Prime Central London Residential Property Time to invest?
Introduction
As Warren Buffett said, would you rather have a compound return of 15 per cent a year with high volatility or 8-9% a year with low volatility? Barton Biggs, FT 16/01/06
D&G Asset Management LLP (“D&GAM”) analyses and invests in one sector of the UK residential property market – Prime Central London* (“PCL”).
PCL is geographically precise, internationally valued and, as this report shows, behaves in a rational, understandable way relative to other non-property asset classes.
This report deconstructs PCL as an asset class analysing its volatility, total returns, price actions and correlations to other asset classes over a twenty six year period, 1979-2005 (“the period”).
The D&GAM model allows us to interpret PCL data alongside, and relative to, other liquid asset classes. [Data provided courtesy of Savills].
(*PCL is defined as all property in Mayfair, Belgravia, Knightsbridge, Chelsea, Kensington, Holland Park, Notting Hill, St Johns Wood, Regents Park and Hampstead.)
Summary
- Capital Growth 2002-05 inclusive:
– Prime Central London +10%
– UK Houses +69%
- Total return 2005:
– Average Hedge Fund +5.7%
(source: Hedge Fund research, Chicago)
– Prime Central London +9.2%
(source: Savills fourth quarter statistics report)
- Since 1979 PCL has produced a higher annual mean return than either FTSE All-share or cash on deposit
- Since 1979 PCL has produced less volatile returns than either FTSE-All Share or cash on deposit
- PCL capital growth is closely related to the performance of FTSE Financials one year earlier
- PCL has benefited when FTSE Financials have gone up but been resilient when FTSE Financials have fallen
- FTSE Financials have had three strong years.
- PCL capital growth is sensitive to stability of interest rates in the previous year
- PCL gross yield compares well with that of other International asset classes
- Correlation patterns suggest PCL set for strong capital growth in 2006/7
- Supply of good quality PCL remains low.
UK House Prices and Prime Central London
For the last three years (2003-2005 inclusive) Prime Central London capital growth has been weak.
2003-2005 inclusive:
- UK house prices have risen by 69%
- PCL has risen 10%, barely in line with inflation.
The two are totally different markets and are driven by different factors.
The D&GAM Model
Statistical/mathematical models help understand past performance of different asset classes and uncover relationships between them. Historic trends can give a guide to future performance. If, over a decent period of time, one asset class has been a consistently reliable lead-indicator to the future performance of another, this can be a useful forecasting tool.
The D&GAM model has analysed PCL capital growth and its relationship with the following asset classes for the period 1979-2005:
- FTSE All-Share
- FTSE Financials
- FTSE Real Estate
- UK Base Rate
- 2/5/10 Year Gilts.
In the last ten years PCL has performed better than the FTSE All-Share but less well than FTSE Financials albeit with much less volatility than either.