Copyright: David Lawson – Financial Times Feb 2003
A match with political colours is no coincidence. The top of the market, closely associated with Tory voters, is in most pain as problems spill out of the stock market. Aptly, the City itself is showing the biggest decline – down 0.6% in January - but smart addresses like Westminster and Kensington & Chelsea are not far behind. And the gloom is spreading. Nouveau riche boroughs such as Hackney and Lambeth have turned blue in the fallout from industries like media and financial services.
As usual, analysts quibble over exact figures but all agree that after almost a decade of unprecedented boom, the party is over. FPDSavills says values dropped 4.2 per cent across central London in the last quarter of 2002. Blue-blood agent Knight Frank has 20% fewer potential buyers on the books than last year.
So is it all gloom and doom? Gloom, certainly, but lost in the sound of breast-beating is the fact that Savills predicts a 4% increase in prime values in 2003. Even the much-criticised right-to-buy sector will survive relatively unscathed. ‘Despite press commentary to the contrary, only major economic problems and emergence of forced sellers will lead to sizeable falls in underlying capital values,’ says Richard Donnell of FPDSavills.
Investors are already showing their mettle. ‘There is no panic,’ says Richard Cotton of Cluttons. Those who bought a couple of years ago are sitting comfortably on big capital gains and accepting voids or dropping rents, so the market is not being flooded with cast-off property. It is even still attracting new investors, who believe a net yield of less than 3 per cent is still better than wobbly pensions and weakening equities.
The contradictions are thrown up because central London does not follow normal rules. If a provincial town saw massive cuts in its main industry, the position would be much worse. But high-worth City workers are more insulated against pain. ‘They can swan off for a couple of years and wait for things to improve,’ says Donnell.
Nor are they the dominant buyers in smart addresses like Mayfair, Belgravia and Knightsbridge, that headlines imply, says Simon Jones of Allsop & Co. He looks more to ‘old money’ and overseas buyers. The problem is that many foreigners have already faded. Americans disappeared after the September 11 disaster. Europeans buying flats ranging from £400,000 to £1.5m in Kensington & Chelsea went home after media and banking turned sour. Even loyal mid-eastern buyers are opting for old favourites like Lebanon now order has returned, weakening demand for the flats worth £500,000-plus they once monopolised in certain areas.
The cumulative effect dampened prices last year but means future pain could be less than anticipated. Even around the City, the new villages of Clerkenwell, Shoreditch and Holborn have already been through their pain. ‘Our market stabilised last year after recovering from September 11, so we have no bubble to burst,’ says David Salvi, of local specialist agent Hurford Salvi Carr.
Rents have fallen 20 per cent in two years and he does not see a recovery to those highs but investors will sit tight ‘These are people from finance and professional backgrounds so they appreciate the long-term prospects.’
Analysts are less certain about the rest of central London. Every new development has been dominated by overseas investors over the last seven years, says Geoff Marsh of London Property Research ‘They are now gone and now we must wait to see if owner-occupiers fill the gaps.’ Even if they do, only the best property will benefit, as owners are far more choosy than investors – particularly those from the other side of the world.
A little good news percolates through this blanket of gloom. Cotton says some mid-east buyers are still around, looking for a safe haven away from anti-Muslim feelings. Potential domestic buyers are nibbling: Tim Le-Blanc Smith of John D Wood says the bas weather kept them away but he now 150 on the books. He is relieved to have just sold a house for £2.6m when the £1m-plus range is said to be under most pressure.
It went for just under the asking price, which may be the pattern for the future. Last year sellers were asking 5 per cent over a ‘common sense’ value. He has even seen three cases of gazundering, where buyers dropped offers at the last minute and were still accepted. This fall in asking prices tends to exaggerate the real impact of the downturn on values. Jones has seen up to 15 per cent come off list prices in 12 months but achieved levels remain remarkably similar in areas like Knightsbridge and Kensington.
Pitching the right level will become more difficult with every gloomy headline, however. City workers may not be a buying force but economic gloom breeds uncertainty. ‘Central London does not work by normal rules,’ says Donnell. It does not vary with interest rates as the average mortgage is only 40 per cent. Most purchases are investments or second homes, so they depend on buyers feeling for the future.
At the moment, buyers don’t know what will happen, so they are doing very little. ‘A decision on Iraq would bring them out of their shells,’ he says. Even if war is declared, it will remove uncertainty.