For years, the property market in London was buoyed up by investment by foreign buyers, who regarded the city as a safe place to put their money during the financial turmoil following the 2008 crash. But now, the city faces the threat of a bubble, according to Ben Habib, Chief Executive of First Property Group.
Between mid-2009 and the end of 2012, office space in London rose in price by 52%, and the luxury residential market grew at a similar pace. According to the research group Real Capital Analyticals, commercial property deals reached nearly £21bn last year, and over 64% of the money coming into the market was from abroad, a rise from 61% in 2011 and 55% in 2010.
Amid fears of a breakup of the Eurozone and tax rises in the US, together with spending cuts and economic slowdown in China, the flow of money into London has slowed as concerns over the British economy have grown.
Britain’s economy shrank in the final quarter of 2012, and the country’s AAA credit rating could be in danger too. The pound is weaker against the dollar than it has been for six months and that could make London a less welcoming investment environment. As Jeffries real estate analyst Mike Prew puts it, ‘ prime London asset denominated in a secondary currency loses much of its investment appeal.’
Investment appeal is also divided between investors who are looking towards capital preservation, and investors whose concern is rental yield. While the London market ha functioned well in terms of capital preservation its yields remain relatively low. The West End market as a whole yields at about 5%, but some Mayfair properties yield under 4% and that figure is closer to 3% for some luxury developments.
The luxury residential market is suffering a hiatus as the effects of economic downturn percolate. Several banks have made job cuts, leading to worries about demand strength, and some buildings are starting to drop rents to meet reduced demand.
It’s likely that investors will turn their attention to locations outside London. Outside London and the Southeast, office values have dropped by 14% since June 2009, according to property consultant CBRE. The gap in yields between West End London offices and property in the rest of the country is up to 10%, versus 1% to 2% before the 2007 crash. There’s a sign that companies and individuals are “pressed against the ceiling’ of London’s property prices ” unable to spend less or earn more, many are seeking alternatives.
Not all observers agree that the property market in London is in danger, though. Rightmove predicted a rising market over the coming year, saying that throughout 2012 the strength of London’s property market “stood out like a beacon against the rest of the UK.’ Nine of the ten regions whose prices Rightmove tracks saw property prices fall in December 2012 from the previous month and the only rise, in the East Midlands, was by 0.8%.
Frank Knight reported that London’s Kensington region continued to be popular with foreign investors, and Liam Bailey, Frank Knight’s head of global research, predicted that London would retain its safe haven status, and that this would encourage strong activity across all sectors of the housing market. In 2012, 70% of London property sales were to foreign buyers, according to Frank Knight.
If London faces a bubble and the rest of the country faces stagnation, what does the future hold? According to the financial management company PRUPIM, there could be a return of money to the very southern European markets that so recently saw investors flee to Britain. At least one foreign investor is still interested in the London market, however: PRUPIM recently sold an Oxford Street block to a private foreign investor for £14.8m, reflecting a net initial yield of just over 3%.
Photo credits: Henry via Flickr