By Camilla Dell, Founding Managing Partner, Black Brick
As experts in the Prime Central London (PCL) property market, we’re always, of course, analysing the data, so I would never dismiss the empirical evidence that many reports provide. As someone with a Masters in marine biology, I’ve been trained to “peer review” published findings and look at studies in terms of statistical significance—which is why anecdote often gets a bad rap. Anyone setting out to analyse a particular situation is always encouraged to look at the overall data rather than rely on an individual’s subjective experience. That said, a buyer trying to navigate London’s prime-property market during COVID-19 would do well to disregard the market data and listen to the experiences of those working through it, firsthand.
What I am seeing is a big gap between what the market analysts are saying about falling prices across London and what potential buyers of high-quality properties in the best areas are finding. Buyers were led to believe during the lockdown that prices would come off—in many cases, that’s simply not happening.
Data from agents such as Knight Frank have shown price drops—with average prime London prices falling 5.1 percent this year to the end of May. However, these figures were based on limited data: according to government figures, there were just 38,000 transactions in the entire country in April, 55 percent below the five-year average.
Although large new-build developments or properties in less desirable areas or even streets are likely to be discounted by sellers, pushing the average figure down, popular parts of prime London and particular types of property are in high demand. If you’re looking in Hampstead, Barnes or Fulham for a family home with a garden, you’re going to face a lot of competition. These areas are really benefitting from COVID-19 as buyers are starting to look away from Central London towards “greener” areas.
Savills has noted some interesting data from HMRC (Her Majesty’s Revenue and Customs), which, while it relates to the overall UK market, gives clues as to what’s happening in prime areas. It shows a year-on-year surge in sales agreed on this June (the result of delayed transactions during the lockdown), but the surge is being seen at the higher end of the market: specifically, the number of sales above £500,000 was up 53 percent year-on-year but was up only 12 percent for sales below £200,000. This suggests that demand for more expensive properties is supporting prices at this end of the market. We may now start to see a shift and recovery in transaction volumes at the lower end of the market as a result of the recent Stamp Duty holiday, but for the buyer of a £1 million-plus property, the Stamp Duty holiday is a “nice to have” but won’t make the difference between someone deciding to buy or not.
My feeling is that now, as pent-up demand surges back, buyers are facing stiff competition for limited supply, particularly for good family houses in the prime domestic markets such as Primrose Hill, Hampstead, St John’s Wood, Wimbledon, Barnes and, indeed, in prime country areas too. Those sellers who are in the market are not desperate, with low interest rates and government support schemes helping to reduce forced selling. This is undoubtedly contributing to a gulf in expectations between buyers and sellers: what we often call a Mexican standoff.
Furthermore, buyers who are testing sellers of attractive properties with low prices are being forced to rapidly recalibrate their expectations. We’ve seen buyers coming in with a low-ball offer, seeing it quickly beaten and then responding by paying the asking price or even above. Once they realise the depth of competition for good properties, it gives them the confidence to pay up.
Having said that, there are opportunities in the market. As well as acting for buyers looking to buy homes, we also act for investor clients. One area in which we continue to see opportunity to buy well is in the new-build sector. By way of example, we recently re-negotiated the purchase of six new-build apartments in Shoreditch. The transaction was about to go through right before COVID-19 struck. Understandably, the transaction went on hold. We spent the following three months re-negotiating the deal, resulting in a 20-percent discount from the original asking price for our client.
When looking at the current rise in activity and pent-up demand, many buyers have been holding fire for two or three years and are desperate to move; much pent-up demand pre-dates the lockdown period, stretching back to before the December general election and the three years of Brexit-related uncertainty since the referendum in 2016.
As a result of this, sales agents are being rushed off their feet, but they’re not seeing the stock they are selling being replaced with new instructions, so there could be a real squeeze come autumn.
However, that limited supply notwithstanding, there are clouds on the horizon: There’s still the risk of leaving the European Union (EU) without a trade deal, taxes will have to go up to pay for the COVID-19 response, the Stamp Duty for foreign buyers is going up by an additional 2 percent on April 1, 2021— while limits on international travel will keep many overseas buyers away. It’s really hard to form a medium-term view on the market’s direction.
Acquisition of the month: Long and Waterson, Shoreditch, £4.075 million
Our investment client was looking to invest £20 million into the London property market for a combination of rental yield and long-term capital appreciation. We advised the client to purchase in bulk—buying six units or more in a single transaction to qualify for the commercial rates of the Stamp Duty but diversifying across a number of properties. The client had strict investment criteria: high-quality new build, easy to let and capable of achieving a gross yield of at least 4 percent. Finding suitable opportunities that met all of the criteria was a challenge in Central London.
We identified the boutique Long and Waterson development in Shoreditch, consisting of just 119 high-quality units and the only premium new development in the immediate vicinity. The development is superbly located for this cosmopolitan enclave, which is also on the doorstep of the City. The development also benefits from a 24-hour concierge, private gym, saunas and treatment room, extensive private gardens, screening room and residents’ lounge.
We negotiated the purchase of six apartments in January 2020 for a combined purchase price of £4,750,000—an almost 16-percent discount from the original asking price and an estimated average net return on equity of 6.6 percent over a projected five-year holding period. However, right before we were due to exchange contracts, COVID-19 struck.
We decided to put the transaction on hold, carefully monitoring market conditions, and as we approached the end of the lockdown, we successfully re-negotiated the purchase down to £4,075,000. We also de-risked the purchase by replacing one of the more expensive three-bedroom units with a one-bedroom apartment. We also negotiated a one-year rental guarantee for our client to take into account the higher-risk rental environment due to the pandemic. Overall, we managed to increase the overall discount to 20 percent from the original asking prices. At just over £1,000 per square foot, this offers a very good long-term investment for our client in an exciting new growth area of London.
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