Brexit and Stamp Duty. They are the easy explanations for the sluggish market we have been in for the last few years. There is another – and it’s called a Bank Valuation. There is a naive view that a Bank Valuation tells you what your house is worth. It is actually telling the people who have commissioned it what they want to hear.
The starting place is the ‘market’ value based on comparable sales. Whatever this is, bank valuers will nearly always come in at figure 20% under this. No one ever got sued for under-valuing.
But this inevitably leaves the buyer with a problem. For example, a generous loan-to-value is 60%. So, on a £2m purchase, the bank won’t be lending £1.2m but £960,000. Oh, and they certainly won’t be lending anything towards the 15% Stamp Duty and other purchasing costs. When you add those in, the actual loan on the total purchase cost is only 40%.
And don’t think the valuer is an expert. Too often the valuer will turn up in London from somewhere like Birmingham. They will look at the property and then call up three local agents to pick their brains, choose a figure, subtract 20% and send the bill to the bank who pass it on to the borrower to pay. Cynical? Maybe.
This works the other way in different circumstances like commercial valuations for REITs and other property companies whose lifeblood (and management bonuses) depend on rising valuations. This is painfully obvious at the moment in those property companies specialising in retail and, particularly, shopping centres where their share prices are languishing at massive discounts to Net Asset Value. It is not hard to see why the market might be right when Next have publicly said that they expect any lease renewals in the future to be nearly 30% lower than they are currently. Valuers say that they don’t have enough comparable evidence to down-value – but they would say that, wouldn’t they?
Valuers must be feeling uncomfortable. As they should be – but too often aren’t.
It is a truth universally acknowledged…that most people are either over or under insured on their biggest asset – their house. And they won’t find out until the worst has happened and they make a claim to rebuild a blackened ruin.
The main problem is that most people think the value for insurance purposes is something to do with its market value. If they don’t make that error then they often think that the roof and walls will be there, so its only about redecorating. The moment of disillusion comes when the loss adjuster arrives and tells them, too late, that they have either been over-paying premiums for years or, much worse, that they are under-insured and that they will only get a fraction of the cost of rebuilding their house.
The value of house for insurance is actually the gross external square footage (certainly not whatever might have been on the estate agent’s details) and has to include all the out-buildings and walls and, crucially, assumes that the site has to be entirely cleared and totally rebuilt. The room for under-insurance is obvious – particularly in the country. In London, the sky-high price of property tends towards the opposite problem and insurance companies have been quietly benefiting from over-insuring for decades. As most people will never have to make a major claim they will never find this out.
The answer? Pay for an insurance valuation. It will be cheap in the long run.
London used to be well known for its laissez-faire attitude to planning: dig down, slap on a roof extension or merge two flats together – help yourself. The last couple of years have seen a swing the other way with a tightening in many directions, many of which have been in answer to mass complaints about the sheer size and disruption caused by basement excavations.
Excavation doesn’t do justice to some of the holes. At the end of Brompton Square in Knightsbridge is a crescent with large wedge shaped gardens. An owner there had dug down four storeys with a result that resembled a meteor strike. He only had permission for two storeys – but that didn’t improve the mood music.
There are no national rules and most are dealt with at a local level – predominantly in our market by RBKC and Westminster. RBKC has a new local plan that is imminent and it seems to ride a sensible line between wider society concerns and the rights of ownership. There had been a presumption against amalgamation of flats – particularly converting a house back into single ownership. The new plan recognises that the nature of its property market means that larger flats are acceptable even if that means merging two together. Bigger houses, by the same method, will not be treated so indulgently.
The same applies to basements. Within the footprint of the house is allowable but only one storey down. You would still be allowed this if you already had a lower-ground floor (that is the front may be below the pavement but the garden is at ground level). Excavations under the garden would be on a case-by-case basis but no more than 50% of the garden area.
The new plan is not yet adopted – but looks like a sensible compromise.
COMMERCIAL AND RESIDENTIAL – A CROSSING POINT
A key feature of the 21st century property market has been the conversion of office and other commercial buildings into residential – if not a conversion then a demolition and replacement with a block of flats.
The economics were compelling when you had an office building worth £300 a square foot and a finished flat worth £1000 per square foot. The yield on the office may have been 6% as against 3% for the residential – but who was going to be worrying about that when such an obvious capital gain was sitting on the table? Add into the mix a mayor (Boris Johnson) who blithely nodded through the biggest of schemes with as little attention as he paid to most things and you had one of the biggest building booms London has ever seen.
Things have changed. Now office prices are broadly similar to residential with added advantage for offices (in prime areas) having a yield of 4% as against a net yield (there are many more landlord responsibilities and costs in residential) of 2% for residential.
There are other changes. Retail yields used to be much lower than industrial but that, in some places, has inverted as demand for industrial has boomed. There have been some places where developers of industrial have outbid those attempting a residential scheme. This is unprecedented.
This boom in industrial (particularly sheds for logistics) has seen some rejigging of investors’ portfolios away from retail, where the challenges have been obvious for some time. Where we have done this, it has been very profitable – but the result has been that industrial is no longer the obvious buy that it was.
So what might be next? If the time to buy is at the darkest point before dawn, the right retail might be a contender.
Is this the future? The jury is still out. The clear sector leader is Purplebricks whose business model is an up-front fee with no commission and a ‘local expert’ to do the valuation. That’s it. Viewings, advice on the sale and negotiation are all extra. So far the online offering has about 8% of the total UK market. We have not seen them at all in our sector.
Purplebricks’ share has been consolidated when eMoov, the largest of its competitors, went into administration in December last year after a merger with Tepilo and urban.co.uk, but that doesn’t mean that life has been easy. They made a profit of £4m in the UK but a loss of £25.6m overall with heavy investment in marketing in Australia and North America to blame.
The fact is that they have high operational gearing – i.e. high fixed overheads – like the traditional estate agents with whom they are competing. The estimate for Purplebricks’ sales of houses is 24,000 which is roughly the same as for Countrywide. Countrywide’s share price is 10p compared with £6 four years ago, which makes Foxtons look like a success story with a share price of 50p against £3 over the same period. However bad that looks for the traditional agents, a grinding market does not favour an upfront fee model as, with no guarantee of a sale, a commission on success-only looks more attractive.
In all the time we’ve been in business, investing against the traditional estate agency model has not been the way to bet – to our surprise. Like the undead, they keep springing back to life despite the number of digital stakes being driven through their collective heart. There isn’t much in the online sector that suggests a change of betting strategy would be wise – yet.