Battersea Q1 2014
Introduction Anyone who owns a property in London is a property investor. Our lives and plans often depend on the performance of what is likely to be the largest asset we own. So perhaps it will be helpful to take more of an investor’s view of the market. To produce this report we worked closely with D&G Asset Management, a company we cofounded in 2005. They deploy money into London residential property all the time, so they are constantly analysing different areas and the assets within those areas, seeking to maximise returns.
Property Values
Dec 07 – Dec 13 Dec 12 – Dec 13
As well as publicly available sources, we have used the proprietary data that we have been capturing since 1996 to help us make decisions and provide advice and guidance to our clients. D&GAM has helped us focus on the data that counts and we think the results make fascinating reading. If you would like to learn more about the Battersea area please contact our office on Northcote Road.
2013 was an exceptional year for Battersea property. But is it a bubble or a permanent re-rating? Battersea Real Capital Returns over the last 6 years (2007-2013) are flattered by 2013 performance
% 3
40 1 One bed flats have
produced a real return of 8% since the last peak of the market in 2007... 2 ...and all of that return
came from their performance in 2013. 3 Houses have shown
strong real returns over the 2007 – 2013 period.
30 2
20 10 0
1
1 Bed Flats
2 Bed Flats
3 Bed Houses
4 Bed Houses
Source: D&G Proprietary data, ONS
An exceptional year This chart compares the real (that is stripping out the effects of inflation) capital returns for the single year of 2013 with returns over the six year period 2007-2013. It shows that during the six years, capital returns have been good, but not absurd; the annualised real return was +2%, lower than the ten year long term average for the area of +6%.
neighbouring areas. This is particularly true of houses in good school catchment areas. We think that 2013 saw the UK credit cycle starting to turn. If this is correct, mortgages will become easier to obtain and we would expect the capital value of flats to begin rising faster than houses.
The reason for the decent six year return is that last year was a spectacular one. In effect, 2013 made up the ground lost during 2007-2012. For one and two bedroom flats, the capital growth of 2013 pushed the six year return into positive territory for the first time. It is important for 2013 to be seen in this light. It was a year when confidence returned to the market and families started to switch from holding cash in the bank to property for themselves or their children – ‘The Bank of Mum and Dad’.
There is much talk in the press of a London property ‘bubble’. Successful property investors need to spot the difference between an asset price bubble and a genuine re-rating of prices.
Since 2007, houses in Battersea have outperformed flats, as is true in many of the
The big question
Our view is that the 2013 movement in prices has not formed a ‘bubble’. First, the six year real annualised growth rate (+2%) in Battersea is below the long term ten year trend (+6%). Second, there is no evidence that people buying in 2013 were borrowing heavily to acquire their property. Property owners with low loan to value ratios are less likely to be forced into a distressed sale; they will therefore keep a floor under prices.
How an investor looks at the market Residential property investors use two key measures: the capital value of the property and its net rental yield. You can make money from an increase in capital value and earn additional income by renting out a property you own. The net yield is the annual rent, less expenses, divided by the property’s capital value.
area, the economy (in particular, interest and tax rates) and the wider geopolitical picture. The interplay of these factors is what determines investment returns and what makes property investment decisions so interesting. We hope this report provides some help as you assess your options.
Both are important and are influenced by many factors including: supply of new properties, infrastructure projects, demographics of the
2013 was a subdued year for Battersea rental income.
Battersea Nominal Rental Income Growth mixed following steady long term increases
%
Rental Growth & Yield
Dec 08 – Dec 13 Dec 12 – Dec 13
30 1 Rents for 2 bedroom flats 1
20
rose above inflation (+19%) over 5 years, 2008 – 2013.
10
2 There was no rental
growth in 2013.
0 -10
2
1 Bed Flats
2 Bed Flats
3 Bed Houses
4 Bed Houses Source: D&G Proprietary data
A mixed year When renting out a property, an investor will look at current rental yield. However, they also need to take a view on whether rental income will grow; after all, it is rental growth that maintains real income and yield over time. The chart shows that over the past five years, rental income growth in Battersea has been broadly above inflation (+19%). One bedroom flats and three bedroom houses have underperformed other unit sizes producing very slightly below inflation five year rental growth. By contrast, the larger houses have produced above inflation rent rises over the long term. Last year, however, the bigger houses suffered a fall in rent due largely to a very tough summer market.
Generally, 2011 and 2012 saw strong rental growth – the result of tight credit markets delaying many first time buyers entering the market.
Current Yields
2013 was a difficult year with rents for both flats and houses effectively flat. This was due to the squeeze on real incomes of tenants and an increase in supply as buy-to-let investors targeted the area. Landlords may have to be patient and wait for a rise in real incomes before further rent rises stick. Our view is that Battersea remains popular with younger tenants and as wages rise, so will rents.
For more information about D&GAM please go to www.dngam.com. This report is for general information purposes only. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Douglas & Gordon. Whilst every effort has been made to ensure its accuracy. Douglas & Gordon accepts no liability whatsoever for any direct or consequential loss arising from its use.
Dec 13
1 Bed Flats
3.9-4.5%
2 Bed Flats
3.2-4.0%
3 Bed Houses
2.4-3.6%
4 Bed Houses
2.4-3.6%
10 Yr UK Gilt Yield
2.80%
FTSE All Sh Yield
3.30%
UK Base Rate
0.50%
Market Context It has become a truism that London is ‘different’ from the rest of the UK property market. This chart shows just how true this is. House price indices show that the value of an average UK house has risen by 30% (Nationwide) or 22% (Halifax) over the last ten years. But inflation over the same period has been 38%. That means the value has actually fallen in real terms. In Battersea, the inflation adjusted value of an average property has risen by 80% over the
Battersea vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 90 80 70 60 50 40 30 20
same ten year period. In future reports, we will look at how different areas of London have performed relative to each other.
10 0 -10
Battersea
Nationwide
Source: D&G Proprietary data and Nationwide
Battersea key facts & figures Here are the key facts and figures anyone investing in the property market needs at their fingertips.
Nominal Capital Returns to Dec 2013 2013
5 years
10 years
1 Bed Flats
27%
70%
102%
2 Bed Flats
31%
75%
115%
3 Bed Houses
26%
115%
199%
4 Bed Houses
19%
100%
186%
Other Assets Capital Returns to Dec 2013 2013
5 years
10 years
Nationwide HPI*
8%
15%
30%
Halifax HPI*
6%
8%
14% 3%
FTSE100 RPI
Nominal Rental Income Growth to Dec 2013 2013
5 years
10 years
1 Bed Flats
0%
17%
50%
22%
2 Bed Flats
0%
21%
42%
52%
51%
3 Bed Houses
0%
18%
44%
19%
38%
4 Bed Houses
-3%
24%
53%
*House Price Index
Battersea 2014 Our view
• Credit easing • Area re-rating to continue • Capital values: Flats to outperform houses • Rents to slowly pick up
Our Battersea Office
128 Northcote Road, London SW11 6QZ Sales Tamzin Incledon T 020 7924 2000 E tincledon@dng.co.uk
douglasandgordon.com
Lettings Annabel Hay T 020 7924 2002 E ahay@dng.co.uk