Prime property finance is experiencing a boom in demand but battling falling prices.
Yet, as the most resilient part of the market shows it can insulate itself from Brexit, the pandemic and current financial woes.
While not immune from external shocks, its ability to recover faster than the rest of the industry makes it a reliable asset for anyone who can afford it.
City A.M. sat down with the CEO and co-founder of CapitalRise, Uma Rajah, to find out how the prime central London market stays so strong, and why external shocks aren’t impacting it as much as people thought.
CapitalRise lends to property projects in plush areas like Chelsea, Mayfair, Belgravia, Knightsbridge, Kensington and Notting Hill, as well as prime outer London and the home counties.
So, what is happening in the prime central London market at the moment?
Rajah said the firm is seeing “high demand” right now, with £24m in October, so far, with more to be processed.
But, speaking after a report with Savills looking at trends in the PCL market over the last sixty years, she said prices have been consistently falling since 2014.
“Just before the pandemic, they were around one 20 per cent lower than their peak at the end of 2014. And we were literally at the point where the market was correcting, just before coronavirus hit, and that sort of stalled it a bit.”
Its bounce-back-ability however is second-to-none.
“Every time there is a downturn and some form of a property recession, the PCL market bounces back significantly faster than the London market or the UK market. It’s typically three years faster.”Uma Rajah
How did Covid impact on the market?
During the “early lockdowns” when most were “locked in their houses for unprecedented amounts of time, it really made people reflect on their accommodation.”
One of the key trends was “people being prepared to accept a bigger commute to have more space, or deciding to stay in the same location, but wanting a larger property, because they want a home office or a gym, or whatever it might be.”
After the first lockdown eased, and as people returned to the office, “the market then started moving again”.
“Some people have done the move out, and now they’re actually saying they miss the restaurants and the nightlife and being walking distance from their friends”.
But many “have multiple homes. It may not be an either or decision, it might be, both. They’ll have a pad out in the country and a pad in Central.”
She said its resurgence can be seen with a 71 per cent growth in Prime Central London property transactions since the pandemic”.
Is the market immune to the financial turbulence?
Uma said she “wouldn’t say immune, but the impact you can expect to be less”.
“Rising interest rates makes borrowing more expensive” and “that has a massive impact on all areas of the property market.”
But in the prime property market “people tend to borrow less because of the level of affluence.”
“It change the dynamics slightly.”
The energy crisis may however have a secondary impact on the industry, with “general cost inflation” being a major factor in redevelopment and regeneration of undeveloped high-end assets.
“We have to be very careful about cost-price inflation, particularly when we’re writing loans to borrowers, and we’re thinking about the cost of construction process”.Uma Rajeh
She said the company has to “make sure we’ve got decent contingencies” so we can “absorb increases in costs” such as raw materials or energy.
“We’ve always been very cautious in terms of making sure every loan facility has got a decent contingency – but right now, we interrogate that incredibly carefully”.
“Some of our projects are going to be 18 to 24 months before assets are ready to go to the market. A lot can happen in the next two years, so we have got buffers in there to cope.”
What about the international market?
These external shocks have tested the market’s international appeal, but Uma says the resilience has been maintained.
In wake of the Russian war against Ukraine, she said “people assumed that the prime central London market would be quite impacted by he Russian property owners being sanctioned.
“But they’re actually an absolutely tiny, minuscule part of the market.
“It hasn’t had an impact at all, they represent a low single digit number of the market.
There is a similar story for Britain’s exit from the European Union. She said one of the “perceptions before it at all happened was people would be less likely to purchase prime central London property because we’re outside of the European Union, and will they want to go and buy somewhere else.”
“And we just haven’t seen that at all.”
She said a key reason why, is due to London centrality to the business world.
After Brexit, the capital is still “very accessible” and uses “prime business language”. Potential buyers still consider London against “buying in Paris or Berlin, or, an alternative spot in Europe” but the UK is “brilliantly positioned in terms of timezone”.
The only area of difficulty was the “uncertainty that Brexit caused”, comparing it to when there are stamp duty changes, saying in the “run up to big decision making points, people will stall on transactions”.
Finally, what about the immediate future?
“We’re seeing a lot of demand at the moment”, she said, but at the same time “in times of uncertainty, a lot of people will sit on their hands, and not transact and wait to see what happens”.
With prices continuing to fall but demand staying as high as ever, she said CapitalRise is committed to doing “doing sensible lending” with “sensible leverage”.
“Our average loan to value ratio is 62 per cent. So that means every loan that we’ve got has got a 38% buffer in it.”