What Could Possibly Go Wrong? London’s Property Tipping Points (Part 1 of 3)

shard_2583070bWith the global financial crisis finally receding, the London property market is once again booming, but many in the industry are already questioning just how long current investment levels will last.

The current attraction of London property as an investment opportunity is down to a rare conference of factors, several among which being directly attributable to the financial crisis and its immediate aftermath.

The rise of the global middle class has brought with it a new abundance of personal savings, but with low base rates worldwide, investors have been forced look for returns in alternative asset classes. Meanwhile, with increasing numbers of institutional investors, competition for opportunities is also on the rise.

As political instability from the Ukraine to Palestine has sent the wealthy on a quest to find safer places to stash their savings, the falling pound has made London property look cheap for those making the conversion to many foreign currencies. At the same time, the UK’s political landscape has been stable, with a transparent legal system and a broad cross-party consensus allying any concerns investors may have over whether their assets will be safe and free from an interfering government. In fact, government has taken a pro-active role in encouraging inward investment in the property market; in his six years as mayor of London, Boris Johnson has actively set out to attract foreign money, going out of his way to court the Chinese in particular, with several visits to Asia.

As it stands, Chinese companies are among the biggest buyers in the capital. In a bid to attract Asian businesses to Europe, Chinese developer Advanced Business Park has partnered with Stanhope, the British developer, to create a £1bn financial district in the rundown Royal Docks. Greenland Group, the Chinese state-owned developer, bought the historic Ram Brewery site in Wandsworth, south London, at the start of this year, while China Life, the insurer, recently took a majority stake in Canary Wharf skyscraper, 10 Upper Bank Street.

And it’s not just the Chinese making high-profile acquisitions. The Canadian pension fund, Omers – through its property arm, Oxford Properties Group – has backed construction of the City’s newest high-rise, the Leadenhall Building (a.k.a. “The Cheesegrater”), and Indian developer Lodha bought the former Canadian High Commission building on Grosvenor Square, Mayfair, in November of last year. While large US private equity firms such as Blackstone and Lone Star continue to be active, the new kid on the London City block is Taiwan.

Taiwanese life funds have long been expected by London property advisers, following the ruling by Taiwanese regulators last year that insurers could invest in foreign real estate. Cathay Life’s August purchase of Woolgate Exchange in the City was the first step, with JPMorgan Cazenove analysts consequently predicting that the deal would mark the beginning of a stream of Taiwanese investors into London’s commercial property market.

And to cap it all off, there is a positive feedback loop constantly fuelling the market – the presence of buyers and sellers attracts more participants, making it more liquid, which attracts more buyers and encourages more sales. And so it goes on.

This fortuitous conference of longstanding factors is unlikely to dissolve overnight, but there are other aspects behind the London boom that could crumble very quickly. More in part 2, next week…