Updated: Jan 26, 2021
LUDGROVE NEWSLETTER, NOVEMBER 2020
"Buy land, they're not making it anymore" Mark Twain
"Buy land, they're not making it anymore" famously said Mark Twain. And so it is to Prime Central London (PCL) where over the long-term property owners have enjoyed consistent annual price growth with limited downside, making the area one of the world's leading real estate markets for investment.
However since the market peaked in 2014, values have fallen considerably whilst at the same time Quantitative Easing and zero or near zero interest rates have inflated assets in much of the Western World. Where then do PCL values sit in this context? Just how far have prices fallen and how much value does the area offer as an investment in comparison to other assets? Our CEO and former Fund Manger, Fraser Slater takes a look:
HOW FAR HAVE PRICES FALLEN?
1. Prices are at a 13 Year Low: The consensus view is that prices peaked in 2014 and are down around 16-20% (depending on the source). However over the long term it is important to assess property prices in real (ie inflation-adjusted) terms to adjust for changes in purchasing power. After the market peaked in mid-2014 prices have fallen 30% in real terms and have now returned to mid-2007 levels. Effectively then, there has been zero growth in PCL values in the last 13 years:
2. The Decline is the Longest on Record: The 2014-2020 downturn is comfortably the longest PCL recession on record at 75 months, far outstripping the 1989-92 and 2008-2009 recessions. Clearly a recovery from these depressed levels is long overdue:
3. ... And the Second Deepest: whilst the real-term decline in this cycle has not been quite as severe as the 1989-92 recession, prices are at the level where they have historically troughed and then recovered strongly:
4. In the Meantime QE has Inflated Other Assets: PCL has been left behind as QE and near zero interest rates have materially inflated other asset values globally:
HOW MUCH VALUE IS ON OFFER?
1. PCL Values are Cheap Relative to London: PCL is trading near the low of its 10 year trading range versus the London property market, offering considerable value for those looking to switch out of the mainstream London market into PCL. Extremes in the ratio tend to offer good buy/sell signals and the fact the ratio has bounced off the 155-160% level 3 times in the last 4 years suggest a bottom may already be in place:
2. PCL is the Cheapest on Record Relative to UK Gilts: Commonly used as an indicator by professional real estate investors to indicate the opportunity cost of owning property, the spread between the average PCL rental yield and risk-free UK Bonds (Gilts) is showing extreme value trading at a 20 year high. Separate research by Ludgrove has shown that historically when the spread between PCL rents and Gilts has been positive, the average PCL capital return has been +8% p/a:
3. PCL is Cheap Relative to Other Assets on a Yield Basis: PCL rental yields are trading at the upper end of their 10 year range and this compares favourably with rental yields in England and Wales, the MSCI World Equities Dividend Yield and UK Government Bonds - all of which are trading at or near 10 year lows. PCL therefore offers relatively good value compared to other assets:
4. Sterling Offers Additional Value to Overseas Buyers: Despite the rally following the 2019 General Election, Sterling still trades near a 40 year low against the Dollar making UK assets attractive to overseas buyers. And it is not just US Buyers who are well placed to benefit from Sterling weakness, but also the large number of Dollar-pegged regions that favour London property such as Hong Kong, Malaysia, Singapore, Qatar, Bahrain, The UAE and Saudi Arabia. Historically bouts of Sterling weakness have led to surges of overseas buying in PCL and it is interesting to see how troughs in GBP/USD in 1985, 1993, 2002 and 2009 preceded significant gains in PCL values:
5. Mortgage Costs Are Exceptionally Low: Finance is cheap with mortgage costs having fallen to record lows. It is also noteworthy that over a period when finance costs have fallen around 65% there has been no real terms growth in PCL - something that is wholly incongruous with other assets:
On a number of fronts it is evident that the PCL market is anomolously cheap and offering homeowners and Investors an exceptional buying opportunity. Prices in real terms are the lowest in 13 years and the decline from the 2014 peak is the longest and deepest on record. PCL is also cheap relative to the mainstream London market and other assets including equities and bonds. Finance costs are exceptionally cheap and the near 40 year low in Sterling/Dollar offers overseas buyers one of the best PCL buying opportunities in decades. The historic coincidence of lows in GBP/USD and strong rallies in PCL also gives us further conviction we are at or near a low.
Despite all of the above we would not be surprised to see further downside in PCL over the 2-3 quarters as negative sentiment surrounding Covid continues to weigh on the PCL housing market (note PCL values are down -7% ytd*). We would strongly advice our clients to use any weakness over this period as a buying opportunity as it may well be the last chance to enter the market at such a depressed and opportunistic level.
*Source: LonRes (Q3 2020 vs Q4 2019)
Biography: Fraser Slater is the CEO and Founder of Ludgrove Property. Prior to Ludgrove Fraser spent 20 years in The City. In the course of his career he was a Real Estate Analyst, the Fund Manager of a £6bn Equity portfolio for USS Ltd and the Founder and CEO of WDB Capital, a London based Fund Management business. In 2008 WDB Capital outperformed its peer group by +52% making Fraser's portfolio one of Europe's best performing Funds during the Financial Crisis. In the same year his Fund was nominated New Fund of the Year by EuroHedge. After leaving The City, Fraser started Ludgrove with an ambition to be Prime London's leading Property Buying agency with an emphasis on original research and delivering a highly value-added service to clients.
Disclaimer: Ludgrove Property Limited is not authorised or regulated by the Financial Conduct Authority (FCA) and we do not provide any financial or investment advice. We recommend that any property investor seeks appropriate professional advice before entering into any contract, and we would also advise that the value of any investment can go down as well as up and that you might not get back what you put in. You may have difficulty selling a property investment at a reasonable price and in some circumstances it might be difficult to sell at any price. We would urge you not to invest unless you have carefully thought about whether you can afford it and whether it is right for you, and if necessary to consult with a professional advisor in accordance with the Financial Services and Markets Act 2000. All information is provided strictly as a guide only, is subject to change without prior notice and does not constitute an offer of investment. The Ludgrove website should not be regarded as an offer or solicitation to conduct investment business, as defined by the Financial Services and Markets Act 2000. Investors who are resident in or citizens of countries other than the United Kingdom may be subject to local restrictions. In particular, no offer or invitation is made to any US persons (being residents of the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof), who are excluded from the services offered in this site. The information on this website and our publications has been obtained from sources which we believe to be reliable and accurate, but without further investigation this cannot be warranted.