LCPq: London Central Portfolio Quarterly Review London Central Portfolio Quarterly Review Prime Central London Market Outlook London Central Portfolio (LCP) specialises in Prime Central London (PCL) residential investment with a specific focus on the Private Rented

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<ul><li><p>LCPq: London Central Portfolio Quarterly ReviewPrime Central London Market Outlook</p><p>London Central Portfolio (LCP) specialises in Prime Central London (PCL) residential investment with a specific focus on the Private Rented Sector (PRS). This report has been compiled following the release of HM Land Registry Quarterly Statistics on February 8th. PCL is defined as the Royal Borough of Kensington &amp; Chelsea and the City of Westminster.</p><p>2015 was a challenging year for the residential market. The last 12 months not only witnessed an anticipated slowdown in the run up to the UK election but saw a new wave of taxation measures. A new graduated Stamp Duty was introduced in 2014, with levels rising up to 12%. A non-resident Capital Gains Tax, mirroring that already paid by UK residents was introduced in April 2015. An additional 3% charge on Buy to Let and second properties applies from April. Other announcements include a catch-all non-domicile inheritance tax and a restriction in mortgage interest relief from 2017. Despite these headwinds, PCL has demonstrated remarkable resilience. Key factors supporting this growth have been the continuing reduction of available property to buy and the buoyant performance of properties in the lower price brackets (under 1m). As a blue-chip asset based investment with limited correlation to global financial markets, PCL continues to play an important role in a diversified portfolio.</p><p>2015 the year that was: pcl topline market review</p><p>1,641,837</p><p>Average Pr</p><p>ice</p><p>5.2%</p><p>PCL Rolling AnnualPrice Growth 2015</p><p>4,665</p><p>Sales Volumes</p><p>-22.9%</p><p>PCL Rolling AnnualVolumes 2015</p><p>A slowdown in price growth in 2015 was to be anticipated. Exceedingly strong growth levels of 16% in 2014 were well above market average and required a mild correction. This was made more inevitable in a General Election year where uncertainty traditionally causes market suppression. 2015s solid price inflation of just over 5% has brought prices back in line with long term growth trends. This demonstrates the markets robust fundamentals as PCL continues to be perceived as a hedge against political and economic instability elsewhere, despite the numerous tax changes that have been introduced. Prices under 1m continued to perform particularly well with annual growth recorded of 7.8% (Lonres).</p><p>The decreasing amount of stock available in PCL underpins continued price growth. As more property owners choose to hold onto one of their best performing assets, the number of sales fell by 23% in 2015 to 4,665, almost half the level of annual sales before the Global Financial Crisis (GFC). In this tiny area of London, which is both globally sought-after and where there is almost no new-build, the weight of demand continues to outstrips supply. </p><p>Source: HM Land Registry HPI &amp; Quarterly Standard Reports</p></li><li><p>The sub-1m sector has put in a particularly robust performance, relatively untouched by the new taxes and benefiting from the 2014 SDLT changes. Representing 51.3% of the market, average square foot prices rose 7.8% (Lonres). Predominantly made up of the Private Rented Sector, it offers a commercial basis of valuation which leads to far more consistent price growth than the discretionary upper end of the market. This historically shows significant volatility in the face of economic or political turmoil and in the tiny super prime sector, above 5m, average square foot values fell 8.6% (Lonres). </p><p>Source: Census, HM Land Registry HPI, Quarterly, PPD, Lonres</p><p>Sub-1m 5m+Prices up </p><p>7.8%Sales down</p><p>15.3%</p><p>Prices down 8.6%Sales down53.5%</p><p>Sub 1m : 51.3%</p><p>1m - 2m : 27.6%</p><p>2m - 5m: 15.7%</p><p>5m+: 5.4%</p><p>Volu</p><p>mes o</p><p>f Sal</p><p>es b</p><p>y Pr</p><p>ice</p><p>PCL under the magnifying glass</p><p>87%Flats and Maisonettes</p><p>13%Houses</p><p>Despite the tiny size of PCL, under 200,000 units located within 6 square miles around Hyde Park, the market is highly nuanced and performance varies by price band. It is a little known fact that over 50% of all units in PCL are still transacted under 1m. Successful investing increasingly depends on specialist knowledge.</p><p>Due to the changing tax landscape and further uncertainty in the UK arising from the EU referendum, 2016 is likely to see similar levels of growth as 2015, with the sub 1m sector outperforming again. The introduction of the new 3% additional Stamp Duty from this April does not appear to have led to a rush of buyers or sellers trying to secure deals in Q1 2016. However, the new rate may slow down activity once it is introduced, until it becomes the new normal. As this recalibration takes place, the smart investor may well be able to take advantage of a quieter market before typical growth resumes. </p><p>Ultimately, PCL residential, as a blue chip asset, will remain the investment of choice in a volatile global economy. It is likely to become increasingly attractive for USD denominated and pegged investors, such as many in the Middle East. With sterling weakening against the dollar, PCL is looking comparatively less expensive with prices standing 9% lower than 18 months ago ago on a currency adjusted basis. This should create a tailwind for foreign buyers coming into PCL, countering the prevailing tax headwinds.</p><p>It is also anticipated that there will be an increasing dominance of professional property investment companies and funds operating in this sector. As these are being exempted from many of the new residential taxes, they are likely to become extremely attractive for the next generation of investors.</p><p>What does 2016 hold for PCL?</p><p>50</p><p>70</p><p>90</p><p>110</p><p>130</p><p>150</p><p>170</p><p>190</p><p>210</p><p>230</p><p>Prices are 9% lower </p><p>than in 2014 for USD investors </p><p>Source: HM Land Registry HPI, XE</p><p>Price Growth in PCL Feb 2007 - Dec 2015Actual vs USD Adjusted </p><p>Actual</p><p>USD Adjusted</p><p>% breakdown by property type</p></li><li><p>PCL: a strong long term performerPCLs role in a balanced investment portfolio is not a recent phenomenon. </p><p>Over the last 15 years, PCL has significantly outperformed the major financial markets, including the FTSE 100. </p><p>During this period, the FTSE100 has seen values fall 12% compared with PCL which has quadrupled in value. The FTSE100 now stands 9% below its pre-GFC high, compared with a 68% increase in values in PCL. </p><p>0</p><p>50</p><p>100</p><p>150</p><p>200</p><p>250</p><p>300</p><p>350</p><p>400</p><p>450</p><p>FTSE 100 S&amp;P 500 ESTX50 NIKKEI 225SSE (China) Hang Seng STI (Singapore) PCL</p><p>PCL prices are 4 times higher than 15 years ago</p><p>and 68% higher than pre-GFC</p><p>high</p><p>The Ftse100 is down 12% from 15 years ago and </p><p>9% down since the pre-GFC </p><p>high</p><p>Price growth at the premium end of the market, broadly represented by the Houses sector in Land Registry where the average price now stands at 3,975,705, traditionally experiences much more volatility in the face of political and economic change than the lower ticket Flats &amp; Maisonettes sector (average price 1,266,356). </p><p>Whilst long term price appreciation of both sectors is usually similar, over a typical 8 year investment cycle, the Houses sector witnesses far more marked peaks and troughs (as seen following the dot com bubble, 9/11, the Iraq War, the GFC, and more locally the UK General Election, the introduction of ATED* and graduated Stamp Duty). The current fluctuations in price, therefore, are nothing new and in due course are likely to be countered by a market correction. *Annual Tax for Enveloped Dwellings</p><p>0</p><p>100</p><p>200</p><p>300</p><p>400</p><p>500</p><p>600</p><p>700</p><p>800</p><p>Series1 Series2</p><p>-20</p><p>-10</p><p>0</p><p>10</p><p>20</p><p>30</p><p>It is also an old adage that unlike gold, which attracts investment in the bad times, PCL thrives in both the good and the bad. </p><p>Flats and Maisonettes 2015 Average Price</p><p>Houses2015 Average PriceSource: HM Land Registry HPI, XE</p><p>Source: HM Land Registry HPI, Reuters</p><p>Source: HM Land Registry HPI, Reuters</p><p>Source: HM Land Registry HPI,</p><p>Source: HM Land Registry Quarterly</p><p>1,266,356 3,975,705</p><p>Performance of Global Financial Indices vs PCL 2000 - 2015 (not currency adjusted)</p><p>Performance of Gold vs PCL 1995 - 2015</p><p>Yr on Yr % Price Change in PCL Houses Sector</p><p>House Price Growth</p><p>2000 - 2015163% </p><p>Source: HM Land Registry Quarterly</p><p>9/11 </p><p>iraq</p><p>gfc</p><p>uk ge</p><p>new taxes/ uk ge</p></li><li><p>PCL: outperforming the uk</p><p>historic performance therefore bears little correlation with the UK housing market. It has seen values increase by 9.3% per annum since 1996 and has witnessed price rises of 68% since the high point before the financial crisis. </p><p>This contrasts with the slow recovery in the wider UK, outside London, which has seen no consistent market growth since the pre-credit crunch high in 2007 (208,347) until Q1 2014 (210,280). The overall increase in prices of 5.8% in 2015 will be welcomed by many homeowners who have been held back from trading up for at least 7 years.</p><p>The fall in transactions of 3.4% in 2015, however, is concerning given the Government schemes to reduce the Stamp Duty burden for 90% of buyers and augment first time buyer numbers. Should the Government deliver on their commitment to build one million new homes by 2021, this trend should be significantly reversed, although 2016 is unlikely to see the benefit.</p><p>Source: HM Land Registry HPI &amp; Qtly Standard Reports</p><p>PCL</p><p>2015 Volume</p><p>% Annual Change</p><p>2015 Average Price</p><p>% Annual Change</p><p>England &amp; Wales (without GL)</p><p>Greater London</p><p>1,641,837 556,039 237,921</p><p>5.2% 4.5% 5.8%</p><p>4,665 103,772 739,128</p><p>-22.9% -9.0% -3.4%</p><p>80</p><p>180</p><p>280</p><p>380</p><p>480</p><p>580</p><p>680</p><p>the market in greater londonPCL also demonstrates entirely different dynamics from Greater London and indeed from the other nine boroughs that make up Inner London. Greater London is essentially a domestic market where about 8 million people live, representing 12.5% of the population and it is affected largely by domestic factors.</p><p>The tailing off of growth seen in 2015 (4.5%) is a direct result of new harsher salary caps on mortgage lending which have impeded second steppers from moving up the ladder. This has brought the surge in prices of 10.3% experienced in 2014, as Greater London pulled itself out of the GFS, to a swift end. Sales also fell by 9% to just 103,772 over the year.</p><p>In 2016, overall growth is expected to slow further as the market continues to battle with this ceiling of affordability and the new additional 3% Stamp Duty affects more people than originally anticipated. However, there may be a short-term spike of fire-sales in Q1 2016 as domestic sellers try to off-load before the increase.</p><p>Source: HM Land Registry HPI</p><p>Whilst the UK Chancellor appears to be totally fixated on balancing the books, the motive for the new residential taxation measures is not purely economic. It is part of a UK Government initiative to discourage private landlords from removing housing stock from local domestic buyers and to actively professionalise the buy to let sector. </p><p>Whilst tax legislation is subject to change, as part of this strategy, the Chancellor has exempted property investment companies, such as property funds with Genuine Diversity of Ownership, from both the new non-resident CGT (Capital Gains Tax) and the forthcoming catch-all IHT (Inheritance Tax) in 2017. They will also be unaffected by the proposed restrictions in mortgage interest relief and are expected to be entirely exempted from the new additional rate Stamp Duty. LCP has been actively involved in the consultation process to lobby for further exemptions and promote fairness. The outcome will be published in the March 2016 UK Budget. </p><p>It is therefore expected that property investment companies and funds will become increasingly important in the PRS landscape. They will provide a new opportunity for investors to access the returns offered by PCL through tax-efficient vehicles, such as LCPs latest offering, London Central Apartments III. </p><p>Tax Exemptions: Good News!</p><p>Price Growth Trends 1995 - 2015PCL vs Greater London </p><p>and England &amp; Wales</p><p>PCL is a global asset class whose performance is more aligned to international factors than to domestic ones. The factors that affect the UK housing market - concerns about employment, mortgage availability and interest rates have limited impact on property in PCL. </p><p>PCL benefits from buyers who have little or no reliance on credit and who are taking a global investment view. Its</p><p>PCL</p><p>GreaterLondon</p><p>England &amp; Waleswithout GL</p></li><li><p>England &amp; Wales (without GL)</p><p>237,921</p><p>5.8%</p><p>739,128</p><p>-3.4%</p><p>Will the new-build market fall down?</p><p>Within PCL itself, there is very limited new development. On average, only 300 units are brought to market each year (Lorema). However, LCPs research indicates that the premium for new builds amounts to 20% with the average square foot price standing at 1,701, compared with 1,418 for older property. </p><p>LCP have also tracked the erosion of new-build premiums over time in some of the older developments in PCL. Taking a particularly well known example, launched in 2003, the suppression in price growth, resulting from the initial premium becomes clear. Price growth lags 26% behind the rest of the market, increasing just 7.3% a year since 2003, compared with the PCL long term average of 9.3%. </p><p>The Inner London market, outside the central core, is particularly impacted by the proliferation of high value new build schemes. Currently there are 75,229 new units in the development pipeline (Lorema). Investors tend to pay a premium for these units, due to their newness and the extensive marketing campaigns which surround new developments. A glut of commodity-style flats and an insufficient private rented sector tends to lead to softening prices. These new units can also suffer from limited re-sale potential once they are no longer new. In Tower Hamlets, for example, home to Londons prestigious Canary Wharf, the average price of property is 523,352, just 37% higher than in 2008. In Newham, home to the Olympic Village, the average property price is 325,298 and growth has been just 26% since 2008. </p><p>Only 300 new units are brought</p><p>to market each year </p><p>in PCL</p><p>In Inner London, there are</p><p>75,229 new unitsin the </p><p>developmentpipeline</p><p>Source: HM Land Registry Quarterly/PPD</p><p>Tower Hamlets+37% </p><p>since 2008</p><p>Newham+26%</p><p>since 2008Prime Central London+68%</p><p>since 2008</p><p>Tax Exemptions: Good News!</p><p>Source: HM Land Registry HPI, Lorema</p><p>Price Growth 2003 - 2015All PCL vs A New Build </p><p>2003 = 100 </p><p>1. Vauxhall Tower 2. New Bondway 3. Nine Elms Sainsburys4. One Nine Elms 5. New Covent Gdn (N) 6. Vauxhall Square7. New Covent Gdn (A) 8. Embassy Gardens 9. US Embassy </p><p>100</p><p>150</p><p>200</p><p>250</p><p>300</p><p>PCL</p><p>New Build</p><p>The changing skyline south of the river Thamesbetween Vauxhall and Nine Elms</p></li><li><p>511 per we</p><p>ek</p><p>Average Re</p><p>nt2.8%</p><p>Annual Rental Growth 2015</p><p>Annual Rental Increases 2015 vs 2014</p><p>776per we</p><p>ek</p><p>Average Re</p><p>nt3.1%</p><p>Annual Rental Growth 2015</p><p>One Beds Two Beds</p><p>Source: LCP Source: LCP </p><p>Source: Lon</p><p>res</p><p>Source: LCP</p><p>Source: Lon</p><p>res</p><p>3.6%</p><p>Renewals</p><p>New Lets</p><p>5.4%</p><p>The Lettings Market in PCL</p><p>Weekly rents, particularly for small flats which make up 87% of all stock have started climbing again.</p><p>The key dynamic remains location over size. The squeeze on rents during the credit crunch has not completely relaxed which means that tenants attracted to the bright lights of central London look for smaller, more affordable pro...</p></li></ul>