Market Overview – Year End 2012
Sales values performed strongly in the 2nd half of 2012 across Midtown, City and Docklands ended the year 27% higher than at the end of 2008. London’s rental market has also performed strongly and the capital’s residential property market again turned in another confident performance.
The UK economy, however, remained weak throughout 2012. Despite some faltering improvement in output statistics in Q3, there was never any real sense that the economy had returned to growth. In November the Governor of the Bank of England warned that, while we appeared to be on the road to recovery, we should expect a long, slow and zig-zag journey. Few commentators would be bold enough to rule out a triple dip recession.
It is perhaps surprising then, against this backdrop, that the London residential markets were so robust in 2012. But the scale of demand to live in the centre of London is such that the market struggles to produce enough supply and there remain plenty of buyers with discretionary income or capital, who are keen to invest. Sale prices had been driven up steeply in 2011 and continued to rise, although at a slower pace in 2012.
Midtown and City grew at similar rates of 5% and 5.5% respectively, while Docklands prices rose by 3%. We consider this level of capital growth to be reasonable and sustainable. The pattern of growth undulated in 2012. It was at its steepest in the early months of the year, flattened out in the spring, dipped over the summer and then rose gently in the autumn before flattening out again towards the end of the year. Over the course of the year, the price of a one bed apartment in the resale market rose by around 5% to £405,000. Most of the growth occurred in Q1 with a second wind in the autumn.
The New Homes sales market in Midtown, City and Docklands was also strong. In Midtown, sales made overseas achieved significant premiums above prices that were paid locally. This trend appears to be confined to Midtown where overseas buyers area attracted by proximity to the West End, while in Docklands and East London the evidence was that the domestic market paid high prices.
Rental values fluctuated over the course of 2012, although, for onebed apartments they ended up pretty much where they began, at £425 per week in Midtown, £450 in the City and £350 in Docklands. Average rents for two bed apartments fell in all three submarkets in the 1st half of 2012 before rebounding in the 2nd half of the year finishing approximately 4% down on pricing at the end of 2011. There was an Olympic effect, particularly in Docklands where rental values were raised in the lead up to the Games and fell back afterwards as stock was returned to the market. The returned stock, is the main reason that there was no autumn increase in rents this year, despite the usual high volumes of demand.
Rental values were high coming into 2012 after two years of upward pressure and so a levelling off in values is to some extent understandable. We noticed a far greater incidence of tenants ending tenancies early in a bid to track the values as they dipped. The average length of time that a tenant would stay in a property shifted from 30 to 24 months, during 2012, as they sought lower rental deals or alternative, lower value locations.
Centre for Economic and Business Research (CEBR) issued some dismal employment forecasts in November, for the banking and financial sector in the City of London. They forecast that by 2013, the number of jobs would fall to its lowest level for 20 years and that the earliest they would expect any growth would be 2017.
While the fall is attributed in part to the weak economy and financial crisis, they also cite increasing regulation as a brake on growth as well as a rebalancing of the global financial hierarchy that will see Hong Kong overtake London by 2015 in terms of number of jobs in the sector.
Earlier in the year, GLA Economics, also predicted a loss of employment in the financial sector. Their forecast was of a 9% fall in the number employed in the sector across Central London between 2011 and 2031, although this forecast expected the fall to be counterbalanced by growth in information technology and business services employment.
The secondary office market in City fringe locations and particularly around Shoreditch and Clerkenwell performed strongly in 2012 fuelled by media, telecoms and technology companies together with fashion retailers and showroom occupiers. In December, funding for the redevelopment of ‘TechCity’ Old Street Roundabout was confirmed which will further boost local employment in non banking sectors.
For a time in the summer and autumn the Euro crisis seemed to recede. It faded from the front pages, if not from the minds of economists, and the mood in the UK lifted, helped by London’s staging of the olympic games and an exceptional summer of sporting success. But by November, there were general strikes and mass demonstrations against austerity measures in several European countries including Spain, Italy, Portugal and Greece which made it all too clear that the crisis was far from over and the UK’s demands for a spending freeze had caused offence in Brussels.
Inflation was disappointingly high in Q3, fuelled, amongst other things, by university tuition fees and output was lower than expected. The most positive indicator was employment where UK-wide figures continued to buck the trend, highlighting a reduction in productivity as employees were retained despite the falls in output. Some commentators expect there to be an adjustment in 2013 as employers look for more ways to cut overheads. In the Chancellor’s Autumn Statement delivered on 5th December, it was reported that the UK was set to miss it’s key economic performance targets.
The Government hopes for boosting economic growth through private sector infrastructure spending have been frustrated by the unwillingness of investors to invest in high-risk projects. Its ambitions for the residential sector have also been thwarted by the lack of credit available from mortgage lenders and by their risk-averse attitudes. It remains an important plank of Government policy however and we outline proposals to encourage investment in the private rented sector later in the report. (See Investment section).
The Montague Report, published in August, examined the barriers to institutional investment in private rented housing stock and laid out some proposals to encourage greater investment. The Government has already announced £10 billion of debt guarantees to support growth of the sector. There are clearly some major hurdles to overcome but it seems almost inevitable that it will eventually emerge as an investment sector alongside commercial property for the UK institutions as long as they find a way to achieve their target returns on capital and to reduce the risk associated with residential management.
Buy-to-let remains a popular route to investment for individual investors across Midtown, City and Docklands, as more conventional pension funds fail to perform and the next generation struggles to get a foothold in the home ownership market. The buyers who underpinned the sales market in this part of London in 2012 were overseas investors, particularly from the Far East, Italy and Greece; UK buy-to-let investors; affluent London workers seeking a pied-aterre and first time buyers, often helped out by their parents. Three of these four categories of buyer are likely to become private landlords. The scale of interest in the rental market has led to a wave of new initiatives to regulate landlords, which, we believe, will ultimately flow through to the tenant and add to the cost of renting in London.
It is a feature of our core markets that in 2012 purchasers were not dependant on high loan to value borrowing. However lenders were still the cause of additional delays during the sales process by introducing additional levels of due diligence for lawyers undertaking the conveyance process.