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215: UK market pros and cons - some future hotspots in London

08-09-2008 team


UK Market Pros and Cons



Nationwide reported prices dropping by 1.2% in July. Similar trends were report by Halifax and Hometrack (-1.2%). Rightmove reported a mixed bag, with some parts of London still rising (London rose +0.3% overall). The Land Registry numbers were a little more positive, though these figures are about 4 weeks behind the other indications (note: Rightmove has the leading indicator).


Grim Trends:  Clearly the UK market slowdown continues with property prices falling in almost all areas because of a combination of:


·          Credit squeeze – banks are reluctant to lend high multiples of income, and are demanding high deposits to reduce their risk of default and negative equity

·          GDP slowdown - the economy is growing at ca. 1.5% per annum, and may be heading for a couple of quarters of recession, hence consumer confidence is low, unemployment is rising slightly and wage growth has moderated to ca. 3.5% per annum (from 4.0 to 4.4% in 2007)

·          Buy to let investors are buying less – likely waiting for prices to drop further and more bargains to appear

·          First time buyers – have dropped to a half of levels three years ago – they are almost non existent

·          Existing homeowners – the introduction of home information packs, high stamp duty taxes and moving costs has meant many existing owners have chosen to stay put and instead extend their homes. Difficulties getting kids into good schools means many owners, once they have got establish in work and schooling arrangements, are reluctant to risk moving 

·          Taxes – the rises in stamp duty over the last ten years make it far less attractive for people to move home, particularly in southern England

·          Debit – levels of debit got so high leading up to mid 2007 - many home owners and investors have now retrenched

·          Inflation - the rise in CPI inflation from 1.5% a few years ago to the current 3.2% (driven in large part by higher oil prices between $125 to $145/bbl) has meant interest rates have remained at 5% making borrowing relatively expensive compared to the USA (2% base rate) and European mainland (4%).

·          Developers – have been reducing prices of new build apartments to offload stock as balance sheets have deteriorated and many home builders have got into trouble with high levels of debit and dropping stock market valuations

·          Equity release – during the boom period of 1999 to 2007, many parents release equity for their kids to help them purchase their first property – because the outlook remain so uncertain for house prices, this method of stimulating the market has faded fast. It is also more difficult and more expensive to release equity – many banks will not know lend higher than 80% of the market value.

·          Buy-to-let slowdown – investors are taking a go slow “wait and see” strategy. Buy-to-let mortgages have dried up – down a staggering 93% from a year earlier. Some of this activity is equity release – but this is also leading to a shortage of purchasers. 

·          Manufacturing – is in recession, albeit a weakening pound should help exports later in 2008

·          Young buyers – many young people prefer to rent rather than being saddled with huge mortgages, particularly now that most student leave collage with massive student debits. They also like to travel, enjoy life and have families later in life – so deferring purchase of a home is considers by many as an attractive option. Young immigrants also find it difficult raising finance in the UK and therefore rent instead. 


Positive Trends: The more positive underlying trends are:


·          Rising population – an additional 5 million people will need homes in the next 20 years

·          Stock market performance – the FT100 and other stock markets have not performed well and their continues to be interest in property as an alterative investment

·          Oil prices – the UK benefits from high oil prices in taxes from the North Sea, oil/gas income and government taxes on oil/gas income from around the world that ends up in London and Aberdeen. Remember the UK is almost self sufficient in oil, and it’s gas important are not high compared to most European countries.

·          Taxes – the government will likely go slow on taxes increase moving forwards because the population cannot afford any more

·          Smaller households – high divorce rates, partner owning two properties and an aging population of single people will mean more homes will be required in the next 20 years

·          Inflation - with oil prices dropping to $115/bbl and the UK and global economies slowing, it may be possible for interest rate to drop in the second half of 2008 to 4.75% or even 4.5%, and possibly further to 4.25%

·          Employment – levels remain high and unemployment is not likely to rise a significant extent in southern England and London

·          Building – levels of home building are at such a low level that demand will eventually exceed supply and start supporting prices, possible late 2009 onwards. 240,000 new homes are required a year, butt only a net 140,000 are being built (25,000 are demolished)

·          Olympics and London Infra-structure – new investments, infra-structure and public spending in London in the run up to the 2012 Olympics will help support prices in London. £1.5 Bln retail park at White City and £1.5 Bln retail park at Stratford will also help. The £16 Bln Crossrail project, scheduled for completion 2017, will also stimulate prices and economic activity along the new routes.  

·          Rental market – young people and immigrant workers have a preference or a necessity to rent – this should stimulate strong rental demand – rents are increasing – this should continue 


We believe house prices will continue dropping for at least another 6 months – likely longer. After this, depending on interest rates (and inflation, and oil prices) it’s quite likely the market will stabilize. Interest spread rates are coming down and the main credit squeeze is starting to subside. It’s too early to say when the drops will stop – or whether there will be a prolonged downturn. Much depends on consumer confidence, and the government’s management of the economy and whether the UK slips into recession and jobs losses accelerate. All these are quite uncertain. 


Clearly for the first time buyer or new property investor it will be a high risk period. For seasoned property investors who are cash rich, opportunities abound, and these could increase towards the end of 2008.


Invest In Positively Changing Areas with Infra-Structure Developments


To reduce investment risk, it’s worth considering purchasing property only in developing city areas – and London probably provides the best opportunities and lowest risk of a fully fledged property price crash. The reason is levels of borrowing as a proportion of property value remain relatively low in London, wages are higher. As long as the financial sector does not contract, the shear scale of wealth in the city and foreign investment in property and business should support prices. This is evidenced by the “super-prime” property prices in Kensington and Chelsea still being on the rise in July. The trick is to find bargains in areas that are regenerating close to very expensive areas – these should experience a ripple effect up until the Olympics of 2012. This is the reason why we have prepared an infra-structure review of London outlined below, to help you with your investment insights and decisions.


Best Investment Areas


Outside London, areas with a projected strong employment prospects are also attractive – some examples are:


·          Aberdeen (oil companies, BP, Shell - if oil price stays >$100/bbl)

·          Cambridge St Neots (high tech jobs)

·          Reading (British Gas)

·          White City-London (2008, 7000 new jobs, £1.6 Bln retail development)

·          Stratford-London (2012, 7000+ new jobs, retail development)

·          Newbury (Vodaphone)

·          Southampton (new business)

·          Kettering (transport hub, new businesses)

·          Exeter (met office jobs, new business)


Historic cities and market towns with good schools and universities should continue to experience better house price stability during a downturn – examples are:


·          Oxford

·          Cambridge

·          Warwick

·          York

·          Harrogate

·          Lancaster

·          Stratford on Avon

·          Bath

·          Exeter

·          Taunton

·          Skipton




Crossrail has recently been given the go-head after 15 years of pre-planning, arguing and concept design. It’s a major milestone for London property. The highlights of the scheme include:

Crossrail line 1 (East – West)

Crossrail 2 (NorthEast-SouthWest)

The programme for Crossrail line 2 is not as far advanced as those for Crossrail line 1, but highlights of the scheme include:


Future Hotspots

The project is scheduled for completion in 2017. Expect a few years delays due to discussions on funding. For the property investor, if you map the East London Line extension, Crossrail, Olympics, Dockland Light Railway Extensions, High Speed One rail links and general regeneration, you cannot go far wrong by purchasing Victorian properties in the following specific locations that will benefit from these infra-structure upgrades:



The closer to the City and West End at low price you can achieve the better. For rentals make sure you are no more than 7 minutes walk to the stations – renters don’t like long walks along dark roads.


New Transport Hubs - Explosive Wealth Creation


The big new transport hubs for the future will be Kings Cross and Stratford. In fact, Stratford will be called Stratford City – a new business and jobs hub in east London. The £1.5 Bln Westfield retail development will help and the Olympics will transform the area. Its should then be a place relatively wealthy city workers will want to live – with 5 min train trip to Kings Cross and direct High Speed One link to Paris and Brussels. Expect banks and big business to start moving in after the next station opens. There will be the City, Canary Wharf and Stratford. This is why Bow, between all three centres, will benefit. This previously drab and distressed area in East London that was extensively bombed in WWII (Victoriana replace by ugly high rise and derelict land) will be transformed – also with the Olympics in the Lower Lees Valley.


South Banks - looks good


Expect Waterloo’s influence to reduce, albeit the South bank is still a good place to invest because of it’s equidistant location 1 mile from West End, Mid Town and City. Kennington and Elephant & Castle are good examples of relatively low prices locations close to West End and City – where the highest paid jobs are and most wealth is created. Nice Victorian flats and houses in quiet streets near tube/train links are probably the best investment since these are the type of property many wealthy city workers aspire to own. If you can purchase an Edwardian or Georgian property – for a similar price with original features – even better. Be careful about purchasing new build properties – the developer makes a 20% profit, and you will normally be paying for this mark up. Better to purchase property from highly motivated sellers that need to sell quickly for any reason – you’ll be far more likely to get a good deal, especially in the current down market.


White City and West Kensington


For those in West London, the new £1.5 Bln Westfield White City retail park will create a positive impact in the area - particularly for the rather bleak White City subsurb NE of the development close to the motorway. We particularly like West Kensington further south - Edwardian and Georgian houses close the mainstream prime Kensington areas with good links east and west.


Bayswater and Marylebone


Closer in, Bayswater continues to come up, and nearby Paddington. Marylebone is even more expensive and has joined the London prime property market - a lovely area close to the West End, Kings Cross and City jobs.


Summary of Key Infra-structure Investments

Because of the overlapping spheres of influenceof these major changes, it's difficult to see how purchase of quality Victorian properties in Stratford, Hackney, Hoxton areas would not be a good investent in a 3-5 year time frame.  


Bleak but outlook good up until 2012 in many parts of London


We hope we have given you some interesting pointers to the UK market and areas of investment interest – with new infra-structure and positive change on the horizon. Okay, it’s looking rather bleak at present, but if London goes into recession, expect the rest of the world to follow. With the massive financial services, banking, oil and international business wealth being created and invested in London, we believe the fundamentals are positive after 2009 for a run up in prices leading up to the Olympics in 2012. In focussing investment close to new infra-structure projects where positive change can be predicted, one can reduce investment risk and increase chances of a good return on investment.


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