London Update

November 2006

High Rise Living in London
Base Rate Rises to 5%
Economic Outlook
Market Comment
Other News

High Rise Living in London

High-rise living in London is on the up. American-style condominium finger towers are rising in Docklands and in the next decade, landmark skyscrapers with luxury apartments are set to transform the South Bank from Vauxhall to London Bridge. What virtually no-one realises is that high-rise living in London actually has a longer history than even New York. In 1888, the tallest residential block in the world was Queen Anne’s Mansions, a vast 14-storey pile of brick opposite St James’ Park station. Queen Victoria was not amused - it spoilt her views of Westminster from Buckingham Palace. Sadly, Queen Anne’s Mansions were replaced in the 1970s.

From the late 1950s, when building regulations were changed to allow skyscrapers to push above London’s skyline, office towers were always outnumbered by tower-blocks. These were social housing built with the philosophy to pack as many homes in as cheaply as possible, by system-building and stacking them up high. In the next two decades, over 300 tower blocks of 50 metres or higher were built across London.

Shard London Bridge

By and large, this massive social experiment was a disaster, and shoddily-built negligibly-maintained tower blocks became synonymous with social deprivation. Strangely, flats in the better-designed or refurbished towers can now command premium prices when they come into the market. That is partially because of the revolution that has happened in attitudes to high-rise living.

In hindsight, luxury high-rise in London is obvious. In a city where land is in short supply, and a view, particularly of the river Thames, commands a premium, developers could leverage riverside land value by building high on it. The first two towers to exploit this formula in the late 1980s were at Chelsea Harbour and Cascades on the Isle of Dogs. Flats sold fast in these to celebrities in the west and Canary Wharf workers in the east. The social stigma of residential towers was eliminated, and they now play their part at the very top of the market. Mayor Livingstone likes them because luxury towers are strong urban regeneration tools, and he requires developers to include affordable housing, although that has sometimes been off-site.

Nowadays, it’s hard to find a stretch of the Thames where luxury towers are not established or in the pipeline, and they are spreading inland, to places as diverse as Islington and Acton. World-class architects like Richard Rogers and SOM design London hi-rise residences. The tallest building in the EU, the Shard at London Bridge, will contain flats as well as offices and hotels. Not all new towers will cut striking profiles, and not all developers will build in arrangements for the decades-long building maintenance cycles that were not planned for in the 60s and 70s towers. But well-planned, well-designed residential towers at transport nodes, in the long-term, should be as safe as houses.

Written by Herbert Wright – Author of London High (Available in stores soon)

Base Rate Rises to 5%

As we predicted in October’s newsletter, this month the MPC raised the Bank of England base rate 25 basis points, from 4.75% to 5%. The main aim was to assuage inflationary fears but the robust housing market had not gone unnoticed and a rise was not unexpected. With 2 rises in quick succession and a housing market showing no signs of slowing, what is the outlook for rates?

According to David Smith who, in his Economic Outlook, Sunday Times, 12th Nov. 2006, feels, “Most economists would put the neutral rate of interest in Britain at between 4.5% and 5.5%...[this is] the level at which monetary policy is neither stimulating nor restraining the economy.” He goes on to say, “…we are now slap bang in the middle of what can reasonably be regarded as the normal range for bank rates.”

Swap rates support the consensus in the market that in the medium term a base rate around the 5% level should be considered the norm.

Economic Outlook

	There is cause for optimism regarding future interest rates, although the MPC voted to raise rates at the beginning of this month, a move widely forecast. The vote was surprisingly split 8 – 2 rather than 9 – 1, as most people expected. Dove, David Blanchflower, was joined in his vote to maintain rates at 4.75% by Rachel Lomax, BoE Deputy Governor for Monetary Policy, which could suggest there is less desire on the committee for another rate rise early next year.
	The minutes of the meeting reveal the main fear driving this recent rise is the long term inflation target of 2%, and most felt this would be exceeded in two years if rates were held for another month. One of the dissenters, though, felt a rise was less necessary, as there is probably room for the economy to grow at a faster pace which would help take up the slack in the labour market.
	Many in the City have taken this news as a sign that interest rates may have peaked. Interest Rate Futures rallied due to investors scaling back bets of further rate rises next year and an economists’ poll by Reuters shows that 60% do not expect a rise in the next 3 months.

Market Comment

	Some estimate that over 4,200 City workers (up from 3,000 a year ago) are due to receive bonuses in the new year in excess of £1,000,000. Ed Balls, Economic Secretary to the Treasury, feels these figures confirm his assertion that “London could become the world’s greatest, global, financial centre.” Michael Snyder, Chairman of the City’s Policy and Resources Committee said “London’s economy has grown strongly, driven substantially by its world leading financial services industry.”
	Savills Residential Research has forecast 7% annual house price growth for 2007, and substantially more in the London market. Yolande Barnes, Director of Savills Residential Research, feels London can expect to enjoy growth of between 12% and 15% for 2007, further commenting “…we have seen considerable growth in these sectors [London and South East] this year, largely fuelled by the buoyant financial markets. With no sign of this weakening combined with the prospect of City bonuses amounting to £8.8billion by the year end…….We estimate £5.5billion from City Bonuses will find its way into housing…”
	According to Rightmove’s monthly property market report, London property rose by an impressive 2.8% over the last month, bringing the yearly gains to 18.2%, which is significantly higher than the rest of the UK. Miles Shipside, Rightmove’s Commercial Director commented, “The divide between London and the rest of the country is still growing. The capital is leading the way, with prices 50% higher than the national average. This head of steam could mean that the hike in interest rates to 5% will not affect the majority of the London property market. [This will result in] a tough time for first time buyers who have to rent for a longer period of time….leading to a more and more buoyant buy-to-let market which in turn causes prices to rise even higher.”

Other News

Abbey have, this month, introduced a mortgage product which will allow borrowers up to 5 times their annual salary, though applicants must meet strict criteria, such as having impeccable credit ratings, low debt, a salary exceeding £50,000 and a 25% deposit.

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