London Update

June 2007

London’s Property Market Leaves the UK Behind – By Paula Hawkins
The Landmark - East & West
Annual Percentage Price Change by Area
Economic Outlook
Market Comment
Other News
Young Group's June Highlights
About Young Group

London’s Property Market Leaves the UK Behind – Paula Hawkins

From struggling first time buyers at the lower end, to super-rich overseas based buyers at the top, the London property market is becoming increasingly segmented. We are starting to see more and more of a disconnect between Central London and the mainstream housing market in outer London and the rest of the country. Indeed, there is even a dislocation between prime Central London and super-prime London – those properties costing £4 million or more.

While the mainstream UK housing market is starting to slow, prime London property continues to go from strength to strength. Figures from Knight Frank show that prime London prices have risen by 57% since June 2005, while prices in the rest of the country have risen by a more modest 21%. These two markets are driven by different forces. While the mainstream housing market is influenced primarily by economic conditions – and in particular by interest rates – prime Central London is less vulnerable to fluctuations in interest rates. Overseas buyers, the strength of the City, and the resulting level of bonuses are what drive property prices in London’s most exclusive districts.

The Central London market is decoupling from the UK as a whole

However, there is one factor common to all levels of the property market: an acute shortage of the right type of housing. At the top end, a growing pool of buyers is chasing a finite supply of properties and City money now has to compete with increasing numbers of high-net-worth foreigners who are keen to snap up London pads. More than half of London’s multi-million pound properties are now sold to resident non-domiciles, who do not have to pay tax on their international earnings and who can benefit from lower stamp duty rates by buying through offshore companies. Just a third of super-prime properties (worth between £6 million and £8 million) are sold to British buyers, with Russians buying 20%, other Europeans buying 13%, Americans buying 11% and buyers from the Middle East taking 8%.

Increasingly, demand from the super-rich is for lateral living – large apartments across a single floor – rather than the traditional Georgian and Victorian townhouse model that British buyers are so used to. Wealthy buyers also demand security: gated properties and those with secure parking are increasingly desirable. But there are very few properties which meet these sorts of specifications within the capital, and with a shortage of development land, there is relatively little scope to build more.

The shortage of suitable development sites is particularly acute in the capital. In Kensington and Chelsea, for example, there are 35 different conservation areas covering some 70% of the borough and in Westminster, conservation areas make up 75% of the land. As a result, very few new properties are being built: according to Knight Frank, completions in the City of Westminster fell from 1,315 residential units in 2000/2001, to just 503 in 2004/5.

Because of this shortage of available land, the price that developers are prepared to pay has rocketed. In April, Candy and Candy scooped the unofficial record for the most expensive development site, paying £900 million for the former Chelsea Barracks, representing a staggering £70.3 million per acre. The development is the brothers’ second Central London project to be launched this year aimed at super-rich international purchasers and comes hot on the heels of One Hyde Park, where apartments are set to cost up to £20 million each.

At the opposite end of the market, the supply problem is equally acute, and there are now clear signs that first time buyers are losing the battle to get onto the housing ladder. In 2002, 527,000 first timers bought property in the UK, whereas last year, there were just 359,000 of them. However, the dwindling number of first time buyers has not yet resulted in falling prices, largely because, to date, there have been plenty of buy-to-let investors to step in and buy the one and two-bedroom apartments which first timers cannot afford. So robust is investment demand that there have been calls from some quarters to curb it in order to ensure that more of our affordable housing stock ends up in the hands of first time buyers. This week, the Chartered Institute of Housing called for the tax relief offered to investors to be withdrawn.

But, it’s a well known fact that developers remain keen to court investors, especially those that purchase pre-completion. By pre-selling units to investors, developers are able to secure more favourable funding, which aids the development pipeline and increases the supply of property.

Similarly, Michael Ball, professor of Urban and Property Economics at the University of Reading, claims that investors have actually improved the stability of the housing market. By increasing the size of the private rented sector, there are now more alternatives to social housing and owner occupancy and therefore it is less necessary for young people to overstretch themselves by taking on large mortgages too early in life.

He argues that the move towards renting among the young is due not just to affordability issues, but also reflects lifestyle factors. People are marrying later and having children later in life, and more and more people now choose to live alone. Moreover, employment patterns have changed: we change jobs a great deal more frequently than we used to.

With Central London property prices being buoyed by an influx of overseas money and the continued shortage of development land, the London market will become increasingly disconnected from the rest of the UK. Indeed, some experts are now suggesting that many of the capital’s prospective first time buyers will actually be ‘never time buyers’: without a significant correction in house prices – which at present seems unlikely given the strength of demand and relatively low interest rates – we may have to move towards a more European housing model in which people rent for the long term, rather than buying.

Written by Paula Hawkins – Paula freelances for The Times, Sunday Telegraph and Evening Standard.

The Landmark - East & West

Following Young Group’s acquisition of the West Tower at The Landmark development, they have recently announced they have secured the remainder of the development. Young Group have now secured both West and East Towers (644 private apartments), 31 and 45 storeys respectively, 28,000 square feet of commercial space and the freehold to the entire development, as well as 195 parking spaces and 800 bicycle bays! The retail value of the development is approximately £400 million and completion is due in 2010.

Neil Young, CEO of Young Group, comments: “The Landmark represented an excellent opportunity for investors and we were keen to secure the entire development at an early stage. Following our purchase of the West Tower when it came to market in December 2006, we’re now delighted to have added the 45 storey East Tower to our portfolio, and have secured the freehold of the whole development. The Landmark is certainly creating a buzz within the market and we’ve already had interesting approaches from both private and institutional investors.”

The Landmark (CGI) - Canary Wharf

The Landmark will be built by Chalegrove Properties. The project architects are Squire and Partners, known for high profile, award-winning projects such as The Knightsbridge, Capital East (Royal Docks) and Chesham House (Warwick Street). Peter Murray at King Sturge represented the vendor, Celtic Motors (C.M.) Limited.

Tony Bell, CEO of Chalegrove Properties, comments: “We’re delighted to be building on our existing relationship with Young Group, and are particularly excited to be working together on such a prestigious development.”

“The acquisition of The Landmark further endorses the confidence from the investment market to acquire residential property in and around the Canary Wharf location,” said Peter Murray, Partner, King Sturge LLP.

Annual Percentage Price Change by Area

Chesterton Residential Trends Review, 1st Quarter, 2007

Click to view a larger image

Economic Outlook

Many commentators are expecting at least one more interest rate rise this year and perhaps even two, a view supported by the latest Monetary Policy Committee (MPC) meeting minutes for June. For only the second time in the MPC’s 10 year existence, the Governor of the Bank of England (BOE) was on the losing side of the extremely close vote, with four members feeling a rise was necessary and only five voting to maintain rates at their current level. The doves claimed that another rise would catch the markets by surprise and felt a measured approach to rate rises was needed due to the high level of personal debt and early signs of a slowing housing market and consumer spending. The hawks, on the other hand, did not feel a hike would have been a surprise, and felt that by raising rates now, the peak could eventually be lower.

It may well be that another rise will not be needed though, as data from other parts of the economy point to an easing of inflationary pressures, consumer spending and house prices. Since the MPC decided to leave interest rates at 5.5% both Tesco and Sainsbury’s have reported lower non-food sales growth than expected. "It appears that higher UK interest rates might finally be starting to bite," said Sam Hart, retail analyst at Charles Stanley. House price inflation across the country has also slowed to its lowest rate for some time with only London, fuelled by City workers and wealthy non-domiciles, still powering ahead unabated. These factors, coupled with the benign pay rises experienced in the first quarter, could well mean we have reached or are nearing the peak of the current rate cycle.

Market Comment

The government’s decision to delay the introduction of Home Information Packs (HIPs) to August has contributed to the average number of properties per estate agent rising to the highest level for 3 years, according to Rightmove.co.uk. "The rush to beat the impending HIPs deadline appears to have attracted some poorly motivated sellers to the market. Their main motivation will have been to save some money avoiding a HIP, rather than being realistic on price because they had seen a property they desperately wanted to buy."

Although higher borrowing costs and an increase in the number of properties for sale is slowing the housing market across Britain, Central London is still forecast to buck this trend, thanks in large to the recent influx of wealthy business people from Russia, India and America and the booming financial services sector. For instance, city bonuses are set to exceed last year’s record £8.8 billion, Jonathan Said, senior economist at the Centre for Economic and Business Research (CEBR) think tank said: “Our forecasts are for City bonuses to be slightly up on last year. It will be another massive payout.” This has prompted Savills estate agents to increase their price rise prediction for prime Central London in 2007 from 15% to 20%.

Other News

Morgan Stanley and Goldman Sachs Group Inc have raised a staggering $12 billion for a variety of Global property funds, highlighting the confidence global investors have in real estate. Morgan Stanley’s high-return real estate funds have posted average gains of 20% since 1991 and thanks to investors seeking better returns than offered in the money markets, property funds are expected to raise a record $69 billion this year.

If inflation is a problem in the UK, recently reaching the heady heights of 3.1%, spare a thought for the Zimbabweans. Officially Zimbabwe’s inflation rate is 4,500%, but independent economists and retailers put the figure at closer to 11,000% and rising quickly. The US ambassador to Harare, Christopher Dell, commented, “I believe inflation will hit 1.5 million per cent by the end of 2007. I know that sounds stratospheric but, looking at the way things are going, I believe it is a modest forecast." Apparently, if you can afford to play golf, it is better to buy your drinks before you start the round as it is likely prices will have risen by the time you finish!

Young Group's June Highlights

Property Portfolio Management

We are delighted to announce a new addition to the team – Tim Collins joins us as Commercial Director from Nelson Bakewell.  Tim is a Chartered Surveyor who has many years experience in the commercial property sector and will bring his expertise to bear on all future Young Group investments.

Young Property

In June we purchased our 5th development in its entirety; The Retreat in Earlsfield, SW18, which was released to Premier Clients at the end of last week. Located in an area of gentrification in South West London it offers great long term potential combined with a low risk profile. We will be launching this high quality, secure gated development to the rest of our registered investors shortly, so watch this space.

Young Lettings

Young Lettings has had a busy month due to the imminent completion of our Union Wharf development. We have had a fantastic response to our marketing of Union Wharf which has resulted in a number of properties being secured by tenants pre-completion. It is still very early days for Union Wharf and local market trends show that prospective tenants begin their search for a property around 4 weeks prior to the date they require possession. Across the portfolio, Young Lettings have had a high retention rate of tenants renewing their existing Tenancy Agreements for a further 12 months.

Young Finance

Young Finance has recently expanded its service offering to include Mortgage Protection products such as life and critical illness cover, General Insurance policies including buildings, contents, landlord’s public liability cover, and private healthcare.

Young Furnishing

To celebrate the launch of a new range of internationally sourced furniture, Young Furnishing is offering a FREE kitchen pack with each furniture package purchased during the month of July.

About Young Group

Young Group specialises in providing Property Portfolio Management services to private investors, identifying the best off-plan opportunities in London on their behalf and managing the entire investment process - from sourcing the property through to financing, furnishing and letting.

Young Group is a wealth manager with a focus on property as an asset class. Young Group owns all the property it sells, and also retains around 10% of properties for its own portfolio. As the principal in every transaction, Young Group does not realise any profits until completion, giving investors 100% confidence that properties will ‘value up’ and that financing will be secured.

In the last 12 months, Young Group has transacted in excess of 1,500 apartments, with a retail value of £630 million. Over 50% of units have been bought by multiple investors. The Group’s lettings division, Young Lettings, has successfully let all investors’ apartments within a week of completion.

For each property exchange, Young Group donates £50 to Children with Leukaemia, the UK’s leading charity dedicated exclusively to fighting Britain's biggest childhood cancer through pioneering research, new treatment and support of children with Leukaemia and their families, and to Norwood, the Children and Families First charity which provides support to families facing social difficulties.

t:  +44 (0)845 356 1000   e: info@younggroup.co.uk