11 July 2023

Bright young things: buying in London

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When new trends emerge in UK real estate, they are often easy to spot, and those who respond fastest will frequently make the greatest gains. For example, Covid lockdowns sparked a wave of demand for properties with outside space, while working from home opened up commuter zones further afield than previously deemed reasonable or desirable. Equally, in the investment arena, Tony Blair’s insistence that everyone should have a university education drove money into student accommodation. Meanwhile, in the early days of e-commerce, when most of us were just getting to grips with online shopping, Amazon had commercial agents scouring the land for anything that could be labelled ‘distribution warehouse’.

But sometimes trends gather momentum in an almost stealth-like manner, taking years to become talked about or widely understood. These are markets which can do well for those in the know, but where the risks for not getting it right can also be considerably higher. Historically, these may have been things like moving to the next station along the line from a previous hotspot or adding additional space by going up into a roof or down into a basement. Often there is a catalyst that brings these considerations into the public consciousness such as a press article or a rash of specialist companies advertising their services. As with so many trends, it’s usually the early adopters who reap the rewards while the laggards lose their shirts when the market changes.

Three trends are currently at play in the London market which have quietly been bubbling along for some time but are now gathering pace and attracting attention.

The first is that younger buyers are inhabiting parts of town that their parents would never have considered — and these aren’t just on the borders of already established neighbourhoods.

Forty or fifty years ago, when the parents of young buyers were laying down roots in London, they might have bought in Chelsea or Kensington but also considered more peripheral areas such as Fulham, Battersea, Clapham, and Wandsworth. It was a time when many traded frequently, slowly climbing the ladder (high frictional costs, largely Stamp Duty, have put an end to this). Today, we’re seeing their offspring cast buying nets far wider and particularly eastwards.

Exposed by jobs or friends working in tech hubs based around Shoreditch, we’ve recently bought a number of properties for young clients in and around Hackney. Dalston for example has a great vibe and holds real appeal for the wealthy young, perhaps not unlike Portobello Road in the 1960s. Cool, edgy, fun and challenging to parents, but generally no more dangerous than trying to cross the Kings Road on a busy Saturday afternoon.

Advising in these situations is not easy; first off, there is a delicate balancing act to perform between those who are buying in these seemingly uncharted territories (the young) and those who are either paying or pitching in commentary from the side lines (the parents, many of whom have rarely ventured north or east of the City). Next, thanks to price inflation, the sums involved are far, far greater than in decades past. More complex still is the fact that the taxes and the costs of buying have effectively killed off the three to five-year market. Now it’s necessary to hold onto something for between five and seven years before it will have appreciated sufficiently to wipe its face financially - the possibility of making an expensive mistake is real.

Trend number two is that in certain areas, particularly in Southwest London, there are sectors of the market which have literally sold out. We are all used to areas where would-be buyers are priced out of the market, but this is a situation where there are simply no good houses for sale.

We have experienced this a number of times over the years, mostly in the country. For example, 40 years ago in the early days of PV, Hampshire was our most active market, and an area where diligent searching could always yield an opportunity. More recently it accounts for a very low percentage of our activity, simply because many of the special houses are now locked away for the long term. This is a trend which has spread to West Sussex, South Oxfordshire, and for the first time, during Covid, affected the Cotswolds. We are now seeing this happening in areas such as Southfields and Richmond.

The result of ‘sold out’ markets is that other areas benefit. Some would argue that it’s all a matter of pricing and that in the face of high demand values will rise, tempting owners to sell. But, our experience is that this is not the case where buyers have both defined budgets and space criteria; they simply go and look elsewhere.

This leads neatly on to the third trend: the emergence of very valuable houses in otherwise ‘hidden’ markets which, in time, have the wherewithal to become established and desirable neighbourhoods. Back in the 1970s, for example, anyone searching for more space who landed in what was then the boondocks of Wandsworth will have made a fortune in property equity, providing they held onto the house. Detached houses with sizable gardens in the so-called ‘Toast Rack’ streets were trading in the mid-1970s for £36,000. Today, the average price of a house in one of these streets is £6.1m.

In the past few months, we’ve purchased properties for clients with budgets of between £4m and £8m in several pocket markets around southwest London. As the desire for larger gardens and home offices (alongside a preparedness to travel further to secure them) is unlikely to fade, there seems to be a strong future for some of these neighbourhoods which have the ingredients to become established—and highly desirable--in time.

So, what are these ingredients? Generally, a stimulus will come along which revives areas of faded elegance; alternatively, it will be a cool regeneration project. The transformation of Battersea Power Station has amazing place-making. It also has a critical mass which brings energy and visitors. This has also had a positive knock-on effect for the surrounding area which despite having pretty housing stock had struggled through lack of good transport links and local amenity. Ideally growth areas should have a strong mix of housing types to allow natural progression up the ladder as marriage and children come along, without necessitating a move out of the area.

The common issue with each of these trends is that individual purchasing decisions are driven more by lifestyle than investment, but elements of both are at play. For example, developers in East London spotted the opportunity early, and quickly created the units that matched the vibe and encouraged the young to base themselves there. Employers, especially in the tech sector, have located their businesses in the same zones spotting that the young minds they want to employ are happy there. Thus, a snowball effect has occurred.

Buyers must consider (as we have seen many times in the past) that when the market turns, the tide often goes out fastest in the newly discovered zones, with everyone’s inbuilt investment radar drawing them back to familiar safe havens. Knowing what will stay hot, and what will not, is important.

As we hit a point in the economic cycle where all real estate sectors are slowing, caution is the key word. In most desirable areas demand still outstrips supply and the reasons for looking at emerging areas remain. But, the early adopters have done the hard work and made their returns. Making sure you are buying the very best you can for your money will ultimately fulfil both lifestyle and investment goals.

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