London property --- time or premature to buy

The UK real estate market, especially London, is always difficult to read. On the positive side, good quality properties in prime locations are generally difficult to find. Depressed sterling and much lower mortgage rates are positive factors. On the negative side, the market experienced an extraordinary bubble and price declines from those levels haven’t been extensive. Deposits on properties must be 25% to 40% to obtain mortgages, well over the bubble norm. Layoffs from banks, brokers and other financial services have only taken place in recent months. As redundancy payments become depleted, people with high mortgages will be under pressure to sell. Redundant foreigners who can't find jobs in the City have to return home, leaving landlords with tennancy voids.

Besides the cyclical factors, short, medium and long term there is also a structural problem. Growing numbers of Baby Boomers born between 1945 and 1955 are falling due or being forced into early retirement . Annuity rates are low and both short and long term interest rates for savers are at punitively depressed levels. Equity markets have recovered from their nadirs, but pensions invested in equities are well below their 2007 highs. In short, baby boom middle class professionals and others, who are not on company or government schemes, are under pressure to sell their homes to supplement income earning capital. The supply of properties could trend upwards. Potential buyers should thus seek bargains and should not chase prices.  Neil Behrmann reports in March 2009 what estate agents and others are saying. He observes that none mentioned the structural  demographic factor.  Watch this space.

Asian, Russian and other foreign buyers are tentatively examining potential residential London property investments, according to agents. Contrary to the real estate recession in the early nineties, however, they’re not rushing to buy.

Foreigners are at an exceptional advantage over local residents and investors, as sterling has depreciated considerably since its peak in the first half of 2008. Compared with 2008, for example, an American, Asian, Middle Eastern and Continental European investor can buy sterling at a third lower than top sterling levels in 2008. The London and UK property market peaked towards the end of 2007. Since London residential real estate has fallen between 20 to 30 percent, prices for foreign investors can purchase property at 40 to 60 percent discounts from the peak. Moreover mortgage rates have fallen considerably in tandem with long term government bonds. Tracker

variable rates are around 3% to 3.5% and fixed rates 3% to 5%

“There will be many stages and regional variations in the, future trajectory of apartment and house prices,” says Yolande Barnes, director of research at Savills. “The market will test the nerves of both home owners and investors but the opportunities for those wanting income returns and the prospect of long-term growth are clearly in place now.”

The main advantage is that prices and mortgage rates have fallen sharply, making it easier for London and other UK residents to buy. But the disadvantage for them is that banks now require deposits of at least 30 to 40 percent, whereas during the free wheeling boom, deposits could be 10 percent and sometimes even lower.

Estate Agent and economist anecdotal evidence & predictions

Barnes and other estate agents and economists caution, however, that in the current depressed economic climate property prices could slip further in coming months. Estate agents believe that the market will bottom out in 2010 and begin rising in 2011 and 2012, but some economists fear that the market will remain depressed for several years. Roger Bootle head of economic forecasting agency, Capital Economics and former chief economist of HSBC is predicting a rise in repossessions and an increase in those entering negative equity. His figures indicate that approximately 3.5 million UK households will fall into arrears – double the amount seen in the early 1990s downturn. He predicts that repossessions could hit 90,000 this year compared with the Council of Mortgage Lenders which is forecasting that repossessions will total around 75,000 for the 2009 year. Bootle was premature in his gloomy forecasts predicting property price declines some time before the peak. But the bubble is now over and he expects a further fall in house prices in the UK with a peak-to-trough fall of between 40 pe cent to 45 percent..

There is also a danger that a depressed over borrowed British economy is still vulnerable to further sterling weakness and that the present currency rally won’t last. Thus foreign investors need to proceed with considerable caution and be highly selective both with properties and areas if they intend bargain hunting in the London and UK real estate market. Thus for example, property in London Docklands surrounding Canary Wharf where several stricken major investment banks are situated, is very depressed. Supplies of apartments are in excess of demand, estate agents say. The same applies to Notting Hill Gate, a favourite high priced property haunt of investment bankers. Anecdotal market evidence, however, suggests that interest from foreign and local cash buyers who don’t require mortgages, is already much higher, says Barnes of Savills.

Rental yields higher than 2007 but still unexciting

The decline in values has raised gross rental yields of prime properties to 4.5 percent from around 3 to 3.5 percent during the 2007 and 2008 property price bubble while net yields have risen from 2.3 percent to 3.5 percent. This compares with money market rates of around 1 percent and long term government bond yields of around 3.5 percent. Well constructed apartments and houses in prime central London areas and North and South London are being taken up, leaving a shortage of supply in some cases, she says. But the number of transactions is low and sellers need to cut prices to obtain deals from cautious buyers, say agents.

The crisis in the financial sector has caused banks in the City to retrench employees. Foreign banks and other corporations thus need to rent less properties. Considering the illiquidity of property as an investment and the risk of “voids”, or vacant periods, the rental yields are still inadequate.

Prices are still high and buyers should examine levels of 2004 to 2005

According to the Land Registry index of houses and apartments traded, average prices in Kensington and Chelsea have fallen from pounds 856,000 at the end of 2007 ($1.8 million at the exchange rate at the time) to pounds 752,000 ($1.1 million at the current rate), City of Westminister from pds 612,000 to pds 564,000; Tower Hamlets, near the financial centre of Canary Wharf from pds 376,000 to pds 329,000 and favoured areas such as Richmond from pds 455,000 to pds 383,000, Islington from pds 450,000 to pds 383,000, Barnet from pds 355,000 to pds 318,000; and Camden, including Hampstead from pds 538,000 to pds 473,000. These are averages of properties ranging from small apartments to semi and detached houses. In practice, house prices in Chelsea and Kensington are currently trading from around pds 2 million with prices of pds 1.5 to pds 3.5 million in areas surrounding Hampstead, St Johns Wood, Islington, Richmond and Wimbledon. Two-bedroom purpose built apartments in these areas have dropped to between pds 350,000 and pds 600,000.
Prices which soared from the mid nineties to bubble levels in 2007, have thus fallen back from exceedingly high levels—prices which very few Britains can afford.

Estate agents expect prices to bottom out in 2010

Although Barnes of Savills expects the market to bottom out in 2010 and revive in the following two to three years, she agrees that London prices could still decline by a further 10 per cent by the end of the year. In that event, the decline from the peak would be around 30 per cent.

Liam Bailey, head of residential research, Knight Frank estimates that the peak to trough price fall for prime London from March 2008 to date is already 22.6 percent . Activity levels are beginning to rise, albeit from a low base, with viewings up 28 per cent in February on a year on year basis.

"After a period of sustained price falls in the central London market, it is rather early to suggest that we are seeing the beginning of a recovery,” says Bailey. “However with bad news seemingly all pervasive even a slowing in the rate of price falls can be viewed positively.”

With prices for some new build properties falling by as much as 40 percent, yields of over 10 percent are possible, contends Bailey. The proviso is that the properties can be let. There are reports that the rental supply of apartments and houses are increasing. Financially stressed owners with large mortgages, who cannot sell their properties are being forced to downsize renting out their pricey properties and are seeking lower rentals.



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