Autumn Property Market Roundup4 November 2019
Until this year Brexit was the dog that didn’t bark. As far as the upper reaches of the property market are concerned, it was always primarily about Stamp Duty. It still is about Stamp Duty, but that has now melded with Brexit in a way that should have been foreseeable – but wasn’t.
The story of George Osborne’s torpedo below the water-line is well rehearsed. Turnover – because, of course, Stamp Duty is a tax on turnover – is half what it was in 2014. As Brexit has loomed ever closer and the prospect of a far-left government that might accompany it a real possibility, the reasons to do nothing have multiplied. Alexis de Tocqueville famously said that the worst moment for a bad government is when it tries to reform itself. Along those lines have been both Boris Johnson’s and Sajid Javid’s remarks about reducing Stamp Duty which, far from making things better, have given yet another reason for buyers to sit on their hands: why buy now when your tax may be halved in an imminent budget? The logic sounds right - but the likelihood is that any such cut would be accompanied by a spike in the market that would almost certainly eclipse any tax saved.
This is where we are and things aren’t going to change this year given all the likely political permutations on the cards – none of which point to sunlit uplands this side of Christmas. Having said that, the one cohort that is still active in the market is the one that thinks in dollars for whom the London market is now over 50% cheaper than it was five years ago. It is noticeable that the further you travel from Dover the less the B word comes up.
Sluggish market aside, life goes on, stuff gets built and rules change. We will try to give you a flavour of some of the things that will make a difference to the look of London, change the law, or alter your chances of getting planning permission, as well as other significant market milestones. It will be southern and London centric (with the exception of commercial) and unapologetically about the top end of the market.
Starting with Chelsea, there is still no decision on the Chelsea station for Crossrail 2 - but the chances of it happening with a combination of local opposition and budget cutting by TFL make it highly unlikely.
There is still a misconception in many people’s minds that this is a tube line. It is, of course, a train mainline and the proposed Chelsea Station, all underground, would funnel the workers for, amongst others, three hospitals directly into Chelsea rather than through Victoria and Clapham Junction and on to a creaking tube and bus system. The ditching of the Chelsea Station may turn out to be a real lost opportunity. In the same area, the plans by the Cadogan Estate for the refurbishment of the entire length of Sloane Street, from Knightsbridge to Sloane Square, have received planning permission and will commence next year. Pavements will be widened and resurfaced with seating, trees and flowers, and raised pedestrian crossings. It should be transformational - particularly at the Knightsbridge end.
The transformation of Sloane Street
Further west, the hole in the middle of Earl’s Court where the Exhibition Centre used to be, looks no closer to getting filled. A combination of cost inflation and a bleak market outlook has caused Capco, whose other major asset is Covent Garden, to announce a de-merger, with a heavily written-down Earl’s Court being hived off into a separate vehicle to counter the threat of the millstone of Earl’s Court, allowing someone to get Covent Garden on the cheap. Who will take on the site is not yet clear. It is a great opportunity for a developer with deep pockets and a long timeframe. Both Jamie Ritblat’s Delancey and Nick Candy (reportedly backed by the Saudis) are circling and, given what is going on in Hong Kong, there is likely to be interest from that source.
Earl’s Court site
Battersea Power Station now has residents and even a few commercial tenants in situ. You can access the site by Chelsea Bridge and it is impressive – if somewhat overdeveloped. The financials of the developer were given a good kicking when contractual delays allowed many buyers to walk away from their contracts – which must have been a relief for them as many were at least 25% underwater; 50% if you factor in currency depreciation. The site was a beached whale for 20 years because of the anticipated cost of refurbishing the listed Power Station building: repointing 6m bricks and replacing 1.75m of them doesn’t come cheap. The eventual cost has been even worse than anticipated and the Malaysian developers must rue the day that they ever got involved, however good it looks.
Battersea Power Station from the river
North of Hyde Park, Queensway, a street that has remained resolutely downmarket despite its proximity to some of the most expensive real estate on the planet, is in receipt of a facelift centring on Whiteleys, which had struggled to reach its potential as a shopping centre ever since it was refurbished in the late 1980s. Over the last 10 years, a fund backed by the Sultan of Brunei has bought Whiteleys and other buildings along the street with the aim of creating a “Covent Garden experience”. Whiteleys itself will become flats and a 50-bed hotel with retail on the ground floor and a cinema within the complex.
At the Kensington Gardens end, Bourne Properties is proposing to refurbish the rag-tag of buildings down to Bayswater tube Station. Queensway must be one of the great redevelopment opportunities in central London being where it is and enjoying two tube stations. Notting Hill Gate is surely the other.
Proposed south end of Queensway looking towards Kensington Gardens
CGI of Queensway with a redeveloped Whiteleys
Outside the major rail stations, South Kensington tube station is the busiest in London, funnelling millions of people a year into the museums nearby. Add to that the Royal Albert Hall and Imperial College and congestion is inevitable. Add to that a tiny ticket hall and limited capacity at the barriers and you have something that you could say does not show London at its best. After years of consultation and arguments the final scheme is now on display at the Institut Français.
Designs for the redevelopment of South Kensington tube
The main features are the bullnose apex to the station that has gone from one storey to three and a line of shops and flats above that will run down Pelham Street towards Brompton Cross. The old entrance will be retained and there will be a much-expanded ticket hall and multiplication of barriers. The scale of the bullnose will change the feel of the station as it sits in its landscape: at the moment it’s certainly no beauty.
The big infrastructure story has been the green light given for a third runway at Heathrow. This is not the place to debate the rights and wrongs of the choice - though rarely can there be a project with so many questions over it from so many quarters. From our perspective the long-term implication that gets few mentions is the change in flight paths that the new runway will entail. At the moment, anyone living south of the river knows the ear-splitting roar of the first inward flight at 4am. With the third runway, the dubious pleasure of that alarm clock will be enjoyed by the denizens of Kensington, Notting Hill and indeed most of north London. There will be nowhere to hide.
Heathrow flightpaths before and after the expansion
One of the clichés about the desirability of buying land is that “they aren’t making any more of it”. That might soon apply to the upper reaches of the central London market where the old developers’ game of turning buildings that consisted of numerous small flats into either maisonettes or large lateral flats across two or more buildings is likely to fall foul of new planning guidelines in the Royal Borough and Westminster, which restrict any amalgamations to no more than 170 and 150 square metres respectively. Turning buildings with many flats back into family houses will also fall foul of these restrictions. The idea is to retain the number of residential units which were being lost in the quest for ever larger flats. When you restrict supply, all things being equal, prices rise.
The buy-to-let market has been hit by multiple whammies over the past few years, particularly of the tax variety. To this has been added falling capital values and low yields that haven’t exactly improved the mood music. If landlords thought it might be safe to get back into the water, they are about to be hit again by proposals to change the basis of Assured Shorthold Tenancies, giving tenants the right to remain in situ as long as they like - unless they behave egregiously or fail to pay their rent. It will be interesting to see what banks have to say about lending into a market that is going back to being regulated. There are still plenty of investors with historic portfolios, but it’s hard to imagine anyone putting one together in this environment. Does the government really mean to kill off the supply of privately provided housing?
For investors searching for yield in a world of negative sovereign rates, the commercial property market is still a happy hunting ground. In London prime yields are below 4% - and for trophies or the very juiciest retail pitches in Bond Street, considerably less. If you go out to the provinces, long leases, with good covenants and possible planning capital uplift, can yield over 6%.
This hasn’t gone unnoticed by all sorts of investors - including councils fighting to stay solvent: Spelthorne Council in Surrey now owns nearly £1 billion of such income producers and makes nearly as much money from that source than it takes in council tax. Transaction volumes are down over 30% this year but interest from non-sterling investors is on the up. Such is the Brexit gloom that you could recently buy Land Securities, the biggest REIT in the country, with a 6% yield and on a 40% discount. There is no doubt that valuers have been behind the curve - particularly with retail - but that sort of discount is pricing in a lot of pain.
Landsec Securities share price
In the countryside, one of the outstanding features of the last 10 years has been the seemingly inexorable rise in land prices. The additional few acres to a house that is short of them has always attracted a premium - and always will. Wider land prices have been driven partly by farmers keen to spread their fixed costs over a wider acreage and increasingly by investors taking advantage of Agricultural Relief from Inheritance Tax: James Dyson’s foray into industrial-scale farming is surely an example of this. If Brexit is combined with a leftish government, both of these pillars of land price support are likely to crumble. Farming, marginally profitable at the best of times, is almost certainly going to become a more difficult - and that is a kind word - business after Brexit. Apparently there is an organisation called Farmers for Brexit: it could be related to Christians for Lions. As for Agricultural Relief, it may be a Conservative chancellor that turns his baleful eye on that one.
The Labour Party recently commissioned a report on land ownership, landforthemany.uk, which is a long way from a far-left manifesto and actually a thoughtful and interesting analysis of how land ownership has seeped into so much of national life and distorted the economy. The broad conclusions deserve consideration and in more normal times could garner considerable support across the political spectrum. Fat chance of that now.
There is a well-known Chinese saying that another word for crisis is opportunity. There are plenty of buyers, particularly those that think in dollars and whose home markets are wide open to political risk that makes Brexit look like a stroll in the park, who are active buyers in this market. They see opportunity where the majority see only risk. Those that wait for the crisis to resolve itself will certainly sleep better - but the corollary is that they will miss the opportunity. It was ever thus.
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