Pimlico & Westminster 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 Pimlico & Westminster area please contact our office on Wilton Road.
2013 was an exceptional year for Pimlico & Westminster property. But is it a bubble or a permanent re-rating? Pimlico & Westminster Real Capital Returns over the last 6 years (2007-2013) are flattered by 2013 performance
Dec 07 – Dec 13 Dec 12 – Dec 13
% 40 1
30 1 Two bed flats have
produced a real return of 33% since the last peak of the market in 2007... 2 ...and most of that
return came from their performance in 2013. 3 Houses have shown weak
real returns over the 2007 – 2013 period.
20
2
3
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 over that six year period, once inflation is taken into account, the real capital returns have been good, but not absurd. These six year returns are very reliant on last year’s performance, which was spectacular. 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’. In Pimlico & Westminster, unlike some areas just south of the river, it was the flat market that was exceptionally strong in 2013. Prices in the ‘grid’ comfortably broke through the £1,000 per sq. ft. watershed. As Pimlico & Westminster evolves into a true ‘prime’ area, we expect investors to be less sensitive to rental yield, relying instead on consistent capital growth for their total
returns. Infrastructure improvements in Victoria and Battersea will help underpin this re-rating story. We think 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 is right, we would expect flats to continue to rise faster in value than houses. The big question 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, because the six year real annualised growth rate (+ 3% p/a) is in line with long term trends (+5 % p/a). 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 weak year for Pimlico & Westminster rental income.
Rental Growth & Yield
Pimlico & Westminster Nominal Rental Income Growth weak following good long term increases
%
Dec 03 – Dec 13
70 Dec 12 – Dec 13
60 1
50
1 Two bed flats have
40
produced above inflation (+38%) rental growth over the last ten years…
30 20 10
2 …but rents were down in
0 -10
2013.
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 ten years, rental growth in Pimlico & Westminster has been strong and, importantly, above inflation (+38%).
Last year’s stall in rental income growth was due to previous rent rises squeezing the net income of tenants. Although there were signs of a very small pickup in the market in the early autumn, landlords may have to be patient and wait for a rise in real incomes before further rent rises stick.
However 2013 was a difficult year with rents for both flats and houses declining. Houses are suffering more due to corporate budgets being cut.
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
3.2-4.2%
2 Bed Flats
3.0-4.0%
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 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 Pimlico & Westminster, the inflation adjusted
Pimlico & Westminster vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 70 60 50 40 30
value of an average property has risen by 60%
20
over the same ten year period.
10
In future reports, we will look at how different areas of London have performed relative to each other.
0 -10
Pimlico & Westminster
Nationwide
Source: D&G Proprietary data and Nationwide
Pimlico & Westminster 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
11%
75%
110%
2 Bed Flats
23%
93%
132%
3 Bed Houses
20%
89%
150%
4 Bed Houses
4%
57%
114%
Nominal Rental Income Growth to Dec 2013 2013
5 years
10 years
1 Bed Flats
0%
17%
38%
22%
2 Bed Flats
-6%
20%
54%
52%
51%
3 Bed Houses
-3%
19%
58%
19%
38%
4 Bed Houses
-4%
26%
60%
*House Price Index
Pimlico & Westminster 2014 Our view
• Credit easing • Area re-rating to continue • Capital values: Flats to outperform houses • Rents to start to pick up
Our Pimlico & Westminster Office 106 Wilton Road, London SW1V 1DZ Sales Alexander Leschallas T 020 7931 8200 E aleschallas@dng.co.uk
douglasandgordon.com
Lettings Louise Verrall T 020 7931 8300 E lverrall@dng.co.uk