An objective view of the future of Prime London Property

Tuesday, February 16, 2010 by Ed Mead

Central London is the most extraordinary and perhaps unrealistic property market, particularly Prime, and to be blunt this has been a “good” recession for those with money and property here. Never has there been so much that’s unknown or data that’s so subjective and it’s rewarding to spend a day with someone who has a uniquely objective view, as I did yesterday.

I spent it with Stephen Yorke who is CEO of the Prime London Capital Fund, an open ended fund which now has a three year track record and is pretty much the only player in Town offering a real time snapshot, as well as an opportunity to invest in, true prime central London property. It has £40m now under management and invests only in specific prime addresses and as such is perhaps a better guide as to what’s happening than the ubiquitous Savills and Knight Frank indices. It’s ability to give solid information is vital and the valuations on it’s clearly identified portfolio are monthly, via two different valuers, and keep a close track on exactly what’s happening to values allowing very little room for conjecture.

Stephen annoys me intensely at times, I have told him this, because he’s a procedures and details man and I’m not. But, you need someone like that to run a fund and he’s a man who’s spent a varied career working, as far as I can see, between number 10 and the City. As such his observations are salient and worth listening to as he also has a wonderfully objective view about that very narrow slice of the market known as prime.

To summarise some of his views, and I share many of them, and tackle issues raising their heads at the moment;

Rising inflation is likely to subside because of what was happening this time last year and it would therefore seem that pressure has to be down later in the year. Indeed BoE seems much more sanguine about inflation than it does about the risk of a double dip recession, the avoidance of which remains it’s priority.

Much has been made of the potential for whoever takes over at the Treasury to open Pandora’s Box and faint at the sheer awfulness of it, but surely much of this shock has already been factored in. There’s a strong argument that UK PLC is in better shape than many to bounce back quickly (as it usually does unlike the better damped French and German Economies) and that although our deficit is high fiscally it could be a lot worse.

Money has to go somewhere and given that whoever wins the next election, including a hung Parliament, is going to be taking between £80 and £100 billion out of the Economy over 4/5 years it makes sense that gilt yields and interest rates will stay lower for longer and that has to be a good thing for prime property. Many of the big institutions seem to be eyeing up the residential sector and anyone doing that has to target prime London property as a part of any portfolio with it’s excellent hedging qualities.

It seems that demand for office space in the City is very much on the up so the vaunted talent flight doesn’t seem to be happening and with office rents going up dramatically occupancy seems guaranteed. These highly paid workers need to rent or buy. Regulatory risk seems to be running against NYC and in London’s favour as well.

The snap back of Prime values has been fast, as we forecast, and although it won’t continue at 10% per quarter, it’ll soon have regained the 27% it lost between Sept 07 and March 09. It seems likely that these values will overshoot peak 07 values.

The Eurozone is something of a side show for prime London although again fiscally it would appear to be in good shape if existing issues can be sorted out. With Sterling looking as if it’ll stay weak for the foreseeable future this extra demand will help push up prices.

I appreciated Stephen's input, and for someone who’s been turned into a pessimist over the last two years it’s almost enough to turn me.

syorke@dngim.com