LCPq: London Central Portfolio Quarterly Review Prime Central London (PCL) Market Outlook Q2 2017

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1 LCPq: London Central Portfolio Quarterly Review Prime Central London (PCL) Market Outlook Q London Central Portfolio (LCP) specialises in Prime Central London (PCL) residential investment with a specific focus on the Private Rented Sector (PRS). This report has been compiled following the release of HM Land Registry Quarterly Statistics on September 1st 2017, independently verified by Land Registry specialists, ACADATA in partnership with LCP. PCL is defined as the Royal Borough of Kensington & Chelsea and the City of Westminster. Prime Central London: a rally in both sales and prices but buy to let market remains sluggish Prime Central London witnessed a rally in Q2, both in volumes and prices. This follows two years of price suppression as buyers held back due to Brexit and increasing residential taxes. The increase in average prices, however, can be attributed to a surge of high value sales with buyers taking advantage of price discounting in the luxury sector. Underlying price appreciation for the rest of the market remains significantly less buoyant. Prime Central London: Headline q Results Sales volumes strengthen slightly in Q2 2017, with an annual increase of 4.8%. At the same time, average prices reached 1.95m, following quarterly price growth of 7.9%. This rally is, in part, a result of buyers seeking safe havens in the face of increasing global uncertainty, together with the attractions of weak sterling and low interest rates. This statistical increase in price growth has been buoyed by a number of high value transactions and an increased proportion of luxury sales. The 5m - 10m sector was the most active, with the proportion of sales increasing by 23% over Q1. Q also saw the most expensive sale ever to transact through Land Registry at 90m. Average Price 1,946,151 Annual Sales 3,885 As a result, the top 10% of the market performed particularly strongly in Q2, seeing a 20% increase in average prices to 8m. Excluding the top 10% of the market, average quarterly price growth was 4.5%. +7.9% +4.8% The lower value end of the market, however, was more sluggish. Price growth for property under 810,000, largely representative of the buy to let sector, saw a 1.3% quarterly increase in average prices. PCL QUARTERLY CHANGE IN PRICE GROWTH Q Source: HM Land Registry Quarterly Reports PCL QUARTERLY CHANGE IN SALES VOLUMES Q2 2017

2 Prime Central London: a detailed look Average prices reached 1,946,151 in Q2 2017, following quarterly price growth of 7.9%. Transactions have also strengthened marginally, following a sustained period of falls from 6,044 in Q According to LCP s analysis, 3,885 sales have taken place over the last 12 months, representing a 4.8% increase, but remain 40% lower than 4 years ago. Following the market slow down as it adjusted to increased residential taxes and Brexit, the rally in Q2 can be attributed, in part, to buyers seeking safe havens in the face of increasing uncertainty as global tensions mount, together with the attractions of weak sterling and low interest rates. A detailed analysis of the headline figures, however, also indicates that price increases have been buoyed by a number of significant high value sales, including 90m for a flat in 199 Knightsbridge Apartments. Together with some very large individual sales, transaction data shows the 5m - 10m bracket was the most active in Q2 with a 23% increase over Q1. This can be attributed to international homebuyers taking advantage of notable price discounts, alongside beneficial exchange rates. As a result, the top 10% of the market saw prices increasing 20% to average 8m. With this excluded, average growth falls from 7.9% to a more typical 4.5%. The buy to let sector, however, is seeing a much slower picture as investors continue to adopt a wait and see attitude. Price growth here was a more sluggish 1.3% for properties under 810,000, whilst the proportion of sales under 1m also decreased by 9%. The monthly average price breakdown also suggests the rally may be short-lived. Bumper transactions boosted average prices to as high as 2.2m in April and May but June reflected a more sedate picture with average prices falling back to 1.65m. Prime Central London: the rise of luxury homeowners As well as seeing the most expensive sale ever to transact through Land Registry in Q2, LCP has also noted a change in buying dynamics within its client managed portfolio. Over the last 12 months, international homeowners have been increasingly attracted by the discounts available on luxury properties, continuing low interest rates and exchange rate benefits. This is in addition to Prime Central London s attraction as a safe haven asset class and global centre of culture, finance, education and tourism. Homebuyers represented 45% of all purchases, triple their share from the previous year. LCP Prime Central London Sales Audit Aug % 85% Investment Homeowner LCP Prime Central London Sales Audit (Aug Aug 16 - Aug 1617) - 17 Investment Homeowner 45% 55% This is in contrast to the buy to let sector, where the purchase of lower value properties has decreased by one third. With property in this sector commercially rented, sellers who are unable to achieve their price expectations are choosing to hold onto their assets, resulting in less activity. Many investors are still taking stock of the market, weighing up the right time to re-enter. With the majority of investment property now being marketed by highly motivated sellers, there are some attractive discounts available. As a result, the average purchase price for rental investors has fallen 27% to 816,429. 1,115,182 1,115,182 AVERAGE PCL INVESTMENT PURCHASE PRICE 816, ,429 08/15-08/16 08/16-08/17 Source: LCP in-house research

3 The market in Greater London Source: HM Land Registry Quarterly Standard Reports PCL PCL Buy to Let Sector Greater London England & Wales Price appreciation continued in Greater London in Q2, increasing 4% to 634,234 and representing the fourth quarter of positive upward growth. Despite being largely unaffected by the relentless introduction of new taxes, rising prices have been set against notable falls in sales with annual transactions down 24% to a new low of 88,545, half those 10 years ago. Principally a domestic market, the slowing sales volumes reflect the current state of the UK economy. Concerns about Brexit have impacted the feel good factor which drives buying decisions, whilst affordability issues resulting from caps on mortgage lending have hampered buyers ability to trade up or get on the housing ladder. Falling sales volumes have been exacerbated by problems within the new build sector. This has seen international speculators pull back in the face of uncertain or negative returns. It is reported that the number of new building starts in London will fall to just 21,500 this year. Q Average Price % Change vs Q Q Sales Volumes % Change vs Q New building starts in Greater London will fall to just 21,500 this year 1,946, % 3, % 714, , , % 2,091 +4% 88, % 844,380-25% -24% -12% Annual sales in Greater London fell 24% to a new low of 88,545, half 10 year ago England and Wales saw almost nil price growth and sales down 12% The market in England and Wales The picture is more concerning in England and Wales. In Q2, average prices showed almost nil quarterly growth at 0.27% and now stand at 287,823. Despite Government measures to reduce Stamp Duty for 98% of the market and schemes to promote activity such as Help to Buy, weaker sentiment and restrictions on borrowing continue to impact the domestic market. As a result, sales volumes fell 12% to 844,380 annually, the lowest number since the depths of the Credit Crunch in Q With static price growth, coupled with falling sales volumes, the Government needs to address the growing affordability issues within the sector and support the building of more low-cost housing for buyers. Artificial stimulus packages and tax reliefs do not appear to be working to reinvigorate new activity Annual Transactions by Quarter Q to date Q = 100 England and Wales Greater London Prime Central London Source: HM Land Registry Quarterly Standard Reports

4 Prime Central London: a surge of indian buyers whilst buyers from europe dwindle Following 2015 s changes to the Liberalised Remittance Scheme in India, which increased the capital that buyers can bring into the UK to $250,000 per person, LCP has seen a notable surge in Prime Central London purchases by wealthy families from the region, who now represent the second largest proportion of buyers. According to LCP s latest sales audit, buyers from the Indian subcontinent represented 22% of purchases in PCL, an increase from 5% two years ago. Their average investment at 1.8m has also overtaken the market average of 1.6m, with Indian buyers representing 1/3 of total spend in terms of value. % Breakdown of Buyers by Nationality As India has become a more challenging place to invest in, with high loan interest rates and rising prices in the main urban centres, Indian buyers with a larger amount of capital to deploy have increasingly turned to London as an investment destination of choice. With sterling weakening against foreign currencies, representing around a 20% discount for USD denominated investors compared with two years ago, Indian buyers are becoming an increasingly dominant force. They have overtaken buyers from the Middle East who have fallen to third place. - 41% Source: LCP In-House Research The increased interest from Indian investors has not only come from private individuals but from institutions and developers who have been buying up large tracts of the capital. In 2014, Mumbaibased Lodha Group acquired the Canadian embassy in Mayfair for $530m, alongside New Court on Carey Street, announcing plans to become one of London s biggest investors with a projected $5bn spend. Another investor, Indiabulls, also entered the market, investing 155m in Hanover Square, Mayfair. The increase in Indian buyers has been set against a decreasing number of European investors following the Brexit vote, according to LCP s audit. Representing the second largest nationality two years ago, buyers from continental Europe have plummeted with their share of purchases falling by over two thirds. As the group most impacted by the outcome of the UK s exit from the European Union, a bounce back amongst these investors will very much depend on the result of on-going negotiations. Source: LCP In-House Research

5 Prime Central London: the rise of micro-apartments PCL is experiencing the rise of the micro-apartment as squeezed accommodation budgets see tenants opting for location and convenience over size, focusing on affordable, centrally located properties near their place of employment or study. This reflects a trend for the globally mobile to seek small, highly specified apartments, with well optimised space, whilst families tend to opt for more suburban locations where smaller budgets can stretch to larger homes and outside space. This has been evidenced in the sales market with a 68% increase in the rate of year olds leaving London, compared with 5 years ago, being reported by Savills. According to industry source Lonres, 83% of properties let in PCL over the last 12 months have been 2 bedrooms or smaller. Another indication of the trend in PCL towards micro-apartments is the number of properties being rented by price band. Over 70% of properties let have rents under 750 per week, compared with only 3.2% of units rented over 2,000 per week. Within LCP s portfolio, 63% of tenants are now single dwellers. Whilst all of PCL s rental sectors are seeing price discounting as tenants take advantage of landlord uncertainty and increased levels of stock, this has been much less marked for smaller units. Studio and one bedroom units have recorded discounts to asking rents of 5.2% and 6.2% respectively. On the other hand, demand has been notably slower for larger rental properties as families consider less central options, offering greater value and more space. In PCL, discounts to asking rents increase to 11.2% for three + bedroom units. It is also taking much less time to find tenants for smaller micro-apartments. Over the last year, the average marketing time recorded by the industry for three-bedroom properties was 98 days and 119 days for three + bedroom units. This is 42% longer, on average, than for one-bedroom or studio units. Discounts to Asking Rents Studios -5.2% Two Beds -7.8% Three Plus Beds -11.2% One Beds -6.2% Three Beds -9.9% Tenant Profile by Weekly Rent & Unit Size 2,000 p.w ,000 p.w Under 750 p.w 3.2% 27.0% 69.9% 750-2,000 per week 3+ bedroom 3 bedroom 2 bedroom or less Flats 3% 14% 83% Three Bed Flats Tenants increasingly seek newly refurbished, highly specified properties which match their aspirational lifestyles. Analysis of LCP s rental portfolio has shown that newly refurbished one bedroom units continue to show the most robust rental increases, posting rents above projection for the last 5 years and reaching 6.9% over the last 12 months. This compares with a 1.9% fall for older stock. LCP s average void periods currently run at under 30 days, well below the market norm. 83% of properties let have been 2 bedrooms or smaller and 63% of tenants are now single dwellers 70% of lets are under 750 per week Only 3.2% of lets are over 2,000 per week It takes 42% longer to rent a two+ bedroom than a studio or one bedroom Source: Lonres, LCP In-House Research

6 L ong recognising the importance of Prime Central London residential (PCL) as an alternative asset class, LCP was established in 1990 to offer an integrated service exclusively representing the interests of investors looking to maximise their returns. LCP focuses on the bullseye around Hyde Park, where scarcity of stock coupled with international demand underpins long term price growth. It is the only company to specifically target the increasingly important mainstream Private Rented Sector (PRS), offering all the relevant market expertise and property services in-house to provide a one-stop solution. LCP accesses whole-of-market for the best opportunities and uses proprietary financial modelling to evaluate each investment. It manages the development & design of the assets and provides a letting and management service, optimising capital & rental returns. It acts for private clients to individual mandate. LCP also advises on a number of successful closed-end property investment companies, targeting the Private Rented Sector in PCL. LCP is the first company in the UK to have developed Sharia compliant options targeting this market. LCP has advised clients on USD 1bn of investment in PCL. Since 2000, LCP s clients have seen the value of their investments exceed average market growth by over 31.5%1 on divestment. Market growth refers to the performance of the Flats and Maisonettes sector as measured by HM Land Registry from January 2000 to March The measure is Gross Capital Return before transaction costs & SDLT (LCP In-House Research). It includes any uplift in value following refurbishment. Past performance is not a guide to the future. The value of any direct or indirect investment in property may fall as well as rise. Approved as a financial promotion by F2 Capital Ventures LLP (authorised and regulated by the Financial Conduct Authority). All statistics have been collated with care but no warranty is given as to their accuracy. The figures contained within this document should not be relied upon (0) for more information Naomi Heaton Chief Executive naomi@londoncentralportfolio.com Hugh Best Investment Director hugh@londoncentralportfolio.com Robert Guest Director robert@londoncentralportfolio.com Rick Denton Director (LCP Corp) rick@londoncentralportfolio.com Lauren Kemp PR & Market Research lauren@londoncentralportfolio.com