Renewed interest in UK homes

Source : Business Times - 26 Mar 2009

Sliding home prices and the weaker pound are wooing investors back to London. NEIL BEHRMANN reports

ASIAN, Russian and other foreign buyers are back, tentatively examining potential investments in London’s residential property market, according to agents. These investors are at an exceptional advantage over local residents and investors as sterling has depreciated considerably since its peak in the first half of 2008. Compared with last year, a Singaporean investor can buy sterling at a third lower than its peak levels.

The UK property market reached its bubble heights towards the end of 2007. Since London residential real estate prices have fallen between 20 and 30 per cent, according to agents, prices for Singaporeans and other investors are at 40 to 60 per cent discounts from the top.

‘There will be many stages and regional variations in the future trajectory of apartment and house prices,’ says Yolande Barnes, director of research at Savills. ‘The market will test the nerves of both home owners and investors but the opportunities for those wanting income returns and the prospect of long-term growth are clearly in place now.’

UK investors will benefit from the sharply lower home prices and mortgage rates; however, they face the disadvantage of banks now requiring deposits of at least 30 to 40 per cent, whereas during the free-wheeling boom days, deposits could be 10 per cent and sometimes even lower.

Ms Barnes and other estate agents and economists thus caution that in the current depressed economic climate property prices could slip further in the coming months. But they believe there are potential bargains. They expect the market to bottom out in 2010 and begin rising in 2011 and 2012.

There are some economists, however, who fear that the market will remain depressed for several years. Roger Bootle, head of economic forecasting agency Capital Economics, predicts a rise in repossessions and an increase in those entering negative equity. His figures indicate that about 3.5 million UK households will fall into arrears - double the number seen in the early 1990s downturn. Repossessions could hit 90,000 this year, he says - much more than the Council of Mortgage Lenders’ prediction of around 75,000.

Mr Bootle, who had predicted property price declines some time before the bubble hit its peak, now expects a further drop in UK house prices with a peak-to-trough fall of between 40 per cent and 45 per cent..

There is also the danger that a depressed, over-borrowed British economy is vulnerable to further sterling weakness and that the present currency rally won’t last. Thus foreign investors need to proceed with caution and be highly selective, both with properties and locations, if they intend to go bargain-hunting in the London and broader UK real estate market. For example, property in the London Docklands surrounding Canary Wharf, where several stricken major investment banks are situated, is very depressed. Supplies of apartments are well in excess of demand, estate agents say. The same applies to Notting Hill Gate, a favourite with investment bankers.

Anecdotal evidence, however, suggests that interest from foreign and local buyers who don’t require mortgages is already much higher, says Ms Barnes of Savills. The decline in values has raised gross rental yields of prime properties to 4.5 per cent from around 3 to 3.5 per cent during the 2007/2008 property bubble while net yields have risen from 2.3 per cent to 3.5 per cent. This compares with money market rates of around one per cent and long-term government bond yields of around 3 per cent.

Brendan Brown, head of research at Mitsubishi UFJ Securities International, believes that considering the illiquidity of property as an investment and the risk of ‘voids’, or vacant periods, the rental yields are still inadequate. The crisis in the financial sector has caused banks in the City to retrench employees. Foreign banks and other corporations thus need to rent fewer properties.

According to the Land Registry index of houses and apartments traded, average prices in Kensington and Chelsea have fallen from £pounds;856,000 at the end of 2007 (S$2.6 million at the exchange rate at the time) to £pounds;752,000 (S$1.65 million at the current rate), while in the City of Westminster they have fallen from £pounds;612,000 to £pounds;564,000. Tower Hamlets, near the financial centre of Canary Wharf, has seen prices fall from £pounds;376,000 to £pounds;329,000 and in favoured areas such as Richmond they have fallen from £pounds;455,000 to £pounds;383,000.

These prices, however, are averages of properties ranging from small apartments to semi-detached and detached houses. In truth, house prices in Chelsea and Kensington currently trade from around £pounds;2 million with prices of £pounds;1.5 million to £pounds;3.5 million for areas surrounding Hampstead, St Johns Wood, Islington, Richmond and Wimbledon. Prices of two-bedroom purpose-built apartments in these areas have dropped to between £pounds;350,000 and £pounds;600,000.

Although Ms Barnes expects the market to bottom out in 2010 and revive in the following two to three years, she agrees that London prices could decline by a further 10 per cent by the end of the year. In that event, the fall from the peak would be around 30 per cent.

Liam Bailey, head of residential research at Knight Frank, estimates that from peak to trough, the price fall for prime London property from March 2008 to date is 23 per cent. Activity levels are beginning to rise, albeit from a low base, with viewings up 28 per cent in February on a year-on-year basis. After an absence of six months, Russian buyers are back in the market, he says.

‘After a period of sustained price falls in the central London market, it is rather early to suggest that we are seeing the beginning of a recovery,’ says Mr Bailey. ‘However with bad news seemingly all pervasive, even a slowing in the rate of price falls can be viewed positively.’

With prices for some new build properties falling by as much as 40 per cent, yields of over 10 per cent are possible, he contends. The proviso is that the properties can be let. There are reports that the rental supply of apartments and houses is increasing. Financially-stressed owners with large mortgages who cannot sell their properties are being forced to downsize. They are renting out their pricey properties and seeking lower rentals.