residential research

the london review Insight and commentary on the world’s most prestigious residential market

summer 2010

MARKET OUTLOOK Our forecast for the rental and sales market

NEW ORDER What the emergency budget means for prime London property

GLOBAL VIEW Placing London in context with New York and Hong Kong Data focus Opinion

After a bull run lasting over a year, The market in brief questions are now being asked as to whether prices in central London will continue to In the following four charts we have provided a tightly edited selection of the key trends in supply, demand and * rise or whether they are set for a fall. activity from both the sales and the lettings markets. In addition our London map provides a visual guide to the global make-up of demand for prime London property. Against a backdrop of global financial market Three years after the credit crunch began, Figure 1 Figure 2 Figure 3 Figure 4 turmoil, potential sovereign debt defaults in London’s international links, global business Decline in supply Sales market resilience Rental stock in short supply A landlords’ market Europe, and a risk of a double dip recession at base, and unrivalled lifestyle has ensured that New sales instructions and new Volume of exchanges (indexed to 100 Ratio of new prospective tenants to New lettings instructions and new home in the UK, this is one of the most difficult interest in the city’s best houses from the world’s buyer registrations, prime London, at May 2008) and average achieved prospective tenant registrations, prime newly available properties, and volume indexed to 100 in January 2009 to asking price ratio, prime London London, indexed to 100 in January 2009 of tenancies agreed (indexed to 100 at times I have experienced for forecasting the wealthy elite remains as strong as ever. May 2007) central London market. It is also, however, the 150 100 120 With prices rebounding strongly on the back of this 200 first time I have realised that whether prices rise 140 180 5.5 180 demand, the separation in performance between 100 or fall increasingly doesn’t matter. 130 160 95 160 London and the rest of the UK has now turned 5.0 Liam Bailey 120 140 80 140 Outside central London, in the rest of the capital, into a chasm. So too has the divide between 90 4.5 Head of Residential Research London and its international peers. Arguably no 110 120 120 and most definitely in the rest of the UK, whether 100 60 other market, including Manhattan or Hong Kong, 100 4.0 100 prices turn the corner and begin to fall does 80 85 which we feature on page 8, can compete with the 40 matter. Price falls matter because they influence 90 3.5 80 60 who can obtain a mortgage and they confirm how breadth or depth of demand experienced at the 80 60 40 80 20 3.0 top end of the London market. 40 KEY FINDINGs much of an owners’ hard-earned equity has been 70 20 2.5 eroded. Conversely they also create opportunities The real lesson from the past three years in central 60 0 75 0 20 Jan Mar May Jul Sep Nov Jan Mar May Jan Mar May Jul Sep Nov Jan Mar May PRICE RISE for new buyers to access the market. London is that demand for property here is so 2009 2010 May 08 May 09 May 10 2009 2010 2.0 0 Jan Mar May Jul Sep Nov Jan Mar May Despite falls in the second half of the year, large, and supply so limited, that short-term 2009 2010 prime London prices are set to rise by 7.5% Inside central London the dominance of demand price shifts no longer matter to anyone other New sales New buyer Exchanges Asking to achieved New letting New prospective in 2010 04 from the global wealthy means that short-term instructions registrations price ratio % instructions tenant registrations Ratio of new tenants Tenancies than the developer or the, now rather rare, highly to new properties agreed pricing trends are becoming an irrelevance. geared speculator. Source: Knight Frank Residential Research Source: Knight Frank Residential Research Source: Knight Frank Residential Research Source: Knight Frank Residential Research LOW RATES This globalisation of the market – a long-term The need to offset the effects of the largest trend in London, but one that became super- Knight Frank’s Elena Norton, the leading property The London sales market has Volumes of exchanges are still The number of prospective Despite falling rental stocks the peacetime fiscal tighening, means interest charged during the long 2000s boom – was advisor to the Russian wealthy, reports on page slowed since April. While new rising strongly, up almost 100% tenants in the market has number of tenancies agreed rates will be lower for longer 05 finally confirmed as an almost irreversible factor 10 that London is losing potential buyers to buyer volumes are only down since February, at the same declined slightly over the past has continued to rise over the during the recent crash. Switzerland, among other locations. This sounds marginally from their peak, time the asking to achieved 18 months, with an increasing past year, up 5%, contributing GOVERNMENT CONTROL like a vote of no-confidence, but is actually the anecdotal evidence confirms that price ratio has been climbing number finding their way into the to a weakening of tenants’ The Hong Kong government’s experiment in To understand this point, let’s travel back to early reverse. With so few London owners needing or they are more reticent to commit steadily and hit 97% in June. purchase market. The real story negotiating power. The ratio managing a housing market downturn steps 2009. This was the time when the previous UK wanting to sell properties in her clients’ target up a gear 09 to purchases than they were This strength reflects the market for lettings has been the 25% of new prospective tenants to government was desperately trying to undo its £15m to £25m bracket, they are finding it harder pre-election. It is the marked health up to April, we expect decline in stock volumes over the newly available rental properties reputation as a cheerleader for wealth creation. than ever to find what they want. With Switzerland HARD GRAFT decline in supply which has both measures to soften over past year, which has contributed rose by a third, to 4.14, in the We had the announcement of a new ‘non-dom’ tax, offering one of the only acceptable alternatives Prime London property investment is all helped prices to continue rising. the summer. to strong rental growth. year to June. a new 50% higher rate of income tax and even the to the UK in terms of schooling for the children of about hard work again 11 ‘one-off’ bonus tax. The explicit message was that the Russian elite, it is becoming the new target of Global demand the world’s wealthy were no longer welcome here. frustrated buyers who have been denied access to the london review 2010 the top of the London market. Prime London (£2m+) international purchasers’ market share and key buyer nationalities, 12 months to June 2010 The world’s wealthy, however, didn’t get the message. Spurred by a 30% devaluation in The prime London market is becoming ever more Sterling, the moment the UK attempted to difficult to access – with choice so limited in some Hampstead 66% become unwelcoming to new wealth was the areas as to make suitable purchases a virtual exact moment foreign buyers began to pour back impossibility. into the market. Between December 2008 and Over the past six weeks, amid renewed concerns March 2009 international buyers’ share of the over the health of the global banking system and £5m+ London market soared from 39% to 48%. St John’s Wood 41% rumours of radical action by the world’s central By June this year it had hit 68%. banks, there is a heightened sense of nervousness Hyde Park Estate 43% Central London is now a market apart, not only in the London market. Notting Hill 54% 49% 66% 53% 55% is demand seemingly immune from wealth We know that if the storm comes that no market is Kensington 58% attacks, but so too is supply. The proportion of immune, and not a day goes by without someone un-mortgaged owners in central London is 59%, asking me whether prices are set to rise or fall. 61% 56% compared to 41% for the UK. Central London is Our headline forecast is provided overleaf, Chelsea 52% dominated by discretionary owners, they can sell increasingly, however, to a growing number of when they choose to, meaning that when prices property owners in prime London, the real answer Fulham 55% fall so too does supply. appears to be – ‘who cares’? Richmond

Belgravia 40%

Wandsworth 23%

Wapping Published by Knight Frank LLP. ©Knight Frank LLP. This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage Canary Wharf resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to 43% particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank to the form and content within which it appears. Wimbledon Knight Frank LLP is a limited liability partnership registered in England and Wales with registered number OC305934. This is a corporate body that has “members” not “partners”. Our registered office is at 55 Baker Street London, W1U 8AN where a list of members may be inspected. Any representative of Knight Frank LLP described as “partner” is either a member or an employee of Knight Frank LLP and is not a partner in a partnership. The term “partner” is used because it is an accepted way of referring to senior professionals.

02 | The london review KnightFrank.co.uk KnightFrank.co.uk The london review | 03 Forecast 2010 Emergency Budget market outlook NEW ORDER Liam Bailey looks at what the emergency budget on 22 June told us about the thinking In this section we have Figure 5 Figure 6 Figure 7 of the UK’s coalition government and how it will shape the future of the central London Falling margins Currency discount Slow jobs recovery economy and housing market. drawn together the critical Average annual UK base rate, Shift in the value of the pound versus Central London employment, annual datasets which will help mortgage rate and margin Euro and US Dollar, benchmarked change (%) 7 3.5 against the end of 2007 position (%) 6 determine the future Actual Forecast The most obvious point to take from George and investment to the UK.” The ultimate impact 0 5 6 3.0 Actual Forecast Osborne’s first budget was the seriousness of of this review will be difficult to pre-judge, there performance of the prime 4 -5 intent. It was a more hard-hitting statement is a sharp divergence of opinion regarding London residential market. 2.5 3 5 -10 2 than had been expected, with the objective ‘non-doms’ between the Conservatives and the 4 2.0 -15 1 of reducing the UK’s budget deficit from 11% Lib-Dems. of GDP to 2% by 2015. No other country is 3 1.5 -20 0 The budget also announced that the -1 planning public spending cuts of anything like 1.0 -25 government is looking to take “action to 2 the size required to meet the new government’s -2 tackle unacceptable bank bonuses.” The 1 0.5 -30 -3 deficit targets. announcement confirmed that the Independent -35 -4

0 7 0.0 9 11 9 7 13 12 14 10

11 Commission on Banking will “look at structural

13 The impact of the fiscal retrenchment is 14 Actual Forecast 12 10 20 20 20 20 20 20 200 200 6 200 8 200 20

20 -40 20 20 200 5 200 6 200 8 200 200 9 and non-structural measures to reform the 11 significant, representing 6.3% of GDP over a 12 14 13 10 20 20 20 20 20 200 200 8 five-year period, and the risk this poses for the banking system and promote competition”. UK base rate (LHS) Mortgage rate (LHS) Total employment Financial and business services employment UK economy is significant, especially as the In addition, the government confirmed that it Mortgage rate and base rate margin (RHS) Euro US Dollar country is barely moving out of recession. would consult on a “remuneration disclosure

There have been two key factors The second factor aiding the As the stimulus from low interest scheme… [and would] explore the costs and The budget wasn’t all about spending cuts, underpinning rapid price growth London market recovery, has and exchange rates begins to benefits of a Financial Activities Tax on profits taxpayers will need to bear some of the pain in London over the past 15 months. been the fall in the pound and weaken, a critical factor influencing and remuneration.” due to the severity of the problems the country The first has been the stimulus the related “discount” offered to demand and pricing for prime We have seen is facing. By virtue of the heavily trailed There is potential from both of the above to

provided by record low interest international buyers. In 2009 it London sales and rental property weaken demand for prime property, especially the number of rates. Although mortgage margins, was European buyers who were will be the performance of the advance warnings from the government, in London. The evidence from the past two years over the UK base rate, have the key beneficiaries. As the Euro central London employment sector. Capital Gains Tax (CGT) was always going to be is that raising taxes on wealthy UK residents nationalities widened considerably from 100 has weakened it is buyers with US Following two years of decline and the main story from this budget. In reality the does tend to encourage people to look overseas basis points in 2007 to over 300 Dollars, or with currencies pegged negligible growth this year, it will rise to 28% for higher rate tax payers is a non- in the London “ more recently, the expectation is to the Dollar, who have led the be 2013, if not 2014, before we see issue for the housing market. for alternative residency options – so far most that as rates rise over the short and market. Most forecasts point to employment back at 2007 levels, have not actually taken up the opportunity – but market rise from The rise came into play overnight, meaning that the government would be wrong to assume medium-term, margins will begin to continued strength for the Dollar, although the direction of growth there was no opportunity for a sudden sell-off around 30 in fall back and help absorb some of which should help to underpin the ought to be positive from the end that there would be no risk of a flight of wealthy “ of second homes or investment properties. people if these reviews were clumsily handled. 2008, to the high the pain for borrowers. London market. of 2011. The new rate effectively takes us back to a level last seen under the pre-2008 rules, when taper The rather clean approach taken with CGT, with Figure 8 Figure 9 Figure 10 the avoidance of the need to reintroduce taper 40s in 2009 and Bonus season International demand Price and rent forecast relief enabled a 40% headline rate of CGT to be and indexation, suggests that we may well be London’s financial sector bonus pool, Prime London £2m+ purchasers, split Prime central London capital value reduced to 24%. more recently seeing the beginning of a welcome return to year end, actual and estimate (£bn) by broad international region, excluding and rental value forecast (%) With higher-rate CGT at 28% the argument for UK buyers, 12 months to June 2010 tax simplification. to over 50. 12 40 property investment still looks strong, and Africa 4.4% The housing market was thought to be at 10 Actual Forecast 30 Actual Forecast capital gains still compare very favourably with Asia 8.8% income tax at 40% or even 50%. significant risk from measures in this budget. 20 8 Australasia 2.9% In reality, the changes announced seemed to While the budget confirmed that the new 5% CIS 3.6% 10 be carefully considered, and the certainty 6 higher rate of Stamp Duty would be introduced created by the announcement will serve to Europe 27.0% 0 for residential property purchases from April underpin the market. 4 India 8.0% 2011, there was a tacit acceptance that Stamp Middle East 16.8% -10 It was noticeable that the budget contained 2 Duty rates are beginning to hit levels where North America 12.4% -20 purchasers are being encouraged to exploit strong GDP growth forecasts for 2011 and 2012. 11 13 12 0 Russia 13.9% 10 more creative opportunities for avoidance. The inference from this is that the Bank of 20 7 9 20 20 20 11 2005 2007 2009 2006 2008 12 10 England will be encouraged to maintain a 20 20 20

2005 The government announced that they would 200 2006 200 2008 South America 2.2% Capital value Rent examine whether changes to the rules on very loose monetary policy well into 2011, if Profitability In London’s financial The sheer diversity of demand in stamp duty land tax on high value property not longer. sector will determine the ability the London market has been a Our prime London price forecast for transactions are needed to prevent a reduction This requirement to offset fiscal tightening of buyers to maintain and even significant reason for the recovery 2010, at 7.5%, allows for price falls in tax take. through monetary policy, suggests that increase current price levels in the market. We have seen the in the second half of the year which interest rates at their current levels could well in central London. This chart number of nationalities in the will go some way to moderating shows the Centre for Economic London market rise from around 30 the double digit rate of growth we Wealth taxes back in the spotlight be maintained for longer than was previously and Business Research’s latest in 2008, to the high 40s in 2009 saw in the first half. The combined As set out in the coalition agreement, the thought likely. This will underpin house prices estimates and forecasts for London’s and more recently to over 50. Above impact of rising interest rates and government announced that it will review the and also contribute to ongoing low supply in financial sector bonus pool up £2m more than 50% of sales are a slowly strengthening pound will taxation of non-domiciled individuals. This the market as potentially distressed owners are to 2012. Renewed turbulence in now going to international buyers. conspire to limit growth in 2011, review will assess “whether changes can be protected by low mortgage payments. before economic recovery leads to global financial markets points to The growing weakness of the Euro made to the current rules to ensure that non- With the imposition of the new 20% VAT rate stronger, yet still moderate, growth growing uncertainty over the ability and concerns over the Eurozone domiciled individuals make a fair contribution in 2012. The outlook for rents is being delayed until January 2011, the risk that of this performance to be achieved, economy are likely to put pressure on to reducing the deficit, in return for greater more positive in the short term as this change might add to inflationary pressures irrespective of the political moves to the ability of European buyers (who certainty and stability for those bringing skills is reduced considerably. Sources: Knight Frank Residential cap bonuses and to levy additional account for 27% of all international the market claws back some the of Research, Bank of England, Oxford taxes on the banks. purchases) to access the London 20% decline in 2008 to 2009. Economics, ONS, CEBR market in late 2010 and 2011.

04 | The london review KnightFrank.co.uk KnightFrank.co.uk The london review | 05 Local insight railings, the houses are fine examples of late skips designating the latest rash of huge Local schools are excellent, and for girls in Victorian architecture. The famous Tooting Lido, basement excavations and loft extensions never particular Brook Green is host to arguably built in the 1920s, is a short walk away and the even declined. the best schools in the UK, with St Paul’s common also boasts tennis courts, a café and Despite the improvement to local schooling, Girls School, Godolphin & Latymer and Bute several ponds for fishing as well as weekend and the corresponding rise in prices and next neighbourhoods – House all in very close proximity. In terms football matches for adults and children. demand, the price differential with areas further of accessibility Brook Green is a 5-minute Tooting Common is the largest open space in east is not only as wide as ever, but arguably drive from Kensington High Street and Wandsworth and there are wildlife areas, woods has actually widened in recent years. five of the best Holland Park. There is excellent access and paved walks. to underground lines at Hammersmith, Prices for the best properties in Parsons Green Shepherds Bush, Kensington Olympia and With large family houses in the estate selling Even in a market as well developed as central London there are always areas on hit a ceiling of around £950 per sq ft; move east on to Heathrow Airport. at £1.75m in mid-2009, and a year later hitting and prices very quickly rise up to £1,500 per sq the rise. Our local market experts present a carefully curated selection of the key around £2m price performance here illustrates locations set to outperform in the future. One of the big influences on demand and the market’s positive view of the area. ft in Chelsea, meaning that many more buyers pricing comes from the growing number in central London are jumping straight here as of corporate headquarters in the area, The Heaver Estate has become a target for the their first move for family accommodation. especially at Hammersmith Broadway, more cosmopolitan buyer who has become a with Coca Cola, T-Mobile, L’Oreal and recent feature of Wandsworth generally. There have always been lots of local buyers looking to Disney among others. The expansion of Portman Estate, W1 local employers offering high paid senior upsize, but over the past 18 months the volume Incomers to Leman Street and the surrounding Christian Lock-Necrews, Head of Leman Street, E1 positions has had a notable effect on of Chelsea buyers who have been coming into area are well provided for, with a Waitrose Knight Frank Marylebone sales Sarah Shelley, Head of Knight Frank pricing at the top end of the Brook Green the market has risen, as too has the number of supermarket at St Katherine’s Docks, and new European buyers – with Italians and French in 5 Wapping sales market together with spillover from the shopping, bars and restaurants closer to hand. The regeneration of Marylebone High Street’s 1 Holland Park and Notting Hill areas, with particular becoming a notable part of the market retail offer by the Howard de Walden Estate Regeneration along the eastern fringe of The appeal of the area is also underpinned prices for the best houses hitting £4m. over the past year. the City of London has been progressing for by a theatre, cinema, art, music and events and its beneficial impact on local residential The most significant long-term draw for the decades. Despite considerable improvements provided by the Whitechapel Art Gallery and the Key streets in demand include: Luxemburg prices is well known. An area long overlooked Heaver Estate is the volume of attractive, as a prime residential location in favour of in locations like Wapping and Spitalfields, increasingly popular Wilton’s Music Hall. Gardens and Rowan Road, south of the perfectly proportioned, family-sized properties areas further south and west, it took off on there has been an ongoing problem that these Green, and Caithness Road and Girdlers Currently a large portion of residential demand on offer. While prices have risen strongly over the back of high quality independent shops areas have tended to be created as isolated Road, to the north. Smaller but attractive comes from the ‘City’ market, with a strong the past year, they still only stand at half the and restaurants. pockets of gentrification. houses around Masbro Road and Faroe requirement for weekday crashpads and pied- level achieved for similar properties north of the Road are also hugely favoured. With some What is less well known is that the positive This dislocation highlights the importance of river. The outlook for the estate looks positive a-terres. As the area matures we expect a more excellent shopping and restaurants, impact of retail-led regeneration is being the regeneration of Leman Street. This process over the long-term. mixed demand base to develop, including including one of the original gastro pub’s taken up with aplomb in new locations by the effectively creates an arc of new and emerging families, as we have experienced in Wapping the Havelock Tavern on Masbro Road, the Howard de Walden Estate and the neighbouring prosperity from Spitalfields in the north, over the past two decades. The English Martyrs lifestyle offer in the area is very strong. Portman Estate. through Brick Lane, Whitechapel and Aldgate Catholic Primary School in St Mark Street has Parsons Green, SW6 and then south towards Wapping. During the recent market recovery, prices The Portman Estate, which controls much of the proved a key driver of demand, particularly in the Anne Soutry, Head of Knight Frank have risen here by around 20% to 25%, western part of Marylebone, has started its own case of French families re-locating to London. Fulham sales The new attention from developers and and the best houses now exceed the peak improvements in the Portman Village, to the retailers along and around Leman Street of the market in mid-2007, although with 4 Parsons Green is perhaps the most established north of Marble Arch tube station, and also with suddenly has made a big difference. Only five pricing at around £700 to £800 per sq ft of the five areas selected in this review, and improvements to Portman Square for the lead years ago Leman Street was a very run-down accommodation is effectively half price Brook Green, W6 readers might be surprised to find that we think up to 2012. location with little on offer to attract new compared to Notting Hill. Rupert des Forges, Partner, there is more room for growth and improvement residents. In recent years developers, retailers The opportunity for the Estate is to harness in the future. The lesson here is the power that and even restaurateurs have begun to pay Knight Frank Knightsbridge sales the attraction that the set-piece Bryanston and 2 schools have to create residential demand. Montagu Squares hold for buyers, where sales attention to Leman Street itself as well as Brook Green is an area that has grown a serious neighbouring streets. Heaver Estate, SW17 of £1,300 per sq ft are common, and to translate following from those looking for high-quality Luke Pender-Cudlip, Head of While Parsons Green has benefitted from the presence of Fulham Prep and Kensington this into the neighbouring streets like Wyndham One of the biggest catalysts for change family living. The presence of attractive streets Knight Frank Wandsworth & Prep (the 2009 Sunday Times Independent and Upper Montagu Street where prices are has been the Berkeley Homes’ City Quarter with a good mix of family properties – from 3C lapham sales more like £900 per sq ft. and Sugar Homes development which has two bedroom cottages to seven bedroom Prep School of the Year), in recent years the improved the physical fabric of the area and family houses with good gardens – have been Wandsworth has carved a justified area has become home to two more very high What we have seen over the past few months imported several hundred new residents. the main driver for pulling in new demand. reputation for offering a spacious and more profile arrivals – Thomas’s Prep and l’Ecole is buyers who would have only considered the Suddenly there is a real feeling of sustainable Schooling and easy access to the West End relaxed alternative to more central locations Marie d’Orliac. squares or something closer to Marylebone High Street are now looking at the streets change in the air. have also been strong contributory factors. north of the river. With over 500 acres of This cluster of well-regarded prep schools has around the main squares. The key driver for this parks and commons the area is perfect for served to reinforce the well established pattern shift in demand is the belief that the streetscape family living. for young families to move out of Kensington & and retail improvements are creating concrete Chelsea and into Fulham. The difference now is There are so many different parts of and permanent change in the locality. Wandsworth that have grown in popularity that the move is prompted by a desire to access over recent years, but one area that stands local schools as much as the opportunity to One key sign of the change in the area has been out in terms of growth in both prices and make a significant saving on housing costs. in developer activity, which has been much demand has been the grid of streets around more evident in the area south of Crawford For new arrivals Parsons Green offers the benefit Ritherdon and Elmbourne Roads that form Street in the last 12 months. of a village environment. There are a host of the Heaver Estate. independent shops, cafes and restaurants The biggest change in Marylebone over the The estate was built towards the end of the along New King’s Road and easy access to past two years has been the volume of people nineteenth century by Lord Alfred Heaver as open spaces. In addition to the eponymous looking to relocate here from areas further large family homes, many of which overlook green itself, Hurlingham Park, South Park and south and west. Exiles from Notting Hill have the common. This provenance lends the Bishops Park are only a few minutes walk away. long been a feature of the market, and buyers area an architectural integrity and a high moving out of neighbouring Mayfair are to quality streetscape that partially explains its One of the key targets for new arrivals is the be expected, but there has been a noticeable popularity, but also contributed to the area grid of streets that makes up the Peterborough increase in interest from Kensington and becoming Balham’s first conservation area. Estate, in particular Quarrendon, Chiddingstone Knightsbridge. Looking at where values moved With their red brick façades, decorative and Bradbourne streets. The strength of in those locations over the recent past it should window panes and intricate wrought iron demand for the estate was clearly evidenced be an interesting time for Marylebone over the through the downturn, when the number of next few years.

06 | The london review KnightFrank.co.uk KnightFrank.co.uk The london review | 07 Global insight

Learning lessons As an example, in 2006 57% of all government action. The Hong Kong This experiment Manhattan sales were new-build units, government has shown its willingness from New York in 2010 to date the figure is closer to actively cool the residential market. in direct “ to 17%. There was considerable popular support for some form of government response government The prospects for the second half of 2010 to rapidly growing prices, and a three- look fairly benign for Manhattan. Prices action on the and Hong Kong pronged approach has been introduced are likely to edge up, but significant price to attempt this. housing market growth does not appear likely. In fact the most probable outcome is for the market Firstly, the maximum loan to value ratio will be an to move sideways for the remainder of this “ for luxury homebuyers has been lowered interesting case- year and next . to 60%. Secondly, the government has London’s housing market recovery, on the back of low interest rates and an tried to increase land supply, with a view study to watch. improving global economy, is not unique. Most of the main world cities have to changing price expectations as well Hong Kong cooling seen improving fortunes over the past 12 months. If the recovery is not unusual, as demand-supply dynamics. Finally, neither are the emerging problems surrounding the requirement to plan for Xavier Wong, Head of Research, developers are now virtually barred from deficit reduction and the need to manage the future trajectory of inflation and Knight Frank Hong Kong phasing the release of new developments into the market, in an attempt to try to interest rates. Like London, Hong Kong saw a dramatic push prices higher as successive phases recovery in the residential property market are sold, pretty much a standard practice To understand how other major cities are coping with economic and housing after the credit crunch and the downturn across the world. Developers now have to market turmoil we spoke to the most influential commentators in two of the in 2008. However, the rate of price release 50% of each development’s units biggest markets. growth experienced in London pales by in the first phase. comparison to that in Hong Kong. In the 16-month period up to April 2010, prices With the Hong Kong authorities taking of prime residential properties in the city The big problem in the market, which actions to slow the market, I believes Manhattan shifts sideways rose by about 50%. Residential property reflects the London experience, is that a major market downturn could be Jonathan Miller, CEO of Miller Samuel has not been alone in experiencing the financing. Mortgage lenders are still avoided. I do expect that prices will fall Real Estate Appraisers, New York asset price boom, the value of Hong Kong putting obstacles in the way of everyone another 5% before the end of 2010, wiping Grade-A office accommodation rose by The Manhattan market has not experienced but the very best purchasers and out the price gains recorded in the first over 70% during the same period. the bounce in pricing you have seen in confidence within the banks is still fragile. few months of the year. central London, although the market is a lot The factors driving this growth are I am For those who can access them, mortgage My relatively confident outlook for the healthier than it was 12 months ago. One sure familiar to you in London. Very low rates in New York, as in London, are low by Hong Kong market is based on the way in which the market did improve over interest rates have pushed demand historical standards. The recent Eurozone assumption that low interest rates will the past year was in sales volumes, which higher, mortgage rates of sub 2% are crisis has acted to push longer term rates be maintained through this year and rose rapidly from the second quarter of common and strong demand has been set even lower – 30-year fixed rates at 4.89% well into 2011. In addition, demand for 2009 to the end of the first quarter of 2010. against limited supply. are available and these are helping to accommodation is still outstripping However, one of the federal stimulus supply, and while the Hong Kong encourage some buyers into the market. Despite these positives, it was inevitable measures that aided the growth of sales authorities are committed to releasing that price growth at this level could not volumes was the Tax Credit on house The new-build market in New York is still more development land, this process will continue for long. Market pricing turned purchases, which came to an end at the a major problem for the wider market. be slow and the new projects will not come down in May, and prices fell by 2-3% end of April. The expiration of the Tax My understanding is that in London the onto the market until 2013 at the earliest. through the month. Understanding Credit has meant that the pace of sales majority of available new-build units why prices have fallen is useful to help volume growth began to ease in April sold steadily through 2009 after This experiment in direct government understand the differences between after unprecedented growth in the first developers slashed prices to get the action on the housing market will be an Hong Kong and London. three months of the year. The market is market moving. In Manhattan the volume interesting case-study to watch over the next year – we may see similar attempts in now beginning to return to more expected of available new-build stock – the so-called In addition to a worsening sovereign other countries and not just in Asia. seasonal patterns. shadow inventory – is still equivalent to debt crisis in Europe and unsettled global Prices have been fairly flat for around 12 around seven years’ worth of expected financial markets, capital flows into Hong months, although there does seem to be annual take-up. Kong from the Mainland have also been reduced due to liquidity in the Mainland the beginning of growth at the upper end Until developers or funders decide to property market drying up. of the market ($2m+) where the recovery tackle the issue of overpricing in this in bonuses and earnings on Wall Street is market this overhang of stock will Another key driver for the slowdown feeding into demand and competition for continue to act as a drag on the market. in Hong Kong’s housing market is the best properties.

08 | The london review KnightFrank.co.uk KnightFrank.co.uk The london review | 09 Interviews

Investment opportunities Money into property Willie Gething, co-founder of Property Simon Gammon, Head of Knight Frank 3V ision and now Executive Chairman of 4Finance, provides his outlook on the Market insiders L ennox Investment Management, explains prime mortgage market, and examines his strategy for navigating the market. He trends in lending. Insight and expertise from key players at the top of the market describes what is going on as “the most difficult time ever in my experience to call As the high street lenders slowed down their the market.” lending activity following the credit crunch, Changing buyer requirements The critical point that serves to limit the market the private banks stepped up their activity. The opportunity offered by central London property The burgeoning market for private buying is the management of conflicts. Buying agents In fact the private banks have seen the last investment remains undimmed. Neither the 2008 services provides an opportunity for can only act for one client at a time looking in a year as an opportunity to pick up clients they 1 crash, which shook the faith of many buyers, Andrew Giller, Head of London Buying single price bracket in a single part of London would normally not be coming into contact nor the rebound in 2009, which removed the at The Buying Solution, to reflect on the or the country. It is this factor that to my mind with. Although the banks have remained as means that for all the growth of my market over opportunity for bargain hunting, has undermined choosy as ever it is just that this has been an changes to his market over recent years. the past decade, high-quality buying services the long-term case for investment. That said, the opportunity to see who else is out there. The buying business has changed significantly will always remain niche, or at least boutique market today requires a more nuanced and careful While the private banks have been expanding in the 10 years that I have been operating. Most service rather than transferring over into the approach from the investor. 1 Andrew Giller 2 Elena Norton their client base, they have not had to become obviously the market has become bigger. More mass market. This will ensure that demand for In early 2009, the view from almost everybody more competitive, they have largely maintained people have decided that instructing a buying our service will always outstrip supply. in the market was that prices would fall 30% to their spreads over base rate, it is that the high agent is not a luxury, but a smart move to get 40% peak to trough, and that there would be I always say to clients that I have the best job in street lenders have widened their spreads one-step ahead in the market. blood on the streets in the same way that it flowed property – because rather uniquely I don’t sell and have become by default less competitive

It is no longer just the global elite who retain anything. in 1989-1992. Buying opportunities would be there for the taking. over time. buying agents, our client base has become more diverse and the price point at which we act for It didn’t happen, and the key reason was the The private banks have demonstrated a much The private Russian frustration clients has decreased over time. Five years ago reaction of the Bank of England and the Federal more flexible attitude to risk more recently With demand for London property as high banks have

we did very little below £2m in London, and while Reserve. Interest rate policy in late 2008 repeated than the high street, with loan to values of as ever from Russia, Kazakhstan, Ukraine 3 Willie Gething 4 Simon Gammon we are busier than ever in the £5m, £10m and 2 the move by Alan Greenspan after 9/11 that has 85% being offered at good rates. The banks demonstrated £15m+ price brackets, the fastest growing side and the other former Soviet states, become known as “The Greenspan Put”. With have become more savvy, they recognised of our work in the last 12 months has been the Elena Norton, the Head of Knight Frank’s rates at historic lows and the pound devaluing their power and they tightened up their criteria a much more Russian and CIS desk, considers a new and actively have gone out to widen their £1m to £3m bracket. daily against an over-valued Euro, the London “ source of frustration from her clients. market bounced so that most of the 2008 losses client pool. flexible attitude The key attraction from the client’s perspective For over 18 months there has been very little have already been recovered. to risk more is the speed of action from the buying agent. By targeting clients they have been able to pull “ We can get our clients the first viewing on houses to buy at the top end of the London market. There is a possible correlation between what is considerable wealth into their net, one bank recently than that are coming to the market. In the market we In fact so tight has the market been that buyers happening now and what occurred during the offers very good rates, but insists that in return have shifted their focus to St John’s Wood and have experienced over the past year this has Greenspan heyday. The recent central London price for accessing the rates, that borrowers must the high street, Hampstead, and even here there has been little been critical, because it is the person who views bounce means that, as in 2002, most of the price agree to deposit at least an equivalent pool of to tempt them, so they have been moving further first who has the option to say “yes” or “no”, the growth we would have expected over the recovery funds under management from day one of the with loan to out to prime Surrey locations like St George’s Hill second viewer risks only being able to counter or period has already happened. This means that, very loan commencing. values of 85% better a previous offer. and Wentworth. much as we saw in the 2003 to 2005 period, prices This frustration with slim pickings in London has could easily track sideways through 2011 and 2012. The high street lenders have also been under On average it takes between 6 and 12 months being offered. encouraged some of my buyers to look overseas They are certainly not cheap. pressure from foreign lenders. There was a lot to search, identify and finally buy a property, for alternatives to London. The only location of noise about the Bank of China when it came bearing in mind lots of our clients are out of the This sober reality has to be the starting point for that really works for them is Switzerland, where into the market in early 2009, but there have country for long periods this reflects a real time any investment strategy. There are two drivers education facilities, especially at school age, are been others, especially those from the Middle saving for them. During this period we build a that contribute to investor returns; firstly external, on a par with England’s best, and where taxation East and Asia. very strong relationship with our clients with in terms of market movements, and secondly advantages add to the attraction. telephone calls or meetings at least two to three internal, in terms of what steps we take to add The high street is beginning to relax its criteria times a week. There has been a recent trend for Russian value to each asset. In the short-term, the former a little and buy-to-let products are beginning children to consider the best US universities, as is unlikely to deliver an appreciable result. So the to filter through with some interesting products If I could point to one change that has occurred an alternative to UK institutions. In my experience investor has got to focus on improving the asset. from the likes of Clydesdale. over the past seven years, it is that while this trend is generally resisted by parents who the buying world has become a little more This is our strategy. The central London investment Until recently the majority of our borrowers have become used to the unique combination market is once again all about hard graft, buying democratic, in terms of the people who can now were opting for variable rates, there has been that London offers, with ease of access and high quality properties in the best positions, access the service, the demand from buyers has a noticeable shift toward fixed options, but in excellent universities located next door to a and adding value through comprehensive become ever more demanding. It was the Russian reality it is the five-year options that are taking prime residential market. The problem in the US refurbishments. This is not a time for 50% value invasion that caused it. people’s attention, two and three years are not is that the desirable Ivy League universities are uplifts, but 15%-25% on the back of increased creating a huge amount of attention. When Russian buyers came into the UK in the early not generally adjacent to the best business and floor area, improved layouts and saleability. 2000s they wanted expensive properties, and residential locations. Where are we concentrating our efforts? I have There is plenty of scope for lenders to shrink they got them. By 2004 and 2005 the Russians Looking to the future, Russian buyers are very never been entirely convinced by ‘area plays’; their margins, thereby shielding borrowers who were buying were much more sophisticated positive in terms of their views on the outlook for some go right and some don’t. has from rising rates. There has been precious little in terms of taste and expectation than those who London’s economy. With most buyers being both never really performed in the way the pundits opportunity to over extend on borrowings since came over five years earlier. If you want to see non-resident and non-domiciled, tax changes predicted, and has still to prove its the second half of 2008 and this more cautious modern craftsmanship in homes, go to Moscow. are almost irrelevant, and there is an unshakable potential. So we focus on the best assets in the environment is set to remain with us. Only in the last three years has the same quality belief in London’s global position for finance and best locations and roll up our sleeves to improve and attention to detail been brought to UK. It has business. My view is that demand will remain them – which has proved to be a good strategy served not only to push up their expectations, strong and is one of the key reasons why I would through the rises and falls of the London market but has also pushed up the expectations from UK be very surprised to see prices falling at the top over the past three decades. buyers and all nationalities in London. end of the London market.

10 | The london review KnightFrank.co.uk KnightFrank.co.uk The london review | 11 residential research

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