Market Report - October 2014

Thursday, October 02, 2014 by Douglas And Gordon

"The refusal of most vendors to move on price is the biggest single factor behind the significant reduction in the volume of sales”.

The direction of the Central London residential market in the third quarter of 2014 can be summarised by two statistics: The strongest quarter for rental growth (3%), since summer 2011.

- The strongest quarter for rental growth (3%), since summer 2011.

- Weakest quarter for sales growth (0.3%), since autumn 2008.

These figures relate to D&G land as a whole but it is prime Central London that is driving up average rents with a 5.9% increase in the quarter. Generally, the lettings market is buoyant with demand in the form of applicant registrations up a staggering 86%, year on year and supply, on the same basis, down 25%. In contrast, sales demand is down 36%, year on year and supply up 41%. 

With little or no increase in domestic wages, rental price growth experience has to come from international tenants, on the back of growth in activity in the City. Though these tenants are focused on prime Central London, as we have observed in previous publications, some are prepared to look outside the central core to find better value accommodation. Fulham is a case in point. On the back of a stalling sales market, we see rental prices staying firm over the next twelve months and yields which saw their first quarterly increase in the quarter since spring 2011, continuing in an upward direction.

As reported in our Q2 report, the sales market has gone very quiet and there was no growth in prices during Q3. Whilst it could be argued that this may mark the end of a strong cycle of growth that began after the falls in 2008 following the financial crisis, one can equally point to specific political and geopolitical influences. The Scottish referendum campaign introduced substantial uncertainty for the UK economy. The situation in the Middle East could hardly get worse but it probably will and perhaps most damagingly, for some sections of the sales market, both Labour and Liberal Democrat parties are committed to a mansion tax for all properties of a value in excess of £2m. We believe,, that a Labour government or a Labour / Liberal Democrat coalition will not implement Mansion tax legislation because valuation costs and complexities will greatly diminish the potential tax take -and additional, higher Council Tax bands are a route to a much fairer and more effective revenue collection. However,all potential buyers of property over £2m must include the possibility in their deliberations on whether to buy and at what price. 

The problem for potential vendors is to decide whether values at the upper end of the market will hold against that backdrop of domestic political and geopolitical uncertainty. The number of transactions down by 31% year on year confirms that the positons of buyers and sellers are not being reconciled. As the quarter comes to a close, even though applicant registrations are down, viewing levels are being maintained, overall, and offers generated but the refusal of most vendors to move on price is the biggest single factor behind the significant reduction in the volume of sales. As we will argue in our next Investor View, we believe that concerns over domestic political issues will dissolve after the General Election next May and the flows of international capital which have driven the London market for the last 25 years will return to lift transaction numbers, particularly in the £2 to £5m market.

Michael Hodgson