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

DCHere it is: the final instalment If you haven’t read parts 1 and 2, you should take a look at those first. If you’re returning to pick up where we left off, I can only advise that you remember the many positives outlined in the first instalment. For now, ‘The Dark Side’ continues…

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WHAT? Domestic politics

HOW? The UK has been a relative stranger to political turbulence in recent years, lending it a safe and reliable glow with which to court international investment. But with the 2015 general election and a possible European referendum, and the recent vote on Scottish Independence (regardless of the outcome), the threat of political uncertainty has been looming on the horizon. The various party political election campaigns, and the associated glut of political rhetoric, could have a significant impact upon investors and their decisions in the run-up to the 2015 vote.

The clampdown on foreign property owners, for example, who hold assets through a company structure, has already had a negative impact on the building of new residential properties for the rental market. While some property owners regard the new rules as a fee for privacy, which they are willing to pay, others in the industry have blamed the regulations for signs of cooling in London’s high-end luxury housing market.

HOW QUICKLY COULD IT CHANGE? Months to years.

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WHAT? Geopolitics

HOW? London has long been seen as a financial safe haven by wealthy investors seeking to move money out of their home markets. Property in the capital is a popular choice as a store of value because its relatively opaque ownership structures make it more difficult to trace assets’ ultimate ownership. Property owners who hold their homes through a company structure need only to register the name of the company with the Land Registry, not the name of the beneficial owner. And, given the various Middle Eastern conflicts and rising tensions between Russia and the west, it is almost impossible to see how these safe-haven effects will not continue for the foreseeable future.

HOW QUICKLY COULD IT CHANGE? Much too difficult to say.

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WHAT? The global savings glut

HOW? International investors from developed countries such as South Korea and Taiwan, where savings rates are high, are currently finding that their home property markets are already saturated with investors looking for somewhere to place their surplus cash. Consequently, they are tending to look for investment opportunities abroad in ever-increasing numbers. In London, such investors can find yields of 5-6%, while in their home markets promise less than half that figure. However, with investors increasingly focused on secondary assets and yields on prime central London property already approaching pre-crisis lows, rising prices and falling yields might reduce the attractions of property in the capital.

HOW QUICKLY COULD IT CHANGE? Months to years.

Wider UK Housing Market Now Outpacing Prime Central London (PCL) Property

One_Hyde_Park_007Industry news has been dominated in recent weeks by the sale of Penthouse D in London’s iconic One Hyde Park development for £140m in ‘core and shell’ state, making it the city’s most valuable property, with or without internal walls. The price is evidence that even at the very top end of London property, there are still international buyers – in this case as unnamed Eastern European – looking to diversify and protect their wealth by investing in the capital’s real estate.

Despite the strengthening pound making inward investment comparatively more expensive for most international buyers, prime Central London (PCL) property prices have continued to rise in recent weeks as increasing interest from both foreign investors and domestic owner occupiers energises the market. In stark contrast to the early stages of the post-financial crisis rally, however, it is secondary London locations including Wapping and Canary Wharf that are now pacing property price gains in the capital.

Within Central London, the discrepancy in recent price performance is now increasingly pronounced. Marylebone, good value in the context of PCL, saw prices rise 4.2% in Q1 and some 19.3% in the year to end-March. By contrast, prices in Chelsea, Knightsbridge and Belgravia rose just 0.6% in the first three months of 2014 and only 5% in the twelve months to end-March.

The strength in these secondary areas partly reflects the greater influence of domestic buyers and partly the changing mood of investors seeking better value. Buoyed by low interest rates, wage growth and a broader economic recovery that is gathering pace, house prices across the UK have continued their recent positive momentum.

According to Nationwide, house prices across the UK rose 1.2% in April and some 10.9% in the year to end to April, the first time that annual price growth has reached double figures since 2010. Meanwhile, the latest lending volumes figures from the Council of Mortgage Lenders show mortgage levels in the UK a staggering 43% higher than a year ago, fueled in no small part by the government’s Help to Buy scheme.