Savills Magazine, Issue 61, 2008
‘Interesting times’ - but always a market for qualityby Rupert Sebag-Montefiore
Downlands in Hampshire sold for 10 per cent above its guide price,
showing the resilience at the top-end of the market
Rupert Sebag-Montefiore, the Chairman and Chief Executive of Savills Residential business, discusses the trends in today’s property market and how Savills has been affected by them
An old Chinese proverb says: “May you be spared living in interesting times.” Substitute economic turmoil for wars and revolutions and it is a sentiment with which many a banker would agree. In the last issue of the magazine I queried whether we could look forward to a short, sharp correction, or whether it was something more fundamental. It now looks likely to be the latter. The question for Savills and our clients is to what extent housing markets will be drawn into the economic fall out.
The UK housing market is made up of many different markets, and in recent years we have seen the prime markets rising when the mainstream has fallen, and vice versa. Prime markets have become far more international, financed increasingly by wealth, whereas mainstream markets are more domestic, financed increasingly by debt.
For this reason it is the mainstream markets that are currently bearing the brunt of the credit crunch. The good news is that unemployment remains low, as do interest rates. Much depends on the Bank of England’s scope for further reductions in interest rates. To date the benefit of a quarter per cent reduction has been more than cancelled out by higher banking margins, and much more restrictive credit ratings, imposed by the High Street banks. This has led the mainstream markets to slow in terms of turnover, and there must be prospects of price falls. Right at the bottom of the pack, the ignition motor for these markets is the first-time buyer, who has been tempted into the market by mortgages at fine margins of up to 120 per cent of purchase price. Not surprisingly these no longer exist.
The UK housing market has been affected by the credit crunch, but properties in prime markets are still appealing
Prime markets more robust
By contrast, prime markets have been more robust, particularly in the super-prime zone above £5 million. Here, product is scarce and the international buyer, who has often made his fortune fast, is also in a hurry to buy a base in London or a country estate. There is always a market for quality.
In London exclusive addresses, whether it be a 12-bedroom house on Cadogan Square selling for £25 million, or the world-class development at One Hyde Park, will always be in demand. In the country the best houses in a village, or that increasingly rare commodity, the country estate, will always sell well. Downlands in Hampshire, a small country estate with a Georgian house and 280 acres in a consistently popular county, sold for more than 10 per cent above the £9 million guide price. In addition, Savills sold three country estates off market at over £30 million, a record last year.
In January and February this super-prime market was rocked by the proposed taxation of non-domiciles. This produced a crescendo of protest, sufficient to persuade the Chancellor to ‘water down’ the legislation. It remains to be seen whether he has done sufficient to restore confidence. Initial reactions seem to be a mixture of resignation to a tax that is not totally unreasonable, and relief that the concessions have drawn out much of the sting. So while London’s image as a ‘safe haven’ has received a blow, my reading is that, now the details of legislation are clearer, this is far from fatal. The lobbying of the financial community rose to deafening levels and achieved much if not all of its purpose.
Meanwhile, the second source of buyers in the prime markets, the domestic city buyer, will be more cautious, as although bonuses from last year were good, prospects for 2008 are far more uncertain. Some city purchasers, for sure, will wish to preserve their fire power, and avoid taking on large levels of additional debt.
To reflect the above factors our prime Central London forecast for 2008 has been altered to provide for a fall of four per cent in 2008. In a market that has grown by 165 per cent over the past 10 years and 44 per cent over the past two, this is a minor correction. Put another way, a four per cent decrease in 2008 would be the equivalent to just one quarter’s growth in 2007.
In Manhattan markets have been extraordinarily resilient and have continued to rise
Comparisons with the US
The US housing market provides an interesting comparison. In Manhattan markets have been extraordinarily resilient and have continued to rise when the rest of the US has been a sea of red. Manhattan has many obvious similarities to London, although by comparison between the two London does look expensive, whether you are comparing taxis, shopping or apartments.
A major difference between the US and the UK outside the capitals is supply and demand, with unconstrained supply in many parts of the US compared with the UK’s planning constraints and sheer lack of spare land. Where there is oversupply, as for example is the case in the new flat developments in some of the former industrial cities of England, the market is at its most vulnerable.
We are seeing new benchmarks for land values, particularly in the case of prime arable land
Farmland attracts attention
Historically, farmland has been a safe, low-risk investment, providing an annualised return of over 10 per cent during the past 30 years. Recently however, values have recorded substantial rises and, cumulatively during the past five years, the average value for an acre has doubled. This performance has attracted the attention of institutional investors, fund managers and the City. A world shortage of grain could make UK land values the unwitting beneficiary of climate change.
We are seeing new benchmarks for land values, particularly in the case of prime arable land, where sale prices are regularly exceeding £7000 per acre. Putting everything else aside, the very fact that land is a diminishing asset means that we see no reason why there will not be more growth in values this year.