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Allsop on Post-Brexit London Property Auctions

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With 33 boroughs across the capital (59.9%) voting to remain in the EU, the result has sent some jitters amongst London investors – particularly in light of the ensuing political and economic uncertainty. Nonetheless, whilst the true effects of Brexit are hard to frame at the time of writing, investors may well be able to find interesting opportunities amongst a more subdued marketplace, the likely continuation of low interest borrowing, the possibility of lower Corporation Tax and (possibly) a more favourable operational environment for landlords.  On this very topic we were very pleased to be able to interview Gary Murphy (@GaryCMurphy) from prominent auction house Allsop:

In your view, what are likely to be the predominant post-referendum shocks to the London auction market over the remainder of 2016?   

Our commercial auction sale on 5 July was the first large post-Brexit auction. Despite movements in other markets, it was reassuringly business as usual. 80% of lots offered were sold – in line with pre Referendum success rates – and over £62m was raised. At this time, our next residential sale will be held on 20 July and interest in the catalogue is good. So I don’t expect a “shock” to the auction market. There are likely to be price adjustments in the short term in some areas. Most affected are probably going to be poorer quality lots in lower value locations. London and the South East will be steady sub £1m. Higher value stock will adjust – but that adjustment had begun pre Brexit due to increased stamp duty, changes to tax allowances and a softening of demand overseas. Unfortunately, a flight to quality could affect poorer areas further in the short term.  That said, the auction market is pretty agile and it won’t be long before the auction regulars sense buying opportunities and start to put their hands up again.

It would be great to hear what advice is being given to sellers at the current time.

Simply, don’t panic. The market is adjusting, that’s all. Look at the stock market. It’s recovered. As always, price stock to sell. That approach will generate competition in the room and market forces will do the rest to produce best price. Remember, an unsold auction lot will weaken a seller’s bargaining position. The opportunists will offer lower prices after the event. Simply, you may well find yourself accepting a lower figure than you would have achieved under the hammer if the reserve price had been realistic in the first place.

Whilst talk of a property crash may be premature, do you feel there will be a period where property investors may sit on their hands and see how things pan out or perhaps move towards making lower offers?

It’s inevitable that investors will use the current market uncertainty to renegotiate private treaty deals.  Why wouldn’t they? But like the stock market, I think that property will recover to a state of relative stability. Panic selling is very dangerous. It will quickly establish lower comparable pricing. So sellers must hold their nerve. Price chipping is not possible at auction. The deal is done when the hammer falls. There is no “subject to contract” period which risks price cutting.

Again perhaps too early to gauge, but have you witnessed an increased level of foreign buyer interest as a result of the Brexit decision?  Are you expected to see this occurring whilst the uncertainty over sterling´s value and indeed the British economy remains?

I have spoken to a number of house builder clients, many of whom report renewed overseas interest. Currency shifts now make UK property prices very attractive – currently 10% cheaper than pre Brexit levels. Our online auction sales of new homes off plan will, I think, be an attractive route to market for many developers. It will enable them to access this overseas interest and harness competition between different nationalities to raise prices. The method is low cost, high profile, transparent and fair to all parties. It also delivers certainty with a binding contract on the fall of the virtual hammer.

The lack of supply has clearly underpinned London´s significant capital appreciation in recent years.  Regardless of the decision on 24th June, many argued that the market was due some kind of correction (owing to the noticeable increase in income to property price to income ratios, lower yields that many investors have become accustomed to in recent years, amongst other signs).  Could it be argued that Brexit may well trigger the end of the property cycle and, consequently, this would perhaps be a good thing for the stifled first time buyer market?

Brexit will create new equilibria in different areas of the housing market. We haven’t seen new price levels settle yet. I suspect that we will have to wait until the autumn when hopefully some political stability will be restored. That said, the first time buyer market is also likely to be affected by bank lending. If available loan to value ratios increase demand may improve. Any base rate reduction is unlikely to be passed on by lenders. First time buyers still need to find deposits and that will continue to be difficult in the absence of some third party support such as “the Bank of Mum and Dad” or access to the Government’s Help to Buy scheme.

Given the current circumstances do you feel like government policies such as Help to Buy may suffer in the coming years?

I think that it is very unlikely that the Government will want to withdraw from any measures that assist first time buyers given the current housing shortage.

Looking at the buy to let industry specifically, alongside the implications of section 24 of the Finance Act 2015 announced in last summer´s budget, factors such as range of stricter regulatory controls and the stamp duty surcharge on second homes are likely to make investors more risk averse.  What advice would you offer our readers looking to grow portfolios in the coming years, particularly given that the risks have now been somewhat exacerbated with the effects of Brexit?

Regulatory controls and taxation are always going to be unwelcome. But investors will have to live with them. It has to be remembered that there is a housing shortage – but demand for housing is strong.  People will always need a place to live. If accessibility to home ownership is difficult, then the rental market will pick up the slack – and where demand is stronger rental values will rise. That will encourage buy to let investors to invest further. I disagree with Mark Carney. The drivers in the private rented sector do not encourage disinvestment.

The most recent edition of The Rent Check (a periodic report produced in collaboration with BDRC Continental that interviewed almost 2,500 members of the National Landlords Association) it was interesting to see that 40% of responders in the spring of this year anticipated  rental growth of the subsequent 6 months.  Whilst such increases may be called into question given the recent news, what segments of the rental market do you feel will remain the most resilient in a downturn (should it occur)?   

It is too early to predict the market impact on individual households. We are in a very different economic situation now compared to 2008. Credit availability is not as pressurised and we have very little economic data from the immediate effects on the economy. The Bank of England has already taken steps to ensure that lending capital is available if required – and interest rates are forecast to remain low. Rental growth will largely be a function of wage levels and supply of stock. Buy to let investors will be attracted to areas which show sustainable tenant demand. Those will be areas of higher employment or perhaps with healthy student populations. 

How do you feel the PRS landscape as a whole will transform over the next decade or so?  Do you think there will always be a place for the so-called “mom and pop” (small-scale) landlord/lady given the predicted rise of the institutional investor in the Private Rented Sector?

The UK buy to let private rented market is worth over £1 trillion. It has performed exceptionally well and provided much needed stock for increasing demand – so it’s here to stay. That said, the market in the UK has been slowly moving toward the US model. That started out predominantly with “mom and pop” landlords and matured into a model of institutional ownership serving professional tenants. The Government must do more to stimulate institutional investment by providing a sensible framework – such as suitable tax incentives – to ensure that confidence remains. Institutions must be encouraged to support the supply of professional rented accommodation in the right locations in the UK.

For the time being though, I suspect that institutional investors in the PRS will take a breather. The suspension of redemptions by commercial property funds points to that.  But they will be back to buy if they are sensible. There will be plenty of opportunity – particularly as some of the housebuilders struggle with oversupply.  But the funds can’t buy everything and the smaller cash investor should seriously consider the short term opportunities out there for reaping longer term benefits. Tenant demand will drive rents and a calmer market today will offer capital gains in the future.

Can you tell us a bit more about your “virtual agency” service and why you chose to develop this model as opposed to a more traditional solution to attend to the needs of landlords?

Allsop is focused on advising the Private Rented Sector (PRS) which encompasses “Build to Rent”. Virtual Agency delivers a high quality, high tech, online marketing alternative to traditional methods. Online services provided directly through the asset manager can offer prospective tenants fast access to comprehensive information about a broad selection of available rental properties. Virtual walk through videos, along with full descriptions of a development’s features and benefits, reduces time spent on viewing properties. This, combined with an experienced back office team working in conjunction with on-site staff, ensures that our managed schemes are leased quickly and residents can move into their new homes with the minimum amount of hassle.

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