London - The Twilight Zone

Wednesday, July 20, 2011 by Ed Mead

London: The Twilight Zone

Despite D&G being one of the biggest London agents, and producing lovely monthly stats, sometimes you have to revert to the seat of the pants for a feel of what’s going on.

It’s now becoming apparent that London is a market apart and given how long it’s taken this new paradigm to emerge it wouldn’t be a huge leap to think about it staying the same for the foreseeable future. So how has this paradigm shaken out? Not very well for UK Property PLC, that’s for sure. In the same way that ECB rates are good for some sections of the Eurozone and a disaster for others, UK property PLC might look good in London but it’s a disaster elsewhere. Even in London, where the market is measured by values, volumes are circa 40% down on where they were 4 years ago, and a staggering 60% down on a decade ago. Any fool can tell that if you’re living in a country where servicing property in some way is a sizeable [10%?] chunk of the economy, those figures do not look good, regardless of how the press carps on endlessly about bloody values.

Having been in this industry for well over 30 years now, it’s the equally timeless 80/20 effect that explains why London is flourishing. In the late 70s, it was 80% UK/20% foreign and now, it’s pretty much the opposite. You only have to walk around the ghettos of Knightsbridge and Sloane Square to feel you’re actually living in a foreign country. Even the green spaces of Wandsworth feel more EU than UK.

Part of the reason this state of affairs is unlikely to change is the fear factor. Although there are plenty of defenders of the EU, those within it seem keener to make sure at least a part of their net worth is in London bricks and mortar. Whether or not the actual end of the Euro is nigh, fear of it is enough.

However, it’s also worth noting that any market where prices are supported by a lack of supply is vulnerable where that supply is not limited. Any macro, or even micro, economic change could trigger a rapid increase in supply which would lead to prices falling, the most obvious being a rise in base rates. Perhaps in London that might mean volumes would recover for a time but it’s difficult to see how that would be anything other than depressing for the UK as a whole.

A bright spot is the rental market where values appear to be regaining much of what was lost in London post Lehman, but again volumes are thin. With capital values up, many landlords are selling, despite tax rises, and unless the Government does something to stimulate the important private rented sector, it looks as if supply will stay low and demand from both overseas workers in London and those unable to buy will drive values up.

So, depending on how you view the market, it’s been a good period for those worried about values but a continuing disappointment to those of us intimately involved with [the London bit of] UK Property PLC. I suspect that right now, the latter should be firmly in those who wield power’s thoughts.

Ed Mead