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London Update May 2008 Introducing Young London
The Roaring Rental
Market The recent demise of Inside Track, the firm which once promised to show the British public how they could quit their jobs and become property millionaires instead, was greeted with unrestrained glee by the anti-landlord lobby. A clear sign, they argued, of the beginning of the end for the property investor. In fact, times are not quite as hard as a casual reading of the newspapers might suggest. While the capital growth which some investors had come to take for granted has disappeared, rental income is rising fast. And the Inside Track business model, which promoted off plan investment in city centre flats, with the intention of flipping at a considerable profit, was never one embraced by the majority of professional or even amateur investors. The latest figures from specialist buy-to-let lender Paragon Mortgages show that average annual rental incomes across the country rose to £12,041 to the end of the first quarter of 2008, up by 4% on the figure at the beginning of the year. But the overall picture of the rentals market is not uniform: there are significant national variations. While Wales saw rental incomes fall by a shade under 10% over the year to March 2008, in the south west of the country they rose by more than 40%. Growth was also strong in East Anglia, the North West, Yorkshire and in Greater London. Landlords in the capital saw average rental incomes rise to just under £21,000, more than 20% higher than they were in the first quarter of 2007. Yields in the capital did continue to fall: the average gross rental yield in London was just 5.6% thanks to an annual increase in buy-to-let property values of 24%. However, as house price growth slows and rental incomes continue to rise, the yield picture will improve. In the meantime, it makes sense for investors to seek out higher-yielding types of property. At the bottom end of the market, that means looking at investments such as houses in multiple occupation (HMOs) and flats above commercial properties. At the other end of the scale there is the lucrative corporate sector. In London lettings terms, corporates are hugely important: of the world’s top 500 companies, 375 are located in London; 287 foreign banks have offices in the City. That adds up to hundreds of thousands of employees who need to be housed in the capital, many of whom will be on relatively short-term contracts and who will choose to rent, rather than buy. In addition to semi-permanent employees, there is a host of other more transient workers who come to the capital for a few weeks or a few months and who require accommodation. A decade ago, these workers would have had to stay in hotels – at vast cost to their employers. “Today, corporates are more likely to choose serviced apartments,” says Max Thorne, Vice President of Development for Europe, Middle East and Africa at BridgeStreet, an international provider of serviced apartments. Not only are serviced apartment rates cheaper than those in hotels, but there are fringe benefits. “Savings can be made on things like laundry bills and room service because serviced apartments have washing machines and kitchens, so companies can revise their per diem allowance,” Thorne says. The serviced apartment market has expanded rapidly over the past decade. “We started out here in 2001 with 500 apartments. We now have more than 1,000 and we are expanding all the time.” In April this year, BridgeStreet announced a joint venture partnership with Young Group, taking over the management of Young Group’s apartments in The Water Gardens, Canada Water. For the investor, the benefits of serviced apartments are clear. “The returns are significantly higher,” Mr Thorne says. “Typically, on a property costing £550 to £650 per square foot, you could expect a serviced apartment to yield around 25% more. You don’t have the occupancy issues that you have with a private buy-to-let. Then there is the hassle factor – or rather, the lack of hassle." “With a serviced apartment, the investor can just hand it over to us and they don’t have to worry about it for the next five years,” Mr Thorne says. “You don’t have tenants ringing you up on a Saturday night to tell you that the washing machine is broken.” There are potential downsides in the corporate letting sector, however – notably that it is likely to weaken as the credit crunch continues. An internal report by JP Morgan, leaked to the media last month, estimated that 40,000 City jobs could be at risk as a result of the global credit crunch. The Centre for Economics and Business Research, the independent consultancy, had a more optimistic but nonetheless worrying forecast of around 19,000 job losses. So far, however, Mr Thorne says that the market for serviced apartments is holding up exceptionally well. “It would be foolish not to be cautious, but if you look at our forward bookings, we have sold more than we had done at the same point in 2007,” he says. “We have taken on 100 more apartments so far this year, occupancy is above 90% and our yields are stronger than they were last year.” So strong is demand that BridgeStreet plans to take on a further 150 apartments over the next four weeks. It should be pointed out that continued economic uncertainty is not at all bad for the lettings market. Lettings agents report increasing numbers of ‘in-betweeners’ – people who have sold properties but who are reluctant to re-enter the property market before either house prices fall or the economic situation improves. Moreover, at the higher end of the market, many of those who do want to buy at the moment are unable to do so thanks to the acute shortage of suitable properties on the market. Prospective first time buyers, meanwhile, may be heartened by current market conditions, but many are now unable to get adequate mortgage finance thanks to the problems in the credit markets. Supply issues affect this end of the market, too: as noted in last month’s update, figures from the Royal Institution of Chartered Surveyors (RICS) show fewer new houses are in the pipeline. With the big house builders and property companies facing a difficult year ahead, the supply of new homes is likely to dwindle further; this increasing constriction of supply is yet another factor set to underpin the residential rental market over the coming months. 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. Residential Returns Triumph The UK residential investment market delivered strong returns in 2007, outperforming commercial property, bonds and equities, according to new figures from Investment Property Databank (IPD). The residential market saw overall total returns to investors of 17% in 2007, up from 16.4% in 2006. Commercial property returns were -3.4%, whilst equities and bonds returned 5.3% and 6.4% respectively. Ian Cullen, co-founding director of IPD, said: “Residential investment delivered its highest return in five years, and the second highest on record, reflecting the resilience and weight of capital deployed in central and inner London.” Most regions produced returns of over 11%, except the South West, Midlands and Wales, at 8.1%, and Northern England, at 4.3%. IPD’s UK Residential Investment Index is the only index to benchmark residential investment property in the same way that commercial property is measured. Redressing Repossessions The headlines are all about the rising number of people losing their homes. But both the government and mortgage lenders point out that the number of homes repossessed last year was just 27,100, barely a third of the peak in the early 1990s. While repossessions are projected to increase, even the most dire prediction is still well below the levels of the last recession. Interestingly, latest figures from the Council of Mortgage Lenders (CML) show that fewer than 0.1% of buy-to-let mortgaged properties were repossessed during the last six months, a whopping 18% lower than those for residential mortgages. Rental Rates Rise The cost of renting a home in London has risen markedly in the last few months as demand has been boosted by first-time buyers who have decided to put their purchasing plans on hold.
Research by Foxtons shows rental prices in the capital have gone up by between 10 and 20% on new tenancies, while renewals have gone up by around 7%. "This is essentially down to the factor of more people needing properties than there are properties available," commented Foxtons' letting director Ed Phillips. Figures from the March Halifax House Price Index showed that the average house price in the capital rose by 1.6% in the first three months of this year, while Primelocation.com’s index (which tends to focus on prime London property) showed an increase in value of 3.3% in March. Lenders Limit Options Research from price comparison website moneysupermarket.com shows the number of buy-to-let mortgages available has fallen by around 85% in the past year and by 40% in the last month alone, despite an increase in demand for rental properties. Neil Young, Young Group’s CEO points out, “As the mortgage market tightens, our relationships with valuers and lenders are vital in securing mortgage offers that are no longer widely available.” The website also indicated that up to 5% of would be homeowners have been forced off the property ladder into rented accommodation since October 2007 - further fuelling the rental market. HIPs Further Delayed
The full introduction of Home Information Packs (HIPs) has been delayed again. By the end of this month all sellers were supposed to complete a HIP, with information that included title deeds, local searches and an energy performance certificate. The Department of Communities and Local Government has now delayed the final roll-out until the end of the year. Housing Minister Caroline Flint has introduced a package of new measures that will lead to the introduction of a new ‘industry code’ governing the much-maligned HIPs. The government has now appointed the Royal Institution of Chartered Surveyors and other bodies - including the Law Society - to help it establish a new set of standards to improve HIPs. New Home Numbers Dwindle Data from the Office for National Statistics (ONS) shows the number of new homes being built fell by 27% in the first quarter on the previous three months. The ONS figures indicate that the government’s plans to build 2m new homes by 2016 are close to collapse and the constrained supply of homes is set to continue for years to come. Falling construction investment is one reason the National Institute of Economic and Social Research has cut its forecast for UK economic growth to 1.8% this year and next. BoE Predicts End of the Credit Crunch
The effects of the credit crunch should start to wear off and market confidence return in the coming months, Bank of England (BoE) deputy governor John Gieve has said. Speaking as the Bank released its latest Financial Stability Report, Gieve acknowledged that a market correction had been "unavoidable" after lenders had operated with an "unsustainably low" pricing of credit risk. However, he said, the price of this risk was now higher than was warranted by the current market conditions, meaning there are good reasons for confidence to return. He concluded: "The most likely path ahead is that confidence and risk appetite will return gradually in the coming months," adding that the recent special liquidity measures undertaken by the BoE through its £50 billion bond scheme were intended to help this process. Such a situation could see an easing of the mortgage market, which may improve the availability [and lower the cost] of buy-to-let mortgages. This was echoed by the RICS’s Simon Rubinsohn who confirmed that any boost provided by the scheme would see the property market improving as a result. NAEA Puts House Prices in Context Figures released by Nationwide show that the average UK property now costs £178,555, down 1% from a year ago, but the National Association of Estate Agents (NAEA) has said nobody should get carried away with a fall in house prices. NAEA Chief Executive Peter Bolton King stated that this was a "tiny" fall compared with the large rises in price in recent years and added that there were significant regional variations, as well as noting that the factors that underpin the market – i.e. low interest rates, low unemployment and "pent-up" demand – are all currently present. An example of regional variations was provided by the Land Registry figures for March, which showed four regions experiencing positive monthly price growth and London leading the field with an annual price increase of 10.5% to March 2008. Looking at the UK as a whole, the Land Registry Figures (often said to be the most accurate indicator of property value, as it’s based on actual transaction prices), do not echo Nationwide’s findings, suggesting instead that UK property prices fell by less than 0.5% in March, representing an annual rise of 3.6%. Tax Regime Changes Court Big Businesses The Treasury has succumbed to sustained pressure from big business and agreed to water down controversial proposals to change the UK corporate tax regime. Several large multinational British companies had said that they were prepared to move their headquarters from the UK amid concerns that the Treasury was preparing to tax the profits they derived overseas. According to the Financial Times, a Treasury spokesman has confirmed that the department has drawn up a revised set of tax plans after extensive consultation with UK companies. City Jobs Will Ride the Credit Crunch The media’s reports of severe financial job losses are over hyped, according to City office agent BH2. The insurance, accountancy and law firms who make up the bulk of the inhabitants of the City’s financial quarter will not be as severely affected by the downturn as the press would have one think. They will simply restructure their businesses so that insolvency and litigation come to the fore rather than finance, and they will recruit in those areas. While it's true there may be up to 22,000 redundancies, there is likely to be as many as 6,000 jobs created, making a net deficit of 16,000, which represents just 4% of those employed in financial services within the capital. Mayor Blows Winds of Change Through Property Sector After a tight fought contest, Boris Johnson has taken over from long-serving Ken Livingston as London’s Mayor. The decision is likely to have a major impact on the future of housing within the capital. It was high on the agenda throughout both camps’ Mayoral campaigns as London continues to face a housing crisis as a result of increasing population. Johnson and Livingston have starkly contrasting views on the solution to the capital’s housing shortage; while Livingstone had developed a detailed 'London Plan' during his reign which encouraged regeneration through contemporary statement design and towers, Johnson's housing manifesto shows an opposition to high-rise, favouring a more traditional approach. Indeed, his website states: “We must develop more family-sized homes with gardens, and we need to give more Londoners the chance to own their family home and should leave a lasting legacy for future generations.”
Copyright Laura Callan Over the eight years that Livingstone was in power he held planning central to his manifesto when creating his London Plan and appointed leading architect Richard Rogers as his advisor. Johnson has already announced that Sir Simon Milton will leave his role as leader of Westminster City Council to become senior planning policy advisor next month. Time will be the judge as Johnson unveils his housing policy. Fortress Wapping for Redevelopment London property tycoon Marcus Cooper is poised to buy Rupert Murdoch's News International site at Wapping for more than £200m. Cooper beat a host of bidders including Songbird, the owners of Canary Wharf, and Land Securities. Cooper will create a 2m sq ft housing, office and retail scheme. Thought to be a commercial goldmine, the site could accommodate 1,000 homes worth more than £500m. Murdoch will make upwards of £190m on the land he bought over 25 years ago for just £10m, and will retain a lease of between three and five years on the site while he looks for alternative venues. His newspapers may move to a City office being built by Minerva [St Botolphs, a 500,000 sq ft steel and glass building scheduled for completion in 2010] or to Kings Cross. London City Revamp The revamp of London City Airport continues apace; exterior refurbishment work, with £30 million of new aircraft parking stands is underway and the new departure lounge will open to the public in early June, providing 250 more seats and enhanced terminal facilities. The work centres on a major upgrade to modernise the terminal through free internet access points, self-service check-in kiosks and additional shopping facilities. Richard Gooding, chief executive of the Docklands airport, commented: "The growth the airport has witnessed is largely credited to our convenient location on the doorstep of Canary Wharf and the City of London. Frequent flyers demand a premier service and our track record of transferring passengers to their destinations with ease and speed has ensured their continued loyalty.” Mirax Group’s London Debut Russian billionaire Sergey Polonskiy’s Mirax Group has made its first UK acquisition; a luxury central London residential scheme. Mirax is investing £10m in Cornwall Terrace, the former home of British Land near Regents Park, which is owned by Marcus Cooper Group and Oakmayne Properties. British Land sold the property to the joint venture for £50m in 2006 and after combining it with neighbouring buildings, the partners won planning consent for conversion to residential use. The site will be transformed into eight luxury homes, due for completion in 2009. Knight Frank reports values for residential property aimed at rich overseas investors of up to £4,000/sq ft. The agent is marketing the 86,120 sq ft scheme at £3,500/sq ft, valuing it at more than £300m.
The property in Cornwall Terrace will be transfored into eight homes New Commercial Tower for Canary Wharf According to rumours reported in The Times
newspaper, Canary Wharf is planning a new skyscraper on Churchill Place.
It is an expansion of a building already planned for the site which
is thought to be c. 500,000 sq ft. It is thought that Canary Wharf Group
has already secured a tenant for the new office space.
New skyscrapper planned for Churchill Place
Real Men Challenged to Cycle The Real Man Cycling Challenge will be the capital’s first closed road corporate cycling challenge and will see 2000 cyclists taking to a 34km course around Canary Wharf. The Challenge, which takes place on Sunday, September 14, aims to raise over one million pounds to help The Prostate Cancer Charity fight the disease through research, support, information and campaigning. Registration is now open with places strictly limited to 2,000, made up of 500 teams of four, offered on a first-come, first-served basis. For more information and to register a team,
visit: www.realmancyclingchallenge.com. Annual Portfolio Reviews Underway Our Portfolio Managers are currently preparing annual portfolio reviews for clients with apartments that completed before the end of April 2008. These will be circulated in due course. In addition, self assessment tax schedules will be provided to those clients taking advantage of Young Groups’ array of integrated services. Young Finance As touched upon in this issue’s Economic and Market Outlook, mortgage lenders are continuing to change the availability of products at a rapid pace. Young Finance has been working closely with a number of lenders and the main surveying practices responsible for providing lenders’ valuations to secure the best possible mortgage terms available. Of particular urgency is ensuring that lenders honour their agreements in principle and release mortgage finance for our clients completing at myBASE1. Neil Young, Young Group’s CEO, comments; “Even some of the best known mortgage lenders are now changing the terms of their mortgage offers after issuing an agreement in principal. The situation is unprecedented but thanks to the reputation that Young Finance has built and the strong relationships that we have established with lenders, we’re able to ensure that clients’ mortgage funding is secured - and at the most favourable terms available.” Fine Wines Many thanks to all of our Premier Clients who attended the wine tasting and auction evening at the prestigious Lansdowne private members’ club in Mayfair.
The event, hosted in conjunction with Cadman Fine Wines, proved to be a great success and we hope everyone found the evening enjoyable.
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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