The Investor View - Clapham Common

Clapham South 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

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 Clapham South area please contact our office on Abbeville Road.

2013 was an exceptional year for Clapham South property.

But is it a bubble or a permanent re-rating?

Clapham South Real Capital Returns over the last 6 years (2007-2013) are flattered by 2013 performance

Dec 07 – Dec 13 Dec 12 – Dec 13

% 30 3

1 Two bed flats have

produced a real return of 20% 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

better real returns over the 2007 – 2013 period.

20

1

2

10 0 -10

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, real capital returns have been good, but not absurd; the annualised real return was +2%, this is lower than the ten year long term average for the area of +4%.

neighbouring areas. We think, however, that 2013 saw the UK credit cycle starting to turn. This means that over the next few years mortgages will become easier to obtain. If this proves to be the case, we would expect flats to start to rise faster in value 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. 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.

However, notwithstanding the strong growth in 2013, not all unit sizes are, in real terms, above 2007 levels (e.g. one bedroom flats).

Since 2010, houses in Clapham South have outperformed flats – as is true of 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 for the area (+2%) is still in line with, or below, long term trends (+4%).

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 mixed year for Clapham South rental income.

Rental Growth & Yield

Clapham South Nominal Rental Income Growth has been good over 5 years – 2013 was tough Dec 08 – Dec 13

% 1

30

Dec 12 – Dec 13

20

1 All asset sizes have had

above inflation (+19%) rental growth over the last 5 years.

10 0

2

2 Last year rents were

broadly static or down.

-10

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 growth in Clapham South has been strong and, importantly, above inflation (+19%).

In particular, 2011 and 2012 saw strong rental growth – the result of tight credit markets delaying many first time buyers entering the market.

However 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. Rental supply was fuelled by buy-to-let investors targeting the area and some previous owner-occupiers moving out of the neighbourhood, but retaining their property as an investment.

Current Yields

Landlords may have to be patient and wait for a rise in real incomes before further rent rises stick.

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

4.0-5.0%

2 Bed Flats

3.5-4.5%

3 Bed Houses

2.7-4.0%

4 Bed Houses

2.7-4.0%

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 Clapham South, the inflation adjusted value of an average property has risen by over 50% during the same ten year period.

In future reports, we will look at how different areas of London have performed relative to each other.

Clapham South vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 60 50 40 30 20 10 0 -10

Clapham South

Nationwide

Source: D&G Proprietary data and Nationwide

Clapham South 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

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

2013

5 years

10 years

1 Bed Flats

21%

50%

79%

2 Bed Flats

24%

67%

106%

3 Bed Houses

18%

92%

147%

4 Bed Houses

19%

67%

123%

Nominal Rental Income Growth to Dec 2013 2013

5 years

10 years

1 Bed Flats

0%

27%

52%

22%

2 Bed Flats

0%

32%

61%

52%

51%

3 Bed Houses

1%

32%

62%

19%

38%

4 Bed Houses

-6%

22%

65%

*House Price Index

Clapham South 2014 Our view

• Credit easing • Area re-rating to continue • Capital values: Flats to outperform houses • Rents to slowly pick up

Our Clapham South Office

30 Abbeville Road, London SW4 9NG Sales Alastair Summerfield T 020 8675 4400 E asummerfield@dng.co.uk

douglasandgordon.com

Lettings Damian Kenley T 020 8675 0888 E dkenley@dng.co.uk