Buyers thinning, population swelling

Published in PropertyEU on Nov 24th 2015

LETTER FROM LONDON: In his latest comment on the European property market, author and columnist Peter Bill looks at how the gloom in London's top-end residential market is seeping into the city's prime commercial sector. But there is hope in other parts of the market in the form of record-high office starts and an expanding population.

Signalling you are a seller before going to the market is not a good idea, normally. But the London investment market is no longer normal. Buyers are thinning. Prices are being chipped. Proclaiming caution now trumps holding the negotiating cards close to your chest. On 17 November British Land boss Chris Grigg said, ‘mindful of increased volatility’, Britain’s second-biggest REIT would ensure that spending on development was 'at least balanced by asset disposals'. You could say this is what REITs are all about. But saying it out loud at fine half-year results under the heading ‘outlook’ is a clear marker. One placed by a man who opened a wrecked balance sheet when he took over in January 2009. 

Grigg’s first job at BL was to persuade the City to subscribe to a £740 mln (€1 bn) rights issue at 225p per share. Today the stock price is over 800p. His second job was to expunge £987 mln of debt by selling a half stake in Broadgate for £77 mln, plus debt. Buyer Blackstone scooped half a billion profit on the deal when it sold to the Singaporean sovereign wealth fund in 2013. Grigg’s third job was to begin construction on the stalled Cheesegrater tower in 2010. Brave move, great idea. Bets were hedged with the sale of a 50% stake to Canadian pension fund, Oxford Properties. Today the almost-full tower on Leadenhall is worth somewhere between £1 bn and £1.2 bn. No guesses to what Grigg might now sell, given past history and current pressures.

Hollowing out

Bid lists hollowing out ‘Where there were typically 10 or more bids for Grade A assets last year, this is now down to around three,’ says Mike Prew, real estate analyst at US investment bank Jefferies. The biggest bear in REIT-land goes on: ‘There are no more sealed bids, instead “if you give us the asking price then it’s yours”’. 

A fair summary of cocktail party sentiment in London, as a year that turned darker in July rolls towards its end. The gloom spreading through the Grade A commercial investment market seems to be transferring from the darker state of the Grade A residential market. Here is my two-cocktail party story, gleaned at events held by the Grosvenor and the Portman estates, holders of a total of 410 acres of prime central London freehold: The prime central London residential market is currently screwed.

Not that it was put in such indelicate terms. More like: ‘I went into estate agent X’s shop in Chelsea the other day. The man in charge said he’d had the worst six months in terms of sales than he can ever remember.’ Rising stamp duty costs are affecting the market. The charge on a £2 mln home rose to £153,750 from £100,000 last December. 

The number of properties sold in London’s poshest postcodes shrunk by 23% in the third quarter compared to last year, says residential research company LonRes. Knight Frank’s Prime Central London Index shows prices up 75% since April 2009. Stamp duty hikes are having some effect. But we may simply be seeing demand dwindling in the face of prices rising. That may be simply what’s happening in the prime commercial market.

By way of contrast.

Cheer up. London office starts have hit a 13-year high, according to Deloitte Real Estate’s London Office Crane Survey. Of the 11 mln sq ft under construction, 4.3 mln sq ft are pre-let. Brookfield is committed to building its 800,000 sq ft tower at 100 Bishopsgate. AXA Real Estate will begin work in January on its 1.2 mln sq ft tower at number 22. A 278-metre, 67-storey phoenix built on the ashes (well, foundations) of the Pinnacle tower that never was.

Final cause for joy 

Hesitating to invest in London? Remember one thing above all else. This year the population reached its 1939 pre-war peak of 8.6 million. Another 1.4 million folk are expected by 2030. As one grey-beard said at one cocktail party: ‘I’ve worked in London for decades under the weight of a declining population. You can’t imagine how much better things are when you know demand for all sorts of property can only but rise in the long term.’

Peter Bill is author of Planet Property and former editor of Estates Gazette