Prime Spectacle

Just six weeks ago prime London property buying agency, Ludgrove reported that after five sluggish years the prime London property market was finally enjoying a revival, with a surge in buyers and sellers returning to the market, and many agents reporting new buyer registrations were up an astonishing 50-100% in January.

Fast forward to today, and Corona virus is ravaging the world. In just six weeks the FTSE 100 index is down 33%, the domestically orientated FTSE 250 down 41%, crude oil down 63%, interest rates are the lowest on record, Government bond yields around the world have collapsed and fiscal and monetary stimulus has entered overdrive.

Fraser Slater, CEO, Ludgrove Property comments: “We have found ourselves suddenly living in unprecedented times, former stock market trader and author Nassim Taleb would call this a "Black Swan" event: an event so far outside the normal range of expectations that it catches almost everyone unprepared and one that has enormous implications. But what does this mean for the Prime London property market? Using our expertise in the market with and our in-house analysis we think buyers should not be put off, but should be taking advantage of this “Black Swan buying opportunity” and as the old saying goes “don’t wait to buy real estate, buy real estate and wait.”

Fraser continues: “Central London’s prime property market performance will be driven by the economic downturn and its recovery; we are predicting this will be short and sharp. Characterised by a steep but temporary rise in unemployment, bankruptcy of highly exposed businesses, but with a swift recovery in the second half of the year. How the downturn unfolds will be determined by greater understanding of Covid-19, its spread and fatality rate, the success of lockdown measures and how pragmatic the Government responds at the end of the initial lockdown. Historically PCL price falls have mostly been preceded by long periods of booming prices, excessive financial leverage, speculation, City hubris and an influx of overseas buyers for lifestyle or safe-haven reasons.”

Ludgrove research has highlighted the following reasons why prime Central London property remains a good investment. Firstly, prime Central London prices have already fallen to levels where they have historically troughed and then recovered in past cycles. Real-terms prices fell to 28% from the peak in Q1 2014 to the trough in Q1 2019. This is similar to the inflation-adjusted falls seen in 1989/92 (-34%) and 2008 (-26%). At five years in length the recent prime Central London downturn is also by far the longest on record (comparing to the three-year downturn in 1989-92 and the one-year fall in 2008). A bounce back was long over-due before this crisis.

Prime Central London property is usually first out of a downturn. Long recessions tend to shake out the speculative, 'loose-holders' of assets and many of these speculative holders have already been purged between 2014 and 2019.

The recent safe haven flight to the US dollar has returned Sterling to the bottom if its 40-year trading range, making Prime Central London prices 40% cheaper, compared to the peak in 2014. Sterling is also cheap trading at a 14% discount to fair value (Purchasing Power Parity at GBP/USD 1.42 vs 1.22 spot). There are also a number of dollar-pegged overseas regions that favour prime London property. These include Hong Kong, Malaysia, Singapore, Qatar, Bahrain, The UAE and Saudi Arabia. The introduction of a 2% Stamp Duty Surcharge for Overseas Buyers due in April 2021 should encourage these buyers back to the market in the second half of 2020.

Mortgages are at an all-time low and although higher value LTV mortgages have been withdrawn in the wake of the crisis, there is good mortgage finance availability at more modest LTVs. Prime Central London is cheap relative to the London property market trading at a 173% price premium to mainstream London (in a 10-year range of a 155% premium to 250% premium). PCL rental yields are trading near the top of their 10-year range. In comparison yields on cash, the mainstream UK property market, the bond and equity markets (where dividends will inevitably be slashed) are at or close to their 10-year lows. Yields on cash and bonds are also negative in real-terms.

A five-year bear market has created an underswell of pent-up demand so after years sitting tight, there is a significant number of buyers who have outgrown their properties and are desperate to move. Prime Central London rents have also been on an upward trajectory driven by a lack of supply as private landlords have exited the market following changes to Buy To Let taxes. Rising rents tend to support capital values.

At times of crisis, Prime Central London benefits from safe-haven buying. Prime Central London homeowner leverage is low at around 30%. Prime suburban, commuter and rural properties may well see a renewed interest over the next few years as buyers look for more spacious properties to work from home.

As an asset class, it is possible that real estate values may become a more valuable relative to equities as the coronavirus crisis is likely to lead to corporates holding higher levels of cash and inventories on balance sheets in turn depressing return on equity and corporate valuations, with property unlikely to suffer the same fate.

Corporates are also likely to view healthcare provision as a more significant factor when deciding to expand or invest in certain regions of the world. In this context, the National Health Service should help attract talent to London and the UK.

Fraser adds: “Some of the best opportunities will be for bulk buyers seeking new build residential blocks from distressed developers. Indeed, our professional investor clients are still active, using this as an excellent chance to gain sizeable exposure as we have access to many off-market properties. With physical viewings currently impossible, the prime Central London market is frozen and minimal transactions will provide scant evidence of where the market is actually trading. Low volume markets are notoriously skittish and unreliable, so an accurate reading on prices may not be possible until well into the second half 2020. We regard any weakness as a buying opportunity.

We are more cautious on the London mainstream property market though, as it has been mainly driven by First Time Buyers assisted by Help to Buy, parental assistance and high LTV mortgages. With LTV mortgage offers being removed and the Bank of Mum and Dad's savings depleted this has been significantly curtailed. A large number of First Time Buyers over the last five years have also bought new build properties at premium prices (due to these properties qualifying for HTB) and we feel there is a higher risk of downward price pressure and negative equity in this segment of the market - especially if a more protracted downturn materialises.

Prime central London is not immune from the current crisis and some weakness is to be expected in the short term. However, for the reasons outlined above we would regard any sell-off in the coming months as an excellent long-term buying opportunity. The deep and protracted prime Central London bear market that has preceded the coronavirus-crisis is not the typical backdrop for a sustained fall in prices”

For further information on Ludgrove visit www.ludgrovepoperty.com.