Sterling falls a lifesaver for London property market

Prime central London values down -8.7%, rounding off a year that has seen average prime central London values drop by -18.3% and by a full -20%, but clear indicators are emerging of the forces essential to drive eventual market recovery.

The value of prime London homes dropped again in the final quarter of 2008, says property consultancy Savills. The average quarterly drop in prime central London, at -8.7%, rounds off a year that has seen average prime central London values drop by -18.3% and by a full -20% across the board from the peak levels of September 2007, as the company forecast in the autumn.

This has wiped over £13,000 a month off the value of what once a £1million family home and left average values around their autumn 2006 levels, but provides clear opportunities to international buyers and equity-rich long term owners looking to upsize in 2009. “These falls indicate that the bottom of the market is likely to be seen next year and are in line with our expectations”, says Yolande Barnes, head of residential research at Savills.

“The pattern is pretty much uniform with few significant differences between locations and housing types. The areas most susceptible to City job loss fears took the sharpest dip. These include houses in Notting Hill, Kensington and Holland Park, which recorded extraordinary gains of 46% over 2006, on the back of record City bonus money, but saw falls of -11.2% in the fourth quarter of 2008 alone.

Occasionally, prime central London properties are already trading at -30% off peak values where vendors have to sell in a hurry. These prices are, effectively, next year’s, 2009 bargain prices. They suggest at what level the market might stop falling, and give credence to our forecast that average prime central London prices will fall no lower than -30% from peak, reaching the bottom probably before the end of 2009.

The traditional ultra prime (or billionaire properties) at the upper end of the Savills index were continuing to rise in value through to the mid year. It is clear that this is no longer the case, but the extremely low transaction levels make it difficult to establish correct market values for these rarefied properties as buyers and sellers become ever more entrenched in a ‘wait and see’ game. To give context, however, the traditional super prime areas including Knightsbridge, Mayfair, Belgravia and Chelsea have succumbed to -9.9% falls in the quarter, bringing total falls from peak to –17%. In the currently very low volume markets ultra prime properties, that have to be traded, trigger serious buyer interest at around March 2007 prices.

Barnes comments: “London’s prime markets are starting to look very cheap by recent standards. With sterling losing value against most of the major world currencies, this leaves it looking good value by international standards in particular. Over the past few weeks, clear indicators have begun to emerge of the forces essential to drive eventual market recovery. In previous downturns, it has always been overseas investors who pulled the prime London market out of the doldrums. An analysis of the combined effects of the housing market and currency fluctuations shows that prime London properties would now cost 50% less to a new Japanese investor and 40% less to a Hong Kong, Singaporean, Taiwanese, Swiss or Eurozone investor. With global bargains like these, the start of the recovery may well be driven by equity rich investment from the Far East or Europe.

Equity-rich, longer-term recovery buyers will start to emerge in 2009 provided the effects of the credit crisis aren’t seen as doing long-term damage to London’s reputation as a global city. If properties start to be snapped up, good-quality supply could become scarce quite quickly as discretionary vendors won’t want to put their properties on the market. This sets the scene for the start of a price upturn in 2010 -2011. We shouldn’t underestimate the potential attraction of bricks and mortar continuing to provide a relatively safe haven, particularly for owners from less financially and politically stable countries, and in the face of falling/uncertain stock markets and a global lack of confidence in other financial instruments.

“There are serious buyers waiting in the wings right across London, but they will need to be clear that they are paying prices at or close to the bottom of the market before acting” says Barnes.