation fell back below its target within the next twelve months or so. The housing market has cooled, although the decline is nowhere near as great as experienced by the stock market The housing market statistics may look grim, but they are based on extraordinarily thin volumes: Hometrack says that the number of transactions has fallen to levels not seen since the 1970s. “The majority of homeowners simply do not need to move,” says Richard Donnell, Hometrack’s director of research. “They will not do so until either their circumstances change or the outlook for the economy and mortgage rates becomes clearer.” The picture in London is far less gloomy than elsewhere. The latest Chesterton Poll of Polls, compiled by the Centre for Economics and Business Research, shows that while national house prices were just 1.3 per cent higher in June 2008 than June 2007, in London house prices were 6.4 per cent higher. Furthermore, 16 London boroughs actually saw house prices rise in June this year. Chesterton’s findings were confirmed by the Department for Communities and Local Government (DCLG) figures which showed that annual house price growth in May in London was twice that of the national figure (7.8 per cent growth in the capital, compared to 3.7 per cent growth across the UK as a whole). Meanwhile, some property companies insist that the woes afflicting house builders will support house prices over the medium term, because new housing starts have all but collapsed meaning that the supply of new properties will be extremely limited over the next couple of years. However, with home sales also contracting, the key question will be how long it takes for current supply to become exhausted. Another key factor to watch is when will conditions in the mortgage market improve? It is now almost three months since the government launched its Special Liquidity Scheme which allowed banks to temporarily swap their mortgage-backed securities for UK Treasury Bills. This was intended to improve conditions in the credit market, but so far appears to have had little impact. For instance, the total number of mortgage products available on the market is now around 5,280, around 400 fewer products than were on the market at the end of March. Michael Coogan, director general of the Council of Mortgage Lenders (CML) says that “neither the cost nor the availability of wholesale funds has improved for lenders”. Meanwhile mortgage experts point out that despite the fall in Swap rates since mid-June, the cost of fixed-rate deals has continued to rise: the average three-year fixed rate now stands at 7.25 per cent, while two-year fixes averaged 7.07 per cent. As a result, lending volumes remain low. The CML said on July 8 that lending for house purchases did increase slightly in May, but in both volume and value terms lending remains more than 40 per cent lower than in May 2007. First time buyer loans were also up slightly, but once again they remain around 40 per cent down on last year’s figure. Remortgages have also declined steeply in recent months, falling 14 per cent from April to May 2008. Meanwhile, some lenders are citing rising fuel and food prices as yet another reason to tighten lending criteria. Alliance & Leicester, HBOS and Abbey have all announced that they intend to change the terms of their lending in order to reflect rising household bills, which could freeze yet more prospective borrowers out of the market. Amid all the gloom it is worth noting that even taking into account the most pessimistic of forecasts, the outlook for the majority of UK homeowners and property investors is far from catastrophic. Furthermore, the market is protected - to a degree - by the spectacular gains that have been seen in the sector over recent years. And as we go to press, could it be that stirrings of a more optimistic outlook are afoot? Nationwide’s latest house price figures show that the pace of house price fall slowed significantly in June, declining by 0.9 per cent, compared with 2.5 per cent seen in May. Furthermore, over the last ten days, Abbey, Nationwide and HBOS have all reduced the rates on a selection of their mortgage products. 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.
The American Economy The state of the US economy has a significant impact on our own, so it’s prudent to keep an eye on the other side of the Atlantic. “While Wall Street has gone into meltdown since the beginning of June, conditions in the real economy have been unambiguously improving. The latest employment figures, published at the end of June, confirmed that economic conditions had stabilised after their sharp deterioration in the winter, while purchasing managers' surveys, the most reliable indicator of very recent economic trends, suggested a continuation of the modest but clear improvement that began in April. Sales figures from leading retailers were much stronger than expected, showing that tax rebates designed to provide a shot of financial adrenaline to all but the richest US households were doing exactly what the doctor ordered - offsetting the depressing effect on consumption of the credit crunch and the housing slump. As a result, consumer confidence showed its first improvement for six months. Even the figures on home sales have now been near-stable for four consecutive months. Most important of all, the monthly trade figures, published in early July proved that the remarkably adaptable US economy was responding to the credit crunch exactly as the optimists had hoped - by undertaking an immense structural shift from consumer and housing-led growth to growth powered by exports.” Anatole Kaletsky, Associate Editor, The Times ©2008
Bottom Fishers Point to Improving Market News of new funds being put together to exploit investment opportunities in the property and struggling aviation and hotel sectors points to some investors calling the bottom of the market. Sir Richard Branson’s Virgin Group
is well on the way to raising more than $1billion from outside investors
to back start-up airlines and carriers through a Virgin Aviation Fund
and Ryan Prince, the chief executive of Realstar International, has
said the company is seeking individual assets of between €50 million
and €200 million in the residential, hotel and healthcare sectors. UK Remains Top for Inward Investment in Europe KPMG’s latest survey of large multinational
companies, from 15 leading economies, shows Britain is the most popular
destination in Europe for investment by foreign companies. One in seven
expect to make a significant investment here in the next year, and internationally,
only China and the US were more popular.
London House Prices Hold Their Own Latest figures from the National Housing
and Planning Advice Unit (NHPAU) show that average house prices were
unchanged in May. The average price in England and Wales is £183,266,
but the North East was down by 2.4 per cent and the South West fell
by 2.0 per cent. The London market continued to appreciate; with the
average price in the capital being £354,714. Private Rented Assets Outstrip Private Commercial The Association of Residential Letting Agents (ARLA) estimates that the value of assets in the private rented sector has reached £500bn, which outstrips privately owned commercial property. Carried out by Reading University, the report forecasts that rents will climb by up to 15% over the next two years and predicts that the value of UK housing will “almost certainly” increase over the longer term and faster than commercial real estate. Impossible Housing Targets Point to Enduring Undersupply The Construction Products Association (CPA) has pointed
out that it will be almost impossible for the government to achieve
its housing targets. Its prognosis is based on the fact that work will
start on only 147,700 new houses across the UK this year compared with
203,900 in 2007. This is the lowest level since the end of the Second
World War. The sentiment is supported by The Chartered Institute of
Purchasing and Supply (CIPS) who report that UK construction activity
fell at its fastest rate in 11 years, in June; the fourth consecutive
month of decline. A report by the NHPAU points out that falling house prices will do little to improve the affordability of homes for many people. Even a 15% drop in prices will not help the majority onto the ladder. This will buoy the rental market into the medium term.
Barbican Boost Developer, Modern City Living has gained consent to build 69 flats at the Barbican, East of the City of London. The 56,400 sq ft scheme, which will be the first major residential development in the area since 1982, will see the 7th, 8th and 9th storeys of Frobisher Crescent, a building previously occupied by the City University Business School converted into private accommodation. Plans Submitted for Canary Wharf II; Wood Wharf The long awaited masterplan for The Wood Wharf Partnership’s £2bn development next to Canary Wharf have been unveiled. The scheme will feature 5m sq ft of offices in six blocks built around a central square, 1,600 homes and a 2.5 acre park designed by acclaimed landscape architect Martha Schwartz. City Pride Proposals Unveiled World renowned architects Foster &
Partners have unveiled initial proposals for the redevelopment of the
City Pride pub site in Canary Wharf which borders Young Group’s
two iconic 31 and 45 storey residential towers, The Landmark, which
is the pioneer development of a the new residential hub on the western
edge of Canary Wharf.
Pre-Application Proposals for the City Pride Site, Which Neighbours The Landmark at Canary Wharf Include a 5-star Hotel, Restaurants and Coffee Shop The construction, of a mixed use building of the quality mooted by Foster & Partners neighbouring The Landmark will add to the selection of facilities and amenities designed to cater for the area’s swelling number of residents. The Foster & Partners plans for the 2,525 sq m site at 15 Westferry Road are reported to include a 200-bedroom five-star hotel as well as 410 residential units. Neil Young, Young Group’s CEO, welcomes
the Foster & Partner plans; “Although no formal planning
application has been submitted as yet, interest in the City Pride site
is great news for Canary Wharf and demonstrates the continuing confidence
in the area. Foster & Partners’ involvement in looking at
options for the site and the possibility of another iconic development
to complement The Landmark towers will further enhance the area’s
reputation, desirability as a residential location and property values.” Latest Regeneration Plans for Battersea The London skyline could be transformed
under radical new £4bn proposals for the redevelopment of Battersea
power station, which has now been derelict for 25 years. Plans submitted
to Wandsworth Council centre on a 300m (984ft) tower to be built on
the 38-acre site in southwest London, beside the Thames. The huge glass
structure would be higher than the Gherkin. The power station's structure
cannot be altered due to its listed status, so would be converted into
apartments, a hotel and shopping mall surrounded by flats and offices.
There would be up to 3,200 homes on the site. If approved, construction
is set to begin in 2012 and be completed by 2020.
Radical Plans for Battersea Power Station Could see a Striking Glass Tower Built Next to the Iconic Building
YOUNG INDEX - ANNUAL INVESTOR PROFILE There’s nothing ‘average’
about Young Group’s investors, but once a year, we take a snapshot
of our clients. Joe lives in London and has one 1-bedroom apartment and two 2-bedroom investment properties; generally balancing his portfolio of properties with the following spread: 3% studio properties, 30% 1 bedroom apartments, 41% 2 bedroom apartments, 16% 3 bedroom properties and 10% of properties with 4 or more bedrooms. Joe believes that he’s got a good knowledge of the property industry. He’s not intending to sell investment properties within the next 12 months and is considering adding more London property to his portfolio. Neil Young, Young Group’s CEO, commenting on the profile of the average investor, explains: “Given the current market, it’s not surprising that investors are planning to hold onto their buy-to-let investments. They are clearly looking to the long term, citing that the principal reason for holding property assets is to boost their pension provision.” “Much noise has been made about the current difficulties in the finance market, but whilst its true that mortgage finance is more difficult to come by, investors with good credit history who haven’t over stretched themselves and are looking to gear their investments at an appropriate level still have access to mortgage finance and are actively adding to their property portfolios.” This is reflected in the fact that 60% of investors are considering purchasing additional property investments within the next 12 months.” Joe invests principally in the London market; 76% of his UK property investments are in the capital and 59% of his global property holdings are in London. Joe uses the services of a letting agent to source tenants for his investment properties and shies away from managing the properties himself once they are tenanted, preferring instead to instruct an agency to manage the property. Generally, Joe offers his investment properties fully furnished and replaces furniture on an ad-hoc basis, but expects to refurnish every 2 to 3 years. Joe would spend £2,700 on furnishing a studio property, £3,900 on a 1 bedroom and £5,600 on a 2 bedroom apartment. He reviews his mortgage at least every 3 months and chooses a broker that does not charge a fee for their service. He believes that the base rate will stand at 4.50 per cent in June 2009. Joe invests in residential property in
order to boost his pension provision and believes that residential property
outperforms other asset classes over the long term. Joe understands
that residential property forms part of a well balanced investment portfolio
and in addition to his property investments, tends to hold similar levels
of assets in equities and cash on deposit.
Kings Quarter Investors who purchased property at Kings
Quarter, part of the exciting regeneration of Kings Cross should now
ensure that they have considered their finance options. The developer
tells us that completion is expected in September, but Young Finance
is urging investors to make their mortgage applications now as the application
process is currently taking longer than ever. Mortgage Finance Neil Young, CEO of Young Group, points out; “Despite press reports to the contrary, there are good mortgages to be found. However, the specific products available – and their terms – are changing on an almost daily basis, often without warning. It’s vital to remain on top of changes to mortgage products and wider trends within the market to ensure that you receive the best deal.” Young Finance has been fortunate in leveraging Young Group’s standing in the property sector and in a number of situations where lenders have changed the terms of their mortgage offers has successfully negotiated exceptions on behalf of our clients. Notice Served at The Interchange Apartments at The Interchange have now
undergone inspection and been signed off by the National House-Building
Council (NHBC). Consequently, notice has been served and we are in the
process of snagging the apartments to ensure that final build and decorations
have been completed to a high standard. Young Group’s portfolio
managers are working closely with Young Finance consultants on client’s
behalf to confirm that their mortgage funds are in place and will be
available for a smooth transaction to take place on the day of completion,
which will take place from 21 July. The Interchange Rental Website (www.theinterchange8.co.uk) With apartments at The Interchange fast
approaching completion, Young London has already begun marketing clients’
rental properties and launched a dedicated online microsite brimming
with information about the development and the local area. The team
has already pre-let a number of apartments.
Young London's new Rental microsite for Apartments at The Interchange, Dalston, London, E8 The Landmark West Tower Tops Out Another milestone was achieved at The
Landmark early this month with the core (containing the lift shafts
and stairwell) of the West tower reaching its full height. Furthermore,
the glazed cladding that forms the striking exterior is only a few floors
beneath. With c.300 contractors on site, the developer’s team
is able to fit an entire floor of glazing within a week, so the exterior
look of the West Tower will soon be complete. myBASE1 Lettings More than half of the apartments have
now completed and have been let to quality tenants by the Young London
estate agency team. The remaining apartments are set to complete over
the forthcoming weeks and Jean Pierre Kalebic of Young London points
out that there is still high rental demand; “The level of
enquiries for apartments at myBASE1 is still strong and we’re
carrying out plenty of viewings. It’s particularly pleasing to
see that prospective tenants have been impressed with the quality of
the development, and the majority have made an offer.” Young Index Annual Survey: Winner Many thanks to everyone who took part
in our Young Index survey. Everyone who provided contact details was
entered into a prize draw as a ‘thank you’ for taking part.
This quarter’s winner was Jenny Koo Ng, who received £100
of John Lewis vouchers. 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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