Prices And Rents In Prime Central London Both Rise Strongly After Slower Summer

Following the expected Olympic lull in London’s prime property market in early summer, the post Games rebound has seen capital and rental values rise, according to the Cluttons Residential Investment Monitor for the third quarter of 2012.

Average house prices across the capital grew by 3.1% in the third quarter after a more modest rise of 0.9% in the second quarter.

Cluttons says that this healthy growth leaves average property values in prime central London some 3.33% above the market peak in the third quarter of 2007 market peak and 7.1% higher than this time last year.

Cluttons also reports a surge in London’s rental values with growth of 1.5% in the third quarter following three quarters of negative growth. This leaves annualised rental growth unchanged compared to the third quarter of 2011.

International private investment trends in the capital showcased a distinct geographical divide. Property investors from India, Western Europe, Russia and other Eastern Europe countries are increasing their focus on low yielding prime core assets.

But investors from the Asia Pacific region have remained primarily interested in the new build offering of central south east London, which includes east London sub-markets and key areas south of the Thames, where gross yields are higher. 

Cluttons says that the common denominator for private investment remains the generally shared focused on long term performance, with Russian and other Eastern European investors being equipped with the highest budgets of £5 to 20 million, closely followed by Western European investors with budgets varying from £2 to 15 million.

Domestic lending remains restricted for both development funding and investment, with overseas banks becoming more and more of a financial alternative, with a clear upturn in lending by key players like Barclays Singapore and Bank of China.

‘Despite the promising growth in rental values this quarter, we expect average rents in prime Central London to end the year marginally negative, or flat at best. This is due to a market readjustment following the unusual and unsustainable pace of growth recorded in 2011. However, as demand is still outpacing available properties, we are expecting a slight adjustment rather than a significant decrease,’ said Sue Foxley, head of research, Cluttons.

‘Central north west London was the best performing London region during the third quarter of 2012, with an outstanding upturn of 7.5% in capital values being recorded. Calculated yields in Maida Vale and St. John’s Wood are consistently high, reaching 6.38% and 6.36% respectively,’ she added.

Sustainability Role In Real Estate Investments

Due to increasing global population and climate change effects knocking on the door, the importance of effective and sustainable use of energy forms becomes more crucial than ever before. The calculations for primary energy consumption account buildings for 30% of total C02 emission production on a global scale. The merits that will derive for new or updated government legislations to promote sustainability in real estate market will face geographical, demographical, environmental and corporate challenges. These challenges related to market conditions and asset class flexibility to accept or accommodate new regulations. Cost versus benefit analysis tool is the simplistic form to assess financial and non financial benefits derived to applying new standards in energy, waste management, water consumption, air quality and well being of working environment. It is less expensive in terms of time, cost and effectiveness to apply sustainable standards on new developments rather then upgrading existing buildings. In either case effects will take place on buildings direct attractiveness to the market place reducing void periods and bringing long term tenants, reduction of C02 emissions during asset life cycle and becoming a sample of efficient modern living.

Sustainability levels will vary with investment objectives; however they should satisfy minimum mandatory standards. The sustainable investment strategies listed below can be used as a guideline to determine personal investment path:

1.   Selection / Screening: Purchase and/or disposal of property assets that meet / don’t meet predefined environmental and social performance requirements;

2.   Build and operate / Build and sell: Investments into new building projects that are designed, constructed and subsequently managed according to the requirements of sustainable buildings;

3.   Optimization: Investments into the existing building stock in order to systematically improve sustainability performance;

4.   Cause-based investment: Investments into community projects such as affordable housing and urban revitalization in order to foster a more sustainable society“

Table 1: Different aspects of property value –Superior building performance adds value in many ways

The questions that come after reviewing these strategies are:

1.   How is sustainability likely to affect property performance?

To enhance value, buildings and their landlords must be flexible to accept environmental changes dictated by central government. Failure of compliance to new standards may lead to penalties and loss of tenants. The level of savings will be related to primary fuel prices replaced with sustainable alternatives and competiveness of the asset in the market place.

           2.   What makes a sustainable building?

Well planned, designed, constructed or upgraded and managed building will deliver tangible savings over time. Primarily focus falls on energy conservation, however secondary attributes must be treated with a favorable response:

a.    Green leases – part of sustainability transferred to building tenants;

b.   Good access to the public transport – reduces travel time and dependency on personal transport;

c.    Effective Monitoring/Management of the building system – smart energy saving controls, micro power station installation;

d.   High level of water efficiency – collection of rain water, water percolation and economic management systems;

e.   High standards of lighting, ventilation and humidity levels – passive building design;

Sustainability standards changed the paradigm of real estate investing. It is more oriented into efficient use of the asset through integrated management systems.

Table 3: Return and Security is achieved through sustainability

US Residential Real Estate Sales Fell Slightly Last Month But Prices Rose

September existing home sales in the United States declined modestly but the national median home price recorded its seventh back to back monthly increase from a year earlier, according to the latest report from the National Association of Realtors.

Total existing home sales, which are completed transactions that include single family homes, town homes, condominiums and co-ops, fell 1.7% to a seasonally adjusted annual rate of 4.75 million in September from an upwardly revised 4.83 million in August, but are 11% above the 4.28 million unit level from a year ago.

Lawrence Yun, NAR chief economist, said the market trend is up. ‘Despite occasional month to month setbacks, we're experiencing a genuine recovery. More people are attempting to buy homes than are able to qualify for mortgages, and recent price increases are not deterring buyer interest. Rather, inventory shortages are limiting sales, notably in parts of the West,’ he explained.

The national median existing home price for all housing types was $183,900 in September, up 11.3% from a year ago. The last time there were seven consecutive monthly year on year increases was from November 2005 to May 2006.

Distressed homes, that is foreclosures and short sales sold at deep discounts, accounted for 24% of September sales of which 13% were foreclosures and 11% were short sales. This was up from 22% in August but down from the 30% recorded in September 2011. Foreclosures sold for an average discount of 21% below market value in August, while short sales were discounted 13%.

Total housing inventory at the end September fell 3.3% to 2.32 million existing homes available for sale, which represents a 5.9 month supply at the current sales pace, down from a six month supply in August. Listed inventory is 20% below a year ago when there was an 8.1 month supply.

‘The shrinkage in housing supply is supporting ongoing price growth, a pattern that could accelerate unless home builders robustly ramp up production,’ Yun said.

The median time on market was 70 days in September, unchanged from August, but down 30.7% from 101 days in September 2011. Some 32% of homes sold in September were on the market for less than a month, while 19% were on the market for six months or longer.

However, NAR president Moe Veissi said that some buyers who could easily afford a mortgage can't assume they'll get one. ‘Home buyers need to be more focused on the mortgage process in the current environment where lenders and banking regulators are being risk averse,’ he said.

‘Shopping for competitive mortgage terms is a good idea, but it may be more important to find a bank that is willing to work with you given your credit history. Realtors can often recommend lenders that may have more reasonable underwriting standards,’ he added.

The report also shows that first time buyers accounted for 32% of purchasers in September, compared with 31% in August and is at the same level as it was a year ago.

All cash sales were at 28% of transactions in September, up from 27% in August but lower than the 30% recorded in September 2011. Investors, who account for most cash sales, purchased 18% of homes in September, unchanged from August and slightly below the 19% in September 2011.

Single family home sales declined 1.9% to a seasonally adjusted annual rate of 4.21 million in September from 4.29 million in August, but are 10.8% higher than the 3.80 million unit level in September 2011. The median existing single family home price was $184,300 in September, up 11.4% from a year ago.

Existing condominium and co-op sales were unchanged at a seasonally adjusted annual rate of 540,000 in September, but are 12.5% above the 480,000 unit pace of a year ago. The median existing condo price was $181,000 in September, which is 10% higher than September 2011.

Regionally, existing home sales in the Northeast fell 6.3% to an annual level of 590,000 in September but are 7.3% above September 2011. The median price in the Northeast was $238,700, up 4.1% from a year ago.

Existing home sales in the Midwest slipped 0.9% in September to a pace of 1.10 million but are 19.6% higher than a year ago. The median price in the Midwest was $145,200, up 7% from September 2011.

In the South, existing home sales increased 0.5% to an annual level of 1.93 million in September and are 14.2% above September 2011. The median price in the region was $163,600, up 13.1% from a year ago.

Existing home sales in the West fell 3.4% to an annual pace of 1.13 million in September but are 0.9% above a year ago. With continuing inventory shortages in the region, the median price in the West was $246,300, which is 18.4% higher than September 2011.

Sales Figures Indicate That Dubai’s Real Estate Market Is Moving Towards Recovery

The total value of property transactions in Dubai reached more than AED83 billion in the first nine months of 2012, figures from the Dubai Land Department show.

‘The property transactions have become more mature and the investors are now much more aware. The market offers multiple choices and Dubai property sector showed high flexibility in dealing with investors' requirements and trends during the first nine months,’ said Sultan Butti Bin Mejrin, director general of the Dubai Land Department.

Experts believe that the emirate’s property market is on the way to recovery but the figure shows that it is still up and down. For example, land transactions in Dubai reached AED63 billion in the first half of 2012, but in the third quarter deals slowed to AED20 billion.

The transactions include sales, mortgages, mortgage portfolios, deferred sales and other transactions and first time buyers are returning to the market as prices have fallen to what is regarded as more acceptable levels well below the heights of the market in 2008 when speculators pushed values too high.

Cash sales accounted for 52% of the total transactions in the first nine months of this year while mortgages accounted for 44% of the total transactions to the value of AED36.3 billion.

The Burj Khalifa, the world's tallest building, was the most popular development with 3,305 sale transactions. In the land mortgage transactions, Al Barsha South First was the most traded areas with 203 transactions while the Burj Khalifa saw 442 apartment mortgage transactions.

Bin Mejrin also confirmed that the new Dubai Real Estate Arbitration Centre is ready to resolve property disputes using internationally recognized real estate arbitrators accredited by regional and international arbitration centres.

‘Dubai’s real estate market has become one of the most developed and sophisticated markets due to the large number of dealers and clients. Now, there is an urgent need to settle real estate disputes in a smooth and fast manner,’ he explained.

‘The new centre will enhance mutual trust between the concerned parties in the real estate market, provide real estate consultations and legal advice in terms of real estate arbitration along with providing awareness of the laws and regulations on property transactions,’ he pointed out.

‘Other benefits of the centre include easing the burden on the judiciary and the courts, settling disputes quickly and reducing the cost of lawyers and legal advisers,’ he added.

The Dubai Real Estate Arbitration Centre will include a special section of real estate reconciliation to be one of the alternative means to resolve real estate disputes and reach an amicable and fair agreement between the two parties thanks to intermediary intervention that is professional, neutral, impartial and independent.

The Royal Institution of Chartered Surveyors (RICS) has launched an initiative for Middle East markets for qualifying and training real estate personnel.

India's Property Prices- Now Falling, In Real Terms

Recently, Indian property price increases have slowed sharply. Of the 15 major Indian cities covered by the NHB Residex, nominal house prices rose in 9 cities and fell in 6 cities during the year to end-June 2012. However, when adjusted for inflation, house prices fell in more cities (11 cities) than rose (4 cities). 

During the year to end-Q2 2012, house prices in New Delhi rose by 17.01% - but this was the lowest annual price increase since Q4 2010, according to the National Housing Bank (NHB). When adjusted for inflation, house prices in Delhi increased by only 6.23%.

In Mumbai, house prices rose by 8.84% (-1.18% inflation-adjusted) y-o-y to Q2 2012.

Pune registered India’s highest annual house price increase of 33.33% (21.06% inflation-adjusted) during the year to end-June 2012. Chennai and Jaipur also recorded strong house price increases of 24.6% (13.12% inflation-adjusted) and 21.88% (10.65% inflation-adjusted), respectively.

In contrast, Kochi, in Kerala, had seen the biggest annual house price fall of 31.78% (-38.06% inflation-adjusted). It was followed by Bhopal (-7.59%),Hyderabad (-6.59%), Patna (-4.11%), Surat (-2.68%), and Faridabad(-1.36%). When adjusted for inflation, all of these cities registered double-digit house price falls.

Based on the NHB Residex, Chennai has the most expensive housing in India while Kochi had the cheapest (figures as of June 2012).

Property sales in Mumbai had fallen by 70% by late-2011, from their peak levels in 2007, according to Firstpost. In central Mumbai, unsold units accounted for more than 45% of total launched housing units by late-2011.  Similar drops in demand can be seen in other Indian cities.

DFL, India’s largest real estate developer, is projected to cut new project launches. Another property company, Unitech, said that it will halt new projects over the next few months.

The Indian economy has been slowing sharply. During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% from the same period last year, the decade’s worst Q1 performance. The economy is projected to grow just 4.9% in 2012, in contrast to an average growth rate of 8.3% from 2003 to 2010, according to the IMF.

Given this unusually uncertain economic outlook, India’s property market is expected to continue slowing in the coming months.

India’s great housing boom

Indian house prices rose rapidly from 2002 to 2007. Strong economic growth and urbanization supported house prices, while in city centres a housing bubble was encouraged by inadequate infrastructure, lack of planning and antiquated land use laws.

The price increases were accompanied by low interest rates. Home loan rates fell to a historically low rate of 7.5% in early 2004 until 2005.

From 2005 to 2007, the economy grew at 8.9% per annum, making it one of the world’s fastest growing, after 7.6% per annum growth from 2003 to 2004.

The liberalization of major sectors of the Indian economy during the early 1990s brought a rapid influx of foreign direct investment into the country. A boom in the ICT and BPO industry generated rapid employment growth, increasing the demand for housing and causing a ripple effect in the construction and telecommunications sectors.

Yet though house price increases were supported by these strong fundamentals, speculation also played a role. From 2000 to 2006, residential property became significantly less affordable. By 2002, a dwelling in Mumbai cost around 85 times the average annual average income. By 2006, residential properties in Mumbai cost 100 times the average annual income.

Developers’ capital rapidly grew as their stock prices increased, and they used it to bid high prices for huge plots of land, making it relatively easy to sell properties at very high prices.

Flashback to the global crisis

If there is a slowdown, it won’t be the first. During the world economic downturn in 2008, India’s developers cut prices and introduced lucrative deals such as subsidized furniture and internet connections.

Demand for luxury housing fell 50%, while affordable housing demand fell 10%, according to a May 2009 survey by the Associated Chambers of Commerce and Industry of India (Assocham). House prices in Delhi fell by as much as 13.08% during the year to H2 2009. Developers refocused on building low-income homes.

But India’s economy quickly rebounded, and house prices soon started rising again.

Interest rate hikes may continue

In September 2011, the RBI raised its policy lending rate by 25 basis points to 8.25%, the 12th interest rate hike since March 2010, when the RBI moved rates up from 4.75% to 5% to contain inflation.

The RBI’s prime lending rates are also heading up, having been dropped to 7.50% (low) and 8% (high) in July 2010, from 11% and 12% respectively. As of March 2011, prime lending rates are 8.25% (low) and 9.50% (high).

According to Finance Secretary RS Gujral, the government is now concentrating on fighting inflation and slowing growth. The RBI may hike rate again, as inflation remains high at 9.87%.

The increase in interest rates is already being felt in the construction sector, which grew by only 1.2% in Q2 2011, an 8.2% drop from the previous quarter. More construction gloom is expected to follow.

India’s small mortgage market

Despite reforms since 1991, India’s mortgage market is held back by problems:

• Banks prefer to lend to middle and high-income sectors, leaving limited financing options for low-income individuals.
• The government has a huge influence on major domestic banks, discouraging initiative.
• There’s no proper legal framework for foreclosures
• Titling problems are rampant.

As a result, the ratio of housing loans to GDP is very low; in 2010, housing loans were only 4.04% of India’s GDP. The leading mortgage lender is the Housing Development Finance Corporation (HDFC) followed by the State Bank of India (SBI).

In 2010, total housing loans rose by 8.66% to INR 3009.29 billion (US$ 61.21 billion) from INR 2769.57 billion (US$ 56.33 billion) a year earlier. Interest rates at major banks and financial institutions range from 10.75% to 12% for floating rate mortgages, and 13% to 14% for fixed-rate mortgages. The loan to value (LTV) of most Indian home loans is 85%.

Relatively low yields

Rental yields remain low in India, according to Global Property Guide research. Smaller apartments have higher yields.

• Prices of smaller Mumbai apartments are around US$11,600 to US$14,000 per sq. m.; yields are poor, at 2.52% to 2.76%.
• Delhi prices are cheaper at US$4,000 per sq. m., but yields are also low, at 1.71% to 2%.
• Annual yields in Bangalore are relatively higher than in Delhi and Mumbai, ranging from 3.48% to 4.19%.

Residential rents from Q1 to Q2 2011, according to Colliers:

• In selected Mumbai areas, rents rose 2% to 5%.
• Bengaluru prime residential property rents increased by 3% to 7%.
• Delhi prime residential property rents rose by 2% - 4%
• Rents in Chennai rose by 2% to 5%, due to increasing demand and shortage of residential properties,

India’s rental market is hindered by problematic socialist laws protecting tenants. The laws are generally poorly conceived and ineffective, making implementation difficult. Although these are gradually being replaced by more market-oriented laws, the rental market’s full potential is yet to be realized.

Cities with rent controls generate lower yields. Mumbai rents in houses with sitting tenants are frozen at their 1947 levels, due to the Maharashtra Rent Act of 1999, an extension of the Bombay Rent Control Act of 1947. Delhi also has rent controls.

Outlook is unusually uncertain, says IMF

From 2003 to 2010, the Indian economy grew by an average of 8.3% per year, according to theInternational Monetary Fund (IMF). In 2011, the country’s real GDP growth slowed to 7.2%.

The Indian economy continues to slow in 2012, owing to low external demand, slow new project approvals, corruption scandals, sluggish reforms and policy uncertainties.

During the first quarter (April-June) of the fiscal year 2012-13, real GDP expanded by 5.5% y-o-y, the decade’s worst Q1 performance, due to flatlining manufacturing, mining and quarrying sectors.

The IMF revised its GDP growth forecast for the country this year to 4.9% from 6.1%. Likewise, the World Bank has also cut its India growth forecast to 6% in 2012 from an earlier forecast of 6.9%. On the other hand, the Reserve Bank of India (RBI), the country’s central bank, expects the economy to grow by 6.5% this fiscal year.

Exports fell 9.7% y-o-y in August 2012, and imports fell 5.08% to INR2 trillion (US$38 billion), resulting in a wider trade deficit of INR831.3 billion (US$15.7 billion).  The country’s current account deficit stood at 3.9% of GDP during the quarter ending June 2012.

In 2011, the country’s overall fiscal deficit was 9% of GDP. The gap may widen to 9.5% of GDP in 2012, the third highest in the world, according to the IMF. The fiscal deficit is projected to fall slightly to 9.1% of GDP in 2013.

Inflation is another worrying issue. Consumer price increases were projected to remain at about 7.7% in September 2012, according to Bloomberg. From 2006 to 2011, average inflation was 8.7%, in sharp contrast with an average inflation rate of just 3.9% per year from 2000 to 2005.

“The outlook for India is unusually uncertain, monetary policy should stay on hold until a sustained decrease in inflation materializes,” said the IMF.

Economic policy revamp

The government has recently broken the political gridlock, opening the economy to more investment from abroad, in the most extensive policy changes since Prime Minister Manmohan Singh was reelected in 2009.

The economic policy revamp includes the following:

• Foreign companies are allowed to take a 51% stake in multi-brand retail stores
• The cap on foreign stakes in broadcasting agencies has been raised from 49% to 75%
• Foreign investors are allowed to 49% of national airline carriers.

In addition, subsidized diesel prices have been raised by almost 14%, the first increase in 14 months, to tackle the country’s budget deficit. This measure is expected to help narrow the deficit to 5.1% of GDP this fiscal year ending in March 2013 from 5.8% of GDP a year earlier.