Southfields 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 Southfields area please contact our office on Replingham Road.
2013 was an exceptional year for Southfields property. But is it a bubble or a permanent re-rating? Southfields Real Capital Returns in 2013 should be viewed against 2007 – 2013
Southfields Dec 12 – Dec 13 SW London Property Dec 07 – Dec 13 1 One bed flats have
produced a real return of 12% in 2013...
% 30 20 10
3 1
2
2 ...almost the same as
average real returns for south-west London over the 2007 – 2013 period.
0 -10
3 Houses produced strong
1 Bed Flats
2 Bed Flats
3 Bed Houses
4 Bed Houses
real returns in 2013. Source: D&G Proprietary data, ONS
A very good year Since we opened our Southfields office in Autumn 2011, property in the area has produced some excellent returns – performance that has been broadly replicated across our South West London offices. This chart compares the real (that is stripping out the effects of inflation) capital returns in Southfields for the single year of 2013 with average returns for our SW London area 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 for SW London property was +3%, lower than the ten year long term average for the area of +5%. 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’. Additionally, over the past two years, the area has seen an influx of couples ‘upsizing’ from flats
in more expensive areas to houses in Southfields. As a result, Southfields flats have lagged behind houses in performance terms. 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 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 is in line with or below the long term ten year trend. 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,
Rental Growth and Yield
2013 was a mixed year for Southfields rental income.
Southfields Nominal Rental Income Growth mixed following good long term increase Dec 11 – Dec 12
% 30
Dec 12 – Dec 13
20
1 Rental growth was strong
for four bed houses in 2012 (+9%)...
10
1 2 …but was flat 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.
Our outlook for 2014 is that rents for flats might pick up a little, but that rents for houses will remain static.
The chart shows that Southfields rental income growth was predominantly strong in 2012. This was mainly due to first time buyers finding it difficult to get onto the property ladder. 2013, however, was a mixed year. This was driven by the squeeze on real incomes of tenants and an increase in supply as buy-to-let investors targeted the area. Going forward, we believe that rental incomes in Southfields are likely to remain underpinned as many relocation agents, with reduced budgets, have started to discover the relative attractions of the area.
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
4-5%
2 Bed Flats
3.7-4.7%
3 Bed Houses
3.0-4.0%
4 Bed Houses
3.0-4.0%
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 true value of an average UK house has risen by 7% (Nationwide) or 8% (Halifax) over the last two years. But inflation over the same period has been 6%. That means the value has remained flat in real terms. In Southfields, the inflation adjusted value of
Southfields vs UK housing market Real Capital Returns Dec 11 – Dec 13 % 20 15 10
an average property has risen by 20% over the same two year period. In future reports, we will look at how different areas of London performed relative to each other.
5 0
Southfields
Nationwide
Source: D&G Proprietary data and Nationwide
Southfields 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
2 years
Nationwide HPI*
8%
7%
Halifax HPI*
6%
FTSE100 RPI
2013
2 years
1 Bed Flats
15%
27%
2 Bed Flats
14%
23%
3 Bed Houses
18%
29%
4 Bed Houses
22%
32%
Nominal Rental Income Growth to Dec 2013 2013
2 years
1 Bed Flats
4%
7%
8%
2 Bed Flats
-3%
-1%
14%
21%
3 Bed Houses
2%
8%
3%
6%
4 Bed Houses
0%
9%
*House Price Index
Southfields 2014 Our view
• Credit easing. • Area re-rating to continue • Capital values: Flats to outperform houses • Rental income to remain static
Our Southfields Office
24 Replingham Road, London SW18 5LR Sales Imogen Harris T 020 8874 8822 E iharris@dng.co.uk
douglasandgordon.com
Lettings Alex Dowding T 020 8874 8844 E adowding@dng.co.uk