LUDGROVE NEWSLETTER (SEPTEMBER 2020)
In April, shortly after lockdown, we outlined our sanguine view on the Prime London property market. Our optimism was based on a number of supportive fundamental factors that we thought would underpin capital values and at worst lead to a modest decline in prices in 2020. In this newsletter we update clients on the current market environment, taking a look at the drivers of current market activity, some of the nuances and some of the opportunities available to Buyers. We finish by revisiting our outlook.
CURRENT MARKET ACTIVITY
To say the market has been spritely post lockdown is an understatement. New Buyer Enquiries at Ludgrove are up 190% year on year and Prime Sales Agents have seen similar trends. Offers accepted by Knight Frank during August were the highest total in more than 20 years whereas Savills reported a 116% increase in the number of £1m+ deals in the first two and a half weeks of August compared with the same period in 2019.
A number of factors have combined to drive this surge in activity including:
Pent-up Demand: Both the mainstream and prime markets are being bolstered by short term, pent-up demand having shifted into the period post lockdown. The prime property markets however are also benefitting from the release of pent up demand built up over a longer time frame. Those Prime buyers that sat on the sidelines as the threat of a hard left Government and Brexit played out between 2016 and December 2019 are now returning to the market, keen to simply get on with their lives*.
The Stamp Duty Holiday: The temporary abolition of stamp duty on the value of property transacted below £500,000, has encouraged buyers and sellers to bring forward purchases ahead of the March 31st 2021 deadline. For prime property buyers this is a less material saving although it is of course helpful. More importantly, the cut has helped 'un-gum' buying-chains across the market and created a more liquid and transparent marketplace, inspiring buyer and seller confidence.
Change in Lifestyle Priorities: For many lockdown has led to a re-appraisal of lifestyle priorities. Multiple surveys have shown that homebuyers are looking for more internal and outside space with a garden, patio, roof terrace and home office being high on the list of priorities. This change in buyer behaviour has further boosted activity.
A Robust Stock Market Has Supported Wealth: Whilst a number of wealthy individuals will have booked material financial losses at the depths of the stock market rout in March for the many that held their nerve, stock market wealth is broadly unchanged year to date:
MSCI World Index 2016-2020
Quantitative Easing: Professional real estate Investors are active in Prime London property and they tend to assess assets on a relative basis with an eye on historical precedents. In light of the vast QE programmes launched across the world in 2020 it is worth remembering the effect QE had on boosting real estate values in the aftermath of the GFC. Indeed in a world where real-term interest rates and real bond yields are negative, assets which show a significant yield premium become more attractive on a relative basis, in turn boosting capital values. Our December 2019 Newsletter expanded on this theme and this chart from our April newsletter looks back at how that experience played out in PCL in the aftermath of the GFC:
Hong Kong Buyers: The Government's recent decision to offer British National Overseas passport holders in Hong Kong (circa 3 million citizens) a path to British citizenship has led to an influx of Hong Kong buyer interest across the UK. In Prime London many of these buyers are focused on turnkey, ultra-prime new developments with schemes such as The Bryanston selling particularly well lately. The 2% Overseas Buyer Stamp Duty surcharge due to come into effect on 1st April 2021 and the relatively attractive level of Sterling against the Hong Kong Dollar is also bolstering demand:
GBP vs Hong Kong Dollar 2011-2020
PRIME MARKETS ARE NUANCED*
We would make the point however that prime market activity is highly nuanced. Due to restrictions on overseas travel, those prime markets most exposed to overseas buyers (Mayfair, Belgravia and Knightsbridge in particular) are seeing weak levels of activity (with the exception of HK buyers) whereas the £1m+ London markets where domestic buyers dominate (such as Chiswick, Dulwich, Islington, Richmond, Wimbledon and Wandsworth) are far more active. In Outer London, more leafy prime areas within a 30-45 minute commute to the capital such as Virginia Water, Sunningdale, Wentworth, Cobham, Oxshott and Weybridge are also highly active. The Borough of Elmbridge is interesting as prime values here have fallen considerably in relation to London over a significant period:
In particular some of the private estates such as St George's Hill and The Crown Estate are good value with prices having fallen c30-40% from the peak of the market in 2014. After a long hiatus, prime buyers are finally returning to this market sensing bargains. In this context it is interesting to note Curchod's (one of the largest local agencies in the area) recently recorded average sales prices +23% y.o.y - this being led by a greater mix of higher value property sales.
WFH - NOT A WHOLESALE MOVE
A lot has been made of an exodus from Central London in the new Working From Home (WFH)/Zoom economy. Whilst in the short term we expect more homeowners to move out to leafier areas within c60 mins commute of Central London seeking more space, we are dubious longer term for the following reasons:
Working from home requires fast and reliable internet speed and there are many homes (even within the M25) that have poor connectivity.
For many, it would be a brave call to up sticks from London to the deep country on the notion that remote working is here to stay to then find out that normality resumes (or employment circumstances change) and a long commute beckons.
Human beings are competitive in nature and employees who are seen in the office and having person to person meetings in town are surely the ones to rise to the top and achieve promotion at the expense of those "WFH".
Many London homeowners thrive on the range of world-class amenities, restaurants, bars, gyms, educational institutions and social life that the city has to offer. Contrary to some of the press reports, a move to the country is not universally appealing.
One also wonders if London will be a more pleasant place to live even if WFH is more prominent. Surely fewer commuters will make living in London more attractive?
Despite the robust performance of the market, every recession throws up opportunities and Ludgrove has been involved in a number of value-added areas on behalf of clients over the last 5 months. These include:
Our Apartment Block Department has found significant value for clients in the new-build apartment space where Developers are keen to sell some or all of their last remaining units in new blocks. Apart from highly discounted rates, Investors benefit from favourable transaction taxes as well as the operating benefits of managing a collection of apartments in a single block.
Receiverships & Part-Built Developments:
Receiverships are part and parcel of recessions, with this recession being no exception. Additional value can be found in part-built developments in Receivership. We have seen a number of these deals over the last 3-4 months and expect more to come in the remainder of 2020. By analysing the Vendor's Report and Accounts Ludgrove has also been able to pitch bids at appropriate levels.
Mayfair, Belgravia and Knightsbridge:
As discussed above, this market is suffering from a lack of international travel meaning Buyers can often strike competitive deals. Shrewd developers who are able to cash in on this near term market weakness and add "alpha" via value-added development are likely to make significant gains in 2 to 3 years time when the supply of new stock will be depressed.
Weybridge, Cobham & Oxshott (Elmbridge):
As highlighted above these areas offer excellent value for money. The area trades at the bottom of its long-term range relative to London and some of the private estates have witnessed multi-year declines (of up to 40%) from the 2014 peak. Rental yields are also supportive with a number of houses on the private estates showing yields in excess of 5%.
We expect activity to fade in Q4 2020 as concerns mount over the end of Government's furlough scheme in October, Brexit negotiations hit a critical phase and stock market volatility is likely to pick around the US election. Our long term view on prime London property however remains positive as highlighted in our April newsletter. The majority of our clients are buying a home to live in on a 10 year view or Investors with a 5 year plus (and in some cases an infinite) investment horizon. With a new economic cycle upon us, our advice to clients is simply to use any weakness in the coming quarters as a buying opportunity.
Fraser Slater Chief Executive Ludgrove Property Ltd Tel: +44 (0)207 889 2860 Email: email@example.com Web: www.ludgroveproperty.com 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.