There is a growing gap between what vendors and purchasers believe something is worth.
Ultimately that price boils down to what people are prepared to pay. More recently, we have observed purchasers being more conservative when bidding and thus the gap appears.
A number of factors have stifled purchaser demand including: stamp duty reforms, unrealistic asking prices, election uncertainty, a general softening of the market and increased stock.
Purchasers are also keen to see value in their purchase. Nobody buys a house or apartment expecting zero growth in its value. It is ingrained in UK property mentality that property will always go up, so purchasers are therefore looking for a low entry price and vendors a high exit price.
Agents are among the biggest culprits in fuelling the gap, and they are invariably driven by a commission structure that motivates them to maximise fee income. Agents will often show vendors comparable evidence of other ‘similar’ products sold in a given location. However, we all know that one house in a street selling at £5,000+/sq ft doesn’t mean all houses in that street will have the same value.
Purchasers are increasingly in a stronger position than vendors because of an increase in stock on the market. A motivated vendor will be much keener to work with a purchaser who can work quickly. Mortgages are notoriously difficult to obtain these days, following the Mortgage Market Review, and this again contributes to widening the gap.
The gap is further exacerbated at different levels of the market. We see that vendors at the £3,000+/sq ft end of the market are exceptionally greedy. Typically, they seem under less pressure to sell and therefore can wait for longer periods to secure the desired prices. We have often seen development appraisals with tail-off selling periods for new-build assets stretching to periods of circa 12 months.
On smaller lot sizes at sales of less than £1,500/sq ft, we see quite different scenarios playing out. Often at this level, the purchasers are buying to let and therefore are yield-led. The rental price of a flat in Notting Hill will differ significantly from that of one the same size in Mayfair, but as capital values will differ hugely between them, the Notting Hill asset will appeal given the greater yields available.
Everybody wants a bargain when buying but some investors are seeking asset management and planning gains to enhance their profit. This may include reconfiguration or perhaps even an enfranchisement.
Vendors quite often see this value in any sale and automatically embed this profit into the asking price, even though the deal still has risks within it. Such sales with ‘potential’ profits again serve to make the gap larger.
We are not entirely sure where or when things will change but still expect the gap to be there for some time. I guess that you just need to find a desperate seller or an exceptionally keen and rich buyer if you want to end up on the correct side of the gap.
Raed Hanna is managing director of MFL Finance