London’s luxury housing market is still in its prime

Demand from overseas investors means high-end London residential property is still a
safe bet for investment, says Colin Sanders, CEO of  prime real estate lender Omni Capital

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Luxury housing in central London remains a safe haven for many overseas investors

London can take it”; four words that carried much weight in the dark days of 1940. Then, of course, they referred to the Luftwaffe’s aerial assault on the capital; but as the debate intensifies about London’s high-end residential property sector and its continuing appeal as an investment centre, it’s an appropriate time to ask if London can indeed take it.

From where I sit, the answer is an unequivocal ‘yes’. To understand why requires a brief examination of the
factors that determine London’s relative attractiveness.

It will come as no surprise that London house prices across all types continue to outperform the rest of the UK, even after a recent softening in annual growth from 12.7% to 7.3%. According to Nationwide’s most recent House Price Index, the average price of a London home is now £429,711 – more than twice the UK average of £194,258.

Prices in London are 39% above their pre-crash peak in 2007. The most expensive borough is blue-chip Westminster, where the average home costs an eye-watering £956,907. Less central, but offering attractive buying opportunities, the borough of Barking & Dagenham has posted the strongest annual price change – up 19% – yielding an average price of £272,935.

The reasons behind these numbers are generally well-understood and centre on two complementary factors: the impact
of overseas investment on the capital’s property sector; and, more fundamentally, the effects of supply and demand.

While average London prices continue to perform strongly, the position for the prime sector is less clear. Here, and particularly in the £10m-plus ‘super-prime’ bracket, the hype following the Conservatives’ unexpected election triumph failed to produce the double-digit rise in prices anticipated by many.

Up-front costs rise

David Cameron’s victory might have removed the ‘mansion tax’ issue from the political agenda, but last year’s increases in stamp duty for properties worth more than £1.1m have added substantially to purchasers’ up-front costs.

Identifying this as a significant factor affecting prime residential prices, in its recent Global Briefing, Knight Frank observes that while its own super-prime sales enjoyed robust growth in the first half of 2015, volumes across the super-prime sector as a whole were down 20%.

Knight Frank also reports that price growth in the super-prime bracket has underperformed the prime central London average, growing just 4% in the 24 months to June, as opposed to just over 10% in the wider prime bracket.

Such reports are causing a number of commentators to sound more pessimistic about London’s chances of avoiding a ruinous property bubble.

Taking a more moderate position, Nationwide’s chief executive nonetheless observed recently that he detected signs of “natural moderation” emerging in the capital’s housing market and growing evidence of potential buyers “walking away” from over-priced transactions.

Why might this be? Some point to the risk of prime property depreciation (think: top-end automobile marques), while others fret about rising interest rates, the stronger value of sterling, tighter financial services regulation, speculation arising from off-plan purchases and, of course, affordability. The price of an average London house is now more than eight times the salary of the average first-time buyer.

Other causes of concern include the aforementioned stamp duty increases, reforms to close capital gains tax advantages enjoyed by foreign-domiciled investors, changes to the status of ‘non-doms’ and a determined challenge from global competitor cities keen to attract mobile capital.

So where does this leave London? According to a recent article in the South China Morning Post – the newspaper of choice for Hong Kong’s elite and an important influence on UK property-investment sentiment – London remains a safe haven for Chinese property investors.

Something for every strategy

While understanding that ‘entry costs’ have risen due to China’s recently-depreciated currency, the author, a senior figure in international property investment, confidently asserts that “London property offers something for every investor’s strategy and risk appetite.”

He identifies property as a low-liquidity asset class attractive to those seeking stability and greater certainty in their investment strategies.

For Chinese investors battered by that country’s recent stock market turmoil, London property, he says, “continues to offer capital growth and steady yields that outweigh the recently-increased cost of investing in the world’s ultimate safe-haven market.”

Echoing my observations below, the author explains that the enduring Chinese love affair with London real estate is due
to the UK’s improving economy, strong sovereign currency, market transparency and rising population, all of which are helping drive demand.

Balanced against the lack of available property and a chronic undersupply of
new stock, he judges that the London market “offers [Chinese] investors perfect conditions for the longer-term, five-to- 10-year investment play most investors would be wise to take”.

One might reasonably conclude that what is good for the Chinese is equally good for other overseas-based investors.

Knight Frank takes a similarly positive, forward-looking view. In the super-prime bracket, it has identified an emerging trend among younger buyers – high-flyers who have made substantial fortunes in technology and financial services – for seeking ‘added-value’ when making property purchase decisions.

The growing demand for bespoke add-ons, in the form of secure parking, concierge services, leisure facilities etc, is causing well-heeled purchasers to look beyond the traditional ‘golden postcodes’ for high-quality property.

This helps explain why the area – and  attendant opportunities – encompassing £10m-plus sales is now considerably larger than it was three years ago.

Demographics are also in the capital’s favour. With the UK population predicted to exceed 70m by 2024 – a jump of 10m from now – and net immigration showing no signs of receding, it is clear where most of the newcomers will settle. As the UK economy continues to improve, so will demand for high-quality living space.

Unrivalled attractions

London also continues to offer overseas investors an unrivalled plethora of attractions – from superb cultural and recreational facilities to world-class educational institutions, the English language, a respect for the rule of law and an envious position as a global hub between the US and the important financial centres of the Far East.

Current and planned infrastructure improvements – such as Crossrail – will only strengthen the appeal of the metropolis as an investment centre. However, the nature of the ongoing debate about airport expansion is clearly not helpful to London’s cause.

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Sanders: London, a “huge opportunity” for lenders

From my position as a lender, London continues to offer huge opportunity. I’m not complacent about the risks that are building and recognise that certain locales should be avoided because of planning difficulties, unrealistic valuations or exit expectations that cannot be realised.

I recognise, too, that we face strong headwinds from interest-rate rises, the full impact of the Mortgage Market Review, unhelpful (and often ill-informed) EU interventions and a strengthening of sterling. Their effect will be to slow the pace of growth in the quarters ahead. But, as my examination above reveals, this is far from the whole story.

At Omni Capital, we believe London can not only take it but has more to give. We have made the capital our focus and despite our relative youthfulness, have already provided much-needed funding across a variety of residential and commercial projects. We believe this is, indeed, a prime time for London property. n

 

Colin Sanders is chief executive officer of Omni Capital, a leading provider of short and medium-term prime real estate finance

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