Regional Focus : London
London’s high exposure to market volatility means its property can suffer the biggest price falls across the UK, but the upside is that it stands to enjoy the quickest recovery.
The whole of the country may be struggling for sales and activity at the moment, but spare a thought for the London roller coaster. Those outside capitalcommuter- distance or secondhome- bolt-hole-from-the-City territory have been dealing with a slower market since 2004.
So while the credit crunch has massively added to your challenges, you’re likely to be more acclimatized to sales being harder work. Estate agents in much of London have gone from boom to doom virtually overnight. Those of us who have been in estate agency for many years have seen several slowdowns or crashes, and know that the tactics to be a successful agent need serious tweaking in a tougher market.
To change from frothy market practices to staying afloat within the space of a few months is a massive change in both the mind set and practical running of an estate agency business. Unfortunately, not all companies will be able to make the change, with some having already gone out of business. Many senior partners who have been around in previous downturns are privately expressing some relief at the prospect of fewer competitors, stating that there were too many agents around for too few sales, offering ridiculously low fees.
The outlook now is that agents will be tasked with educating buyers and sellers about the new market conditions, particularly forecasts that there could be a shortage of mortgage funds for two years. But while the credit crunch has damaged both home mover sentiment and availability of mortgage credit throughout the country - though Scotland seems to be immune in parts - London has some specific challenges due to the relative speed of the change in market conditions.
Estate agency is still a people business, even though the internet has revolutionized the search and communication process. Getting agents to adapt from listing as many properties as possible to diligently negotiating lower asking prices and holding jittery chains together is a real culture change, particularly when many of them have not worked in a tough market before. London suffered from a difficult market in 2003 when City woes last put a damper on activity. Given the staff turnover of many companies, this downturn will be a new experience for many. The excitement of an active market is a real contrast to the grind of getting sellers to accept lower prices when they naturally want to get the top price while slashing thousands of pounds off the property they are buying. The days of inflated valuations have gone, with agents being forced to market properties below market value to get them off their books.
Agents will need to use all the tools available to them to get this process right, to be able to remain in business. Education Senior partners who have worked through previous recessions can lead by example, but sometimes their effectiveness can be diminished, having been away from the front line for a few years. I heard of one senior partner who recently stepped into the breach at his firm, only to realize that the advances in computer software meant he was unable to give his team the benefit of his experience as processes had moved on. He had to go back to the basics of the technology his team took for granted before he could get his staff to go back to his basics of ‘tough market estate agency’. And he is not alone - many firms have had to bring in external trainers as ‘change agents’ to kick start new practices. Hunting out motivated sellers, who have to move and will price cheaply to differentiate their property, can be a real discipline.
The internet is where most buyers are looking, so when agents have a property that they feel will sell in approximately two weeks, they should make every effort to differentiate it from their competitors’ properties. This skill is vital for agents striving to build their applicant register, as well as sell their properties quickly. Most importantly, agents then have to charge the right fee for that service. Fewer sales means either fees have to go up or revenue falls, so cost savings have to be made to compensate. After years of the easy temptation of pitching the valuation to impress the seller and cutting the fee to land the instruction, these tactics are likely to put you out of business within months in the mortgage finance-starved market we appear to be stuck with for the foreseeable future.
With the high number of agents in the Capital, competition remains high, so old habits will die hard when agents are chasing new instructions. The danger is this temptation will remain until there are fewer agents in business. The reward for change and getting agents’ most important asset - staff - to adapt as quickly as possible is therefore immense.
Unemployment London faces high levels of unemployment, which is perhaps inevitable given its number of workers and the fact that it is most exposed to market volatility. Unemployment certainly fuels the sellers’ market, though the benefits of this are currently being offset by the national media coverage about the market downturn, causing prospective buyers to shy away from the housing market for fear of not knowing what to do.
Home Information Packs have dealt a further blow to the market while house price inflation has also deterred buyers. Prices in the Capital are 50% higher than three years ago, so few buyers can afford to get onto the housing ladder or trade up, or are unwilling to over commit themselves. Given that mortgage rates are rising rather than falling like the base rate, you cannot blame their logic.
Agents should be working hard to persuade sellers that it is actually a good market to trade up in, since the difference between sale and purchase price can be narrowed with clever negotiation. The skills to put deals together like this or negotiate up and down chains are lost arts in some companies and take time and real discipline to regain. There is a big danger of generalizing about challenges in London, as the reality is that the Capital comprises many local markets with their own unique characteristics. And while the mortgage famine hits the majority of homeowners, the top end of £5m-plus buyers are largely immune – assuming they remain in employment – since they often buy for cash or have willing bankers to help them leverage their deals. The remainder of the UK is having an aversion to the new plethora of flats, yet Londoners have long recognized them as a traditional way of living. Local knowledge is key to understanding the mix of sellers and buyers, and often a local branch covers only a few streets to make its living.
Property in the Olympic boroughs of Tower Hamlets and Hackney may not be enjoying the 20% to 30% price growth seen in 2006 and 2007, but the massive investment in the infrastructure will mean they are among the first to recover, along with the affluent boroughs where traditional property is in limited supply. After any boom there is normally a price overshoot, requiring a stagnant period to follow for markets to readjust. In this case, that overshoot has unfortunately coincided with lenders’ liquidity problems.
However, the long-term shortage of supply of properties in London along with the demand that a Capital city creates, should ensure that it will recover. Agents’ ability to adapt their skill sets is key to speeding up that recovery, as is their determination to apply them.