London property popular with foreign buyers

Property 2011

Published September 15, 2011

London property popular with foreign buyers Home prices have risen 0.8% in the year ended June 2011, outperforming the UK average, reports NEIL BEHRMANN (LONDON) The London residential property market has become very dependent on foreign buyers following the August stock market slide. Prime locations: Wealthy investors are especially interested in prime London areas such as Kensington and Chelsea with average prices of £926,000, up 6.6% in the 12 months ended June 'September and October will be crucial,' said Yolande Barnes, head of research at Savills, an upmarket estate agent. On the one hand, contracting businesses and bank layoffs could place pressure on prices in central London and the financial areas of The City and Canary Wharf. On the other hand, wealthy foreigners and cash rich UK investors may regard property as a safe haven from wild stock market gyrations. Since the bottoming of the UK property market in early 2009, London has outperformed areas in the rest of the UK and the price gap has widened considerably. The UK Land Registry calculates that the average price in the Greater London area was £340,000 (S$665,000), up 0.8 per cent in the 12 months ended June, while the UK average was £161,000, down by 2.5 per cent. London is a popular city for global buyers and the stock market recovery from March 2009 until its peak in April this year improved confidence. Weakness of the pound sterling against the Swiss franc, yen, Singapore dollar and other Asian currencies and its depressed level against the euro and US dollar also lowered the effective price for the foreign buyers. These wealthy investors are especially interested in prime London areas such as Kensington and Chelsea with average prices of £926,000, up 6.6 per cent in the 12 months ended June; City of Westminster, around Victoria and the Houses of Parliament where average prices are around £641,000; and St Johns Wood and Hampstead with similar prices to Kensington. Land Registry statistics, however, show that sales volumes are low (see Chart). Since July, confidence has waned. Anecdotal reports and preliminary estimates show that the stock market slump, worries about the UK economy, potential recession in the US and Europe and slowdown in emerging economies are beginning to have a negative impact on London property. According to Rightmove, a property website that monitors the mood in the capital and buyer and seller intentions, London house and apartment sellers lowered asking prices by 3.4 per cent in August. The fall followed a decline of 1.4 per cent in July. Prices often fall back during the quiet holiday summer months. But Rightmove's estimates follow historical trends, notably that turmoil in global financial markets has a dampening effect on London property. Stock market volumes were low this year. Before the hectic August period and after the stock market settles after a rout, trade tends to become quiet. During those conditions, bonuses shrink and vulnerable employees are laid off. The number of rental voids could thus rise and stressed city executives and staff with high mortgages may place their properties on the market. Multinational financial institutions and other companies that are concerned about business could also withdraw employees, say worried agents. If they return to their home countries they will leave vacant properties behind. Estate agents may thus have to adjust their bullish rental growth forecasts downwards. Over the past two years, rents have increased because first-time buyers have battled to raise mortgage deposits of 25 per cent of the total price that now includes a stiff stamp duty and high transaction costs. As a result, demand for rentals has increased, placing landlords in a stronger position. In the prime markets of London, rental growth of 5.3 per cent in the first six months of this year followed annual growth of 11.6 per cent in 2010. But clearly these rental movements need to be considered in perspective. 'In a market heavily dependent on demand from those employed in the financial and business services sector, rents fell by 14.6 per cent between March 2008 and June 2009 as the banking crisis unfolded,' says Ms Barnes of Savills. 'The recent strong rental growth could simply be seen as the market playing catch up, although there has also been a shortage of supply.' The central London market recorded the highest rental growth in the first half of this year rising by 6.7 per cent as corporate demand increased from key employees and their families who were relocated to the capital. Until the stock market upheaval and further downward lurch in the economy, the prime markets of North London, including Islington and Hampstead, experienced the sharpest rise in rentals. The East of City markets that include the Docklands and Canary Wharf were initially the slowest to recover in the aftermath of the credit crunch, but made up lost ground when the share market was strong. Now these units will be under pressure. Despite present uncertainty, the plus side for the London property market, especially in prime areas, is that global property players and investors could snap up bargains and limit any price fall (see Pie Chart). Russian oligarchs, Middle Eastern sheikhs, global billionaires and China's super rich have snapped up properties worth £10 million or more. Even so, much depends on the financial health of global international portfolios as London property is still not cheap. Capital values have not soared as on average, London property is below 2007 peak levels in real terms. Ms Barnes estimates that gross rental yields on prime residential property are only 3.5 per cent, while net yields are a mere 2.5 per cent, which is at similar levels to 10-year gilts (UK sovereign bonds). In less celebrious areas, gross yields can range from 4.5 per cent to 7 per cent while net yields are only 3 per cent to 5.5 per cent with higher maintenance and tenant risks. Considering that property is an illiquid asset which in London has wide buy-sell spreads and high transaction costs, prices need to fall a fair bit further before they reach bargain levels. The general prediction, considering the economic outlook in the coming year is that capital values will not increase markedly while rental growth could flatten out in 2012.