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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.

"The “defensive” quality of PCL is one of its key attractions to geared investors looking for consistent, low volatility, total return over the medium to long-term."