Issuu on Google+

Fulham 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. 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

Dec 07 – Dec 13 Dec 12 – Dec 13

1 Two bed flats have

produced a real return of 32% since the last peak of the market in 2007... 2 ...and most of that

return came from their performance in 2013. 3 Large houses have shown

very strong real returns over the 2007 – 2013 period.

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. 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 Fulham area please contact our office on Fulham Road.

2013 was an exceptional year for Fulham property. But is it a bubble or a permanent re-rating? Fulham Real Capital Returns over the last 6 years (2007-2013) are flattered by 2013 performance

% 90 80

3

70 60 50 40 1

30

2

20 10 0

1 Bed Flats

2 Bed Flats

3 Bed Houses

4 Bed Houses

Source: D&G Proprietary data, ONS

An exceptional 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 during the six years, real capital returns have been dead in line with the long term trend. During the period the annualised real return for the area was +5%, the same as the ten year long term average. In Fulham the six year numbers (2007-2013) are skewed by the extremely strong real capital growth of larger, four bedroom houses. Smaller unit sizes, in particular one bedroom flats, have lagged behind the bigger houses. There is also a marked divergence in performance of three bedroom and four bedroom houses. The former are more sensitive to the credit cycle (see later). The latter have benefited from people moving from other areas, resulting in Fulham beginning to display characteristics of ‘Prime’. For all but the larger houses, the reason there are decent six year real annualised returns is that last year was a spectacular one. In effect, 2013 made up the ground lost during 2007-2012. For smaller houses 2013 contributed all of the six year growth. It was a year when confidence returned to the market and families started to switch from holding cash in the bank to property for themselves or

their children – ‘The Bank of Mum and Dad’. Since 2007, large Fulham houses and two bedroom flats have outperformed smaller houses and one bedroom flats respectively. We think that 2013 saw the UK credit cycle starting to turn. If this is correct, mortgages will become easier to obtain and we would expect the capital value of Fulham’s smaller houses and flats to start increasing faster relative to their larger equivalents. The big question 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. Our view is that the 2013 movement in prices has not formed a ‘bubble’. First, the six year real annualised growth rate (+5%) is level with the long term ten year trend. Second, there is no evidence that people buying in 2013 were borrowing heavily to acquire their property. In 2013 Fulham saw many purchases of houses with cash and no debt. 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 weak year for Fulham rental income.

Rental Growth & Yield

Fulham Nominal Rental Income Growth weak following good long term increases Dec 03 – Dec 13

% 50

1

Dec 12 – Dec 13

40 1 Rental growth over the

30

last 10 years has been above inflation (+38%) for all asset sizes except one bedroom flats.

20 10

2 Last year rents fell.

0 -10

2

1 Bed Flats

2 Bed Flats

3 Bed Houses

4 Bed Houses Source: D&G Proprietary data

A mixed 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 Fulham has kept abreast of inflation (+38%). The notable exception to this trend is one bedroom flats which have seen real rental declines over the ten year period.

Generally, 2013 was a difficult year for rents across all unit sizes; Fulham houses and flats experienced real rental declines in 2013. This was due to the squeeze on real incomes of tenants, corporate budgets being cut and an increase in supply as buy-to-let investors targeted the area. Landlords need to be sensitive to these short term developments and may have to be patient and wait for real incomes to rise before further rent rises stick.

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

3.5-4.5%

2 Bed Flats

3.2-4.2%

3 Bed Houses

2.9-3.9%

4 Bed Houses

2.4-3.4%

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 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 Fulham, the inflation adjusted value of an

Fulham vs UK housing market Real Capital Returns Dec 03 – Dec 13 % 60 50 40 30

average property has risen by 60% over the

20

same ten year period.

10

In future reports, we will look at how different areas of London have performed relative to each other.

0 -10

Fulham

Nationwide

Source: D&G Proprietary data and Nationwide

Fulham 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

1 Bed Flats

10%

56%

87%

2 Bed Flats

29%

96%

125%

3 Bed Houses

30%

84%

104%

4 Bed Houses

32%

168%

164%

Nominal Rental Income Growth to Dec 2013

2013

5 years

10 years

Nationwide HPI*

8%

15%

30%

1 Bed Flats

Halifax HPI*

6%

8%

22%

2 Bed Flats

14%

52%

51%

3%

19%

38%

FTSE100 RPI

2013

5 years

10 years

-5%

0%

30%

-3%

24%

47%

3 Bed Houses

-8%

21%

50%

4 Bed Houses

0%

20%

50%

*House Price Index

Fulham 2014 Our view

• Credit easing •C  apital values: smaller properties to start outperforming larger equivalents •R  ents to slowly pick up • Area to continue to emerge as ‘Prime’

Our Fulham Office

656 Fulham Road, London SW6 5RX Sales Emma Stead T 020 7731 4391 E estead@dng.co.uk

douglasandgordon.com

Lettings Ella Newhouse T 020 7731 4791 E enewhouse@dng.co.uk


The Investor View - Fulham