Article in The Property Chronicle29 January 2018
Though Donald Rumsfeld was much mocked for his ‘known unknowns’ speech, he was right. It’s the ‘unknown unknowns’ that get you when you try to predict the future because, of course, they are unknown. The only thing you can do is look at current trends and then try and work out if they have legs that will carry them on into the year ahead. And perhaps have a guess at the known unknowns. As these have a toss-of-the-coin flavour about them (Brexit? General election? The Grim Reaper?) it is probably best to stick to extending trend lines – particularly when you may have a sense that sentiment has shifted.
A good example of this is residential investment property in London. For the last 20 years it has been the place to be. Yields were always low – and always below the cost of funding – but who cared about that when capital values rose, often in double figures, year on year? You could offset the interest on your mortgage against your income and the banks couldn’t wait to stuff your portfolio with leverage. Developers all over London bought what sites they could and pre-sold them to buyers in Asia and made use of skilled imported labour and cheap imported materials and fittings. Not one of these now applies. Most of the tax benefits are about to disappear, prices for the typical product churned out by developers (two bedroom flats on reclaimed sites) are now soft – to say the least, banks will fill your life with forms and red tape, and Brexit and oversupply will continue to make imports more expensive and produce less demand from tenants. 2018 is not likely to see a reversal of these trends. There will be a few ‘Emperor’s New Clothes’ moments over the next year or two when the new paradigm is finally acknowledged. There will be a moment when some big developers admit that their pricing was wrong and take some big write-downs on their balance sheets. This will ripple across the market.
If investor budgets are big enough, it is to the commercial sector that many investors have been looking, and will continue to look. It’s not hard to work out why. Yields for even the trophy properties in London are more than double the residential equivalent – and if you go out to the provinces double that again for a good covenant and a tenant that looks after the building for you for 15 years. As investors bid up good stock this will put pressure on yields but it is likely that they will remain attractive in a low interest rate environment that is unlikely to change meaningfully this year. The only fly in this particular ointment is the introduction of capital gains tax on commercial property gains for overseas investors. Will this make a difference? Maybe – but there is plenty of domestic interest to take up the slack.
The more niche developers, with the right product in the right place, will continue to attract premium prices as long as they really are prime – not just called iconic because no one can think of another adjective. A good example of this sort is Auriens in Chelsea which is the most upmarket of sheltered housing – prices start at £3m. It’s not the most interesting architecture – but it has all the facilities that that market wants – nursing care if needed, cinema and on-site restaurant – and interior designs that cater to the older market, but don’t look remotely utilitarian. Equally, nearby, the Chelsea Barracks site continues to sell at prices in excess of £4000 per square foot which doesn’t seem to put people off. It should be noted that this is a market where cash, not borrowed money, is the primary currency.
For the rest of the market in London it is likely that patchiness will be the watchword as two of the major trends of the last few years continue. The first of these is the continued effect of the Mortgage Market Review which is like sand thrown into the gearbox. Even the plainest of plain vanilla mortgages takes an age and this is combined with lawyers who are taking risk aversion to another level – a depressing trend that is unlikely to reverse in 2018. Box ticking, and paperwork designed for a market of less sophisticated buyers, will continue to be the bane of everyone’s lives. On a more positive note there are signs that some of the effects of the hike in stamp duty three years ago are now dissipating as sellers realise that this is their problem and that prices need to adjust accordingly. This is on the supply side. At the same time we sense an increase in interest from around the world – particularly Asia and the Middle East – but at a higher level that in the past. These are buyers that understand how London works and are interested in areas and buildings which are not just newbuild.
The country market has been remarkably busy at the end of 2017, as busy as we have ever known it at this time of year, and this seems set to continue into 2018. It should be said though that this is a market where quality is king and always sells well. The less good – road noise, next door chicken farm or a view of pylons – only sells when the price is right. Why is the country market so strong? Primarily because compared with London, it’s cheap. A very ordinary London house can be traded for something special in the country. There is also the ability to escape some of the punitive levels of stamp duty by apportioning the tax amongst different properties on the same site. Because most buyers in the country are in for the long haul, they tend to be more sanguine about stamp duty when it is mentally spread over 25 years. There is also an element of catch-up by buyers that put off their lifestyle move to the country when London was roaring upwards and the country flatlining. All these factors are still in place for 2018.
We are not known for a Panglossian view of the world. We tend to look for the bear traps as much as the opportunities. But if we can avoid an ‘unknown unknown’ and a ‘known unknown’ (think a stock market crash) then most of the markets that we operate in will probably be quite good – rather better than many expect but not as good as most estate agents need in order to make any money. There will be fewer estate agents on every high street and fewer new developments on the starting blocks – but the market will function just fine.