The Investor View - Notting Hill

Page 1

Notting Hill 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.

within those areas, seeking to maximise returns. 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.

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

Property Values

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 Notting Hill area please contact our office on Westbourne Grove.

2013 was an average year for Notting Hill property. Notting Hill Houses have produced the best nominal returns over the last 4 3/4 years

Apr 09 – Dec 13

% Dec 12 – Dec 13

1 One bed flats have

produced the lowest capital returns since April 2009 (+45%)... 2 ...but have performed in

line with houses in 2013. 3 Large houses have shown

very strong real returns over the April 2007 – December 2013 period.

150 3

120 90 60 1

30 0

2

1 Bed Flats

2 Bed Flats

3 Bed Houses Source: D&G Proprietary data, ONS

An average year This chart compares the capital returns for the single year of 2013 with returns over the period 2009-2013. Since April 2009, when London property prices bottomed out (after peaking in Q4 2007), houses have significantly outperformed flats. This has been a trend throughout prime London property. Equity rich investors, many from overseas, have been deploying cash into these ‘real assets’ which are seen as more productive than bank deposit interest and less volatile than equity markets. This type of capital deployment tends to be in the larger lot size (£3m and above). During 2013 however, some policy risk in this section of the market arose as the prospect emerged of increased taxation on residential property above £2m. Investors demanded some risk premium for this and hence capital values for the larger houses slowed down. Units below £2m saw corresponding increased interest from buyers. We expect this to continue during 2014 and into mid-2015. What is also interesting to note is that in 2013, the movement in the capital value of flats in

Notting Hill, which are more credit sensitive, started to match the capital growth of houses. We think that 2013 saw the start of the next UK credit cycle. This means that, over the next few years, mortgages will become easier to obtain. If this turns out to be the case, we see this trend continuing into 2014 due to a combination of further credit easing and the City picking up. Where do we stand today? 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. Our view is that the 2013 movement in prices has not formed a ‘bubble’. First, the six year real annualised growth rate (+4%) of D&G’s prime offices is below the longterm ten year trend (+5%). 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.

infrastructure projects, demographics of the area, the economy (in particular, interest and tax rates) and the wider geopolitical picture.

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.

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,

In mid-2013 Rental Income in Notting Hill started to pick up after seven quarters of decline.

Rental Growth & Yield

Notting Hill 2013 saw a turn in fortunes for landlords Oct 11 – Jul 13

% 15 10 5 0

Jul 13 – Dec 13

2

1 Between October 2011 and

July 2013, rents declined for one bedroom flats.

-5 -10 -15 -20 -25 -30

2 Between July 2013 and

December 2013, rental income grew.

1

1 Bed Flats

2 Bed Flats

3 Bed Houses

4 Bed Houses Source: D&G Proprietary data

A year of two halves 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 from mid-2013, rental income, particularly for flats, started to rise after a difficult period that started in the autumn of 2011. This is a significant development, coming

on the back of signs of a pick-up in City activity. Although rents rose in the latter part of 2013, enquiries from corporate tenants were weak. If they return, our view is that rents will move up further. A word of caution for potential landlords: Notting Hill has seen an influx of new landlords prepared to invest money in rental stock, raising the benchmark significantly. Poorly presented properties can expect to endure void periods.

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.

Current Yields

Dec 13

1 Bed Flats

2.5-3.7%

2 Bed Flats

2.2-3.5%

3 Bed Houses

2.2-3.2%

4 Bed Houses

2.2-3.2%

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 capital value of an average UK house has risen by 16% (Nationwide) or 9% (Halifax) over the last four and three-quarter years. But inflation over the same period has been 20%. That means the value has actually fallen in real terms. In Notting Hill, the inflation adjusted value of an average property has risen by 70% over the same four and three-quarter year period. In future reports, we will look at how different areas of London performed relative to each other.

Notting Hill vs UK housing market Real Capital Returns Apr 09 – Dec 13 % 70 60 50 40 30 20 10 0 -10

Notting Hill

Nationwide

Source: D&G Proprietary data and Nationwide

Notting Hill key facts & figures Here are the key facts and figures anyone investing in the property market needs at their fingertips.

Other Assets Capital Returns to Dec 2013 2013 Nationwide HPI*

Halifax HPI* FTSE100 RPI

Nominal Capital Returns to Dec 2013 2013

2 years

4 years

1 Bed Flats

10%

15%

30%

2 Bed Flats

8%

19%

49%

3 Bed Houses

11%

31%

104%

4 Bed Houses

3%

29%

170%

Nominal Rental Income Growth to Dec 2013

2 years

4 years

2013

2 years

4 years

8%

7%

8%

1 Bed Flats

0%

-5%

6%

6%

8%

2%

2 Bed Flats

0%

-12%

15%

14%

21%

25%

3 Bed Houses

28%

-4%

15%

3%

6%

16%

4 Bed Houses

0%

-14%

-9%

*House Price Index

Notting Hill 2014 Our view

•S ub-£2m to continue to be hottest market followed by sub-£4m • Larger units will require policy uncertainty to lift before growth continues • Rents to rise from 2013 levels

Our Notting Hill Office

299 Westbourne Grove, London W11 2QA Sales Maddie Lewington T 020 7727 7777 E mlewington@dng.co.uk

douglasandgordon.com

Lettings Amanda Bastin T 020 7727 8000 E abastin@dng.co.uk


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