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Chelsea Q1 2014


Introduction Anyone who owns a property in London is a property investor. Our lives and plans often depend on the performance of what is likely to be the largest asset we own. So perhaps it will be helpful to take more of an investor’s view of the market.

As well as publicly available sources, we have used the proprietary data that we have been capturing since 1996 to help us make decisions and provide advice and guidance to our clients.

To produce this report we worked closely with D&G Asset Management, a company we cofounded in 2005. They deploy money into London residential property all the time, so they are constantly analysing different areas and the assets within those areas, seeking to maximise returns.

Property Values

D&GAM has helped us focus on the data that counts and we think the results make fascinating reading. If you would like to learn more about the Chelsea area please contact our office on Sloane Avenue.

2013 was a modest year for Chelsea property.

Chelsea Real Capital Returns over the last 6 years (2007-2013) were modest - except for houses Dec 07 – Dec 13

% Dec 12 – Dec 13

80 70

1 One bed flats have

produced a real return of 10% since the last peak of the market in 2007... 2 ...and much of that

return came from their performance in 2013.

50 40 30 20 10 0

3 Houses have shown good

real returns over the 2007 – 2013 period.

3

60

1 2

1 Bed Flats

2 Bed Flats

3 Bed Houses Source: D&G Proprietary data, ONS

A modest year This chart compares the real (that is stripping out the effects of inflation) capital returns for the single year of 2013 with returns over the six year period 2007-2013. It shows that over the six years, real capital returns have been good, but not absurd; the annualised real return in Chelsea was +3%, well below the ten year long-term average for the area of +4%.

interest from buyers. We expect this to continue during 2014 and into mid-2015.

Since 2007, houses have significantly outperformed flats, with one bedroom flats in particular lagging. During 2007-2013, the real capital value growth of houses in Chelsea has benefited from international capital seeking a home that is more productive than bank deposit interest, and less volatile than equity markets. This type of capital deployment tends to be in the larger lot size (£3m and above). During 2013 however, some government policy risk in this section of the market arose as the prospect emerged of increased taxation on residential property above £2m. Investors demanded some risk premium for this, hence capital values for the larger houses rose by less than inflation. Units below £2m saw corresponding increased

There is much talk in the press of a London property ‘bubble’. Successful property investors need to spot the difference between an asset price bubble and a genuine re-rating of prices.

We believe that increases in taxation are unlikely before the general election in mid 2015. As a result, value opportunities may well arise in the £2m - £4m bracket during the next 12-18 months. The big question

Our view is that the 2013 movement in prices has not formed a ‘bubble’. First, the six year real annualised growth rate (+3%) in Chelsea is below the long-term ten year trend (+4%). Second, there is no evidence that people buying in 2013 were borrowing heavily to acquire their property. Property owners with low loan to value ratios are less likely to be forced into a distressed sale; they will therefore keep a floor under prices.


How an investor looks at the market Residential property investors use two key measures: the capital value of the property and its net rental yield. You can make money from an increase in capital value and earn additional income by renting out a property you own. The net yield is the annual rent, less expenses, divided by the property’s capital value.

area, the economy (in particular, interest and tax rates) and the wider geopolitical picture. The interplay of these factors is what determines investment returns and what makes property investment decisions so interesting. We hope this report provides some help as you assess your options.

Both are important and are influenced by many factors including: supply of new properties, infrastructure projects, demographics of the

2013 was a poor year for Chelsea rental income.

Rental Growth & Yield

Chelsea Nominal Rental Income declined in 2013 after steady long-term growth Dec 03 – Dec 13

% 50

Dec 12 – Dec 13

1

40 30

1 Rents for two bedroom

flats have risen above inflation (+38%) over ten years, 2003 – 2013.

20 10

2 ... 2013 saw a decline in

0

rental income. 2

-10 -20

1 Bed Flats

2 Bed Flats

3 Bed Houses

4 Bed Houses Source: D&G Proprietary data

A poor year When renting out a property, an investor will look at current rental yield. However, they also need to take a view on whether rental income will grow; after all, it is rental growth that maintains real income and yield over time. The chart shows that over the past ten years, rental income growth in Chelsea has been broadly in line with inflation (38%) across all unit sizes. Over that ten year period, two bedroom flats and larger houses have out-performed the one bedroom flats and smaller houses.

2013 however, was a difficult year with rental income for both flats and houses falling. This was due to the squeeze on real incomes of tenants, an increase in supply of buy-to-let properties and pressure on corporate housing budgets. As activity in the City picks up and confidence returns to Corporate London, we expect rents to rise across all unit sizes in 2014.

For more information about D&GAM please go to www.dngam.com. This report is for general information purposes only. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Douglas & Gordon. Whilst every effort has been made to ensure its accuracy, Douglas & Gordon accepts no liability whatsoever for any direct or consequential loss arising from its use.

Current Yields

Dec 13

1 Bed Flats

2.5-3.7%

2 Bed Flats

2.2-3.5%

3 Bed Houses

2.2-3.2%

4 Bed Houses

2.2-3.2%

10 Yr UK Gilt Yield

2.80%

FTSE All Sh Yield

3.30%

UK Base Rate

0.50%


Market Context It has become a truism that London is “different” from the rest of the UK property market. This chart shows just how true this is. House price indices show that the true value of an average UK house has risen by 30% (Nationwide) or 22% (Halifax) over the last ten years. But inflation over the same period has been 38%. That means the value has actually fallen in real terms. In Chelsea, the inflation adjusted value of an average property has risen by 50% over the same ten year period. In future reports, we will look at how different areas of London performed relative to each other.

Chelsea vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 50 40 30 20 10 0 -10

Chelsea

Nationwide

Source: D&G Proprietary data and Nationwide

Chelsea key facts & figures Here are the key facts and figures anyone investing in the property market needs at their fingertips.

Nominal Capital Returns to Dec 2013

Other Assets Capital Returns to Dec 2013 2013

5 years

10 years

Nationwide HPI*

8%

15%

30%

Halifax HPI*

6%

8%

14% 3%

FTSE100 RPI

2013

5 years

10 years

1 Bed Flats

5%

40%

70%

2 Bed Flats

8%

56%

86%

3 Bed Houses

4%

111%

148%

4 Bed Houses

-1%

58%

139%

Nominal Rental Income Growth to Dec 2013 2013

5 years

10 years

1 Bed Flats

-10%

0%

32%

22%

2 Bed Flats

-7%

12%

47%

52%

51%

3 Bed Houses

-18%

5%

21%

19%

38%

4 Bed Houses

-14%

7%

33%

*House Price Index

Chelsea 2014 Our view

• Sub-£2m  to continue to be hottest market followed by sub-£4m • Larger units will require policy uncertainty to lift before growth continues • Rents to rise from 2013 levels

Our Chelsea Office

45 Sloane Avenue, London SW3 3DH Sales Caroline Anderson T 020 7225 1225 E canderson@dng.co.uk

douglasandgordon.com

Lettings Nicky Chambers T 020 7581 6666 E nchambers@dng.co.uk


The Investor View - Chelsea