South Kensington 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.
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 within those areas, seeking to maximise returns.
Property Values
Dec 07 – Dec 13 Dec 12 – Dec 13
1 One bed flats have
produced a real return of 10% 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
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 South Kensington area please contact our office on Harrington Road.
2013 was a steady year for South Kensington property. South Kensington Real Capital Returns for flats over the last 6 years (2007-2013) are flattered by 2013 performance
% 60
3
50 40 30 20 10 0
strong real returns over the 2007 – 2013 period.
1
2
1 Bed Flats
2 Bed Flats
3 Bed Houses Source: D&G Proprietary data, ONS
A modest 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 +3%, well below the ten year long-term average for the area of +6%. Since 2007, houses have significantly outperformed flats, with one bedroom flats in particular lagging. During 2007-2013, South Kensington houses have benefited from international capital seeking a home that is 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 government policy risk in this section of the market arose as the prospect emerged of increased taxation on residential property above £2m. Investors will inevitably demand some risk premium for this, which is why we are cautious on higher priced property (£4m+) before the general election in mid-2015. The most interesting observation in 2013 has been the pick-up in the performance of one and two bedroom flats. 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 think that the strong performance of flats priced below £1.5m will continue into 2014 as the easing of credit meets a resurgent City. We believe that increases in taxation are unlikely before the next general election in mid 2015. As a result, value opportunities may well arise in the £2m - £4m bracket during the next 12-18 months. 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, the six year real annualised growth rate (+3%) in South Kensington is below the longterm 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
In mid-2013 Rental Income in South Kensington started to pick up after seven quarters of decline.
Rental Growth & Yield
South Kensington Nominal Rental Income Growth started to appear in mid-2013 Oct 11 – Jul 13
% 30
Jul 13 – Dec 13
20
1 One bed flats experienced
2
10
rental declines of 21% between October 2011 and July 2013....
0 -10 -20 -30
2 ... the market turned in
July 2013.
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 the middle of 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.
South Kensington has always been popular with corporate tenants. One should not, however, ignore the fact that in recent years the growth of Imperial College and the Lycee Francais has brought in a new class of wealthy, non-economic sensitive overseas tenant. This ‘supply’ feature is why we think that rents will be firm as the City moves into full swing during 2014.
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 true 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 South Kensington, the inflation adjusted value of an average property has risen by nearly 80% over the same ten year period. In future reports, we will look at how different areas of London performed relative to each other.
South Kensington vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 70 60 50 40 30 20 10 0 -10
South Kensington
Nationwide
Source: D&G Proprietary data and Nationwide
South Kensington 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
1 Bed Flats
10%
61%
81%
2 Bed Flats
15%
84%
131%
3 Bed Houses
13%
161%
200%
4 Bed Houses
14%
78%
167%
Nominal Rental Income Growth to Dec 2013
2013
5 years
10 years
Nationwide HPI*
8%
15%
30%
1 Bed Flats
4%
8%
41%
Halifax HPI*
6%
8%
22%
2 Bed Flats
0%
4%
47%
14%
52%
51%
3 Bed Houses
8%
18%
44%
3%
19%
38%
4 Bed Houses
14%
19%
27%
FTSE100 RPI
2013
5 years
10 years
*House Price Index
South Kensington 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 further from 2013 levels
Our South Kensington Office
25-27 Harrington Road, London SW7 3EU Sales Sophie Hayward T 020 7581 8888 E shayward@dng.co.uk
douglasandgordon.com
Lettings Lottie Lambert T 020 7584 8888 E llambert@dng.co.uk