London property market and economy

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04 Mar 2013

London’s stature as a global financial centre is unlikely to change in the medium-term and against an ongoing backdrop of domestic and global economic difficulties, property values in prime central London climbed a further 0.4 percent in January.

According to Knight Frank, the city’s recovery from the financial crisis has been much stronger than that of the UK as a whole and while the wider economy flirted with a triple-dip recession in 2012, London remained resilient, reporting an increase in Gross Value Added (GVA) of 0.9 percent for the year.

According to Knight Frank, the city’s recovery from the financial crisis has been much stronger than that of the UK as a whole and while the wider economy flirted with a triple-dip recession in 2012, London remained resilient, reporting an increase in Gross Value Added (GVA) of 0.9 percent for the year.

Recent forecasts show this growth continuing, and according to the GLA’s medium-term planning projections, London’s GVA growth rate is forecast to be 1.8 percent this year and 2.4 percent in 2014, according to the London Residential Spring Review 2013 report.

Although low, compared to the Office for Budget Responsibility’s forecast, economic growth for the UK of 1.2 percent and 2 percent respectively, London actually stands out favourably.

Liam Bailey, global head of residential research says despite ongoing economic difficulties, the city remains one of the leading global financial centres in the world, alongside New York.

According to a survey of businesses conducted by R3 location, 82 percent believe London’s attractiveness as a place to do business will increase in 2013.

R3 location estimates that there are approximately 20 000 international assignees on long-term assignments in London at any one time - a figure it expects will continue to increase over the next five years.

A competitive exchange rate also benefits London’s property sector and encourages foreign investment.

“London’s stature as a global financial centre is unlikely to change in the medium-term.”

However, he points out that the employment situation in the financial service sector remains bleak.

Data from Morgan McKinley, the specialist city recruiter, shows job vacancies in the city fell sharply last year and this drop shows no signs of abating.

Its London Employment Monitor registered a year-on-year drop in hiring activity in November 2012 of 24 percent.

According to research, while prices for prime central London property increased 0.5 percent since November, currency movements mean that for euro-denominated buyers property values have actually declined by 4 percent in that time, making entry into the market more affordable for European buyers.

“The city’s investment market remains closely tied to the performance of the London economy and the escalation of the Eurozone debt crisis has certainly taken its toll on the rental sector,” says Bailey.

Continued economic uncertainty and threats to employment in the financial sector are affecting corporate relocation budgets.

In turn, the £1 000 to £2 000 per week rental market which has traditionally been supported by affluent city workers has suffered.

“We need to be mindful that these short-term economic difficulties for the rental market are taking place against a backdrop of an increase in demand from tenants which have the potential to boost the sector.”

Bailey says Official Census data shows that the size of the private rented sector in central London has risen by 50 percent since 1991, in line with overall housing demand in the Capital.

The sharp rise in house prices during the boom, combined with more recent credit constraints has limited entry to homeownership for younger buyers.

The recession and falling real earnings have also constrained purchases and there is a wider move towards the private rented sector that looks set to continue, he says.

He points out that while the city economy is still struggling to gain traction, London’s long-term investment appeal is confirmed by the recent growth of the technology and media sectors, a process which should serve to increase tenant demand.

The Prime Central London Index report reveals that demand for luxury London homes from overseas buyers looking for a safe haven for their money, as well as a slice of London life, has helped drive price increases over the last few months.

“The drop in the value of sterling in recent months has made property an even more appealing investment and escalating concerns over the UK economic outlook have increased the pressure on the pound over the last few months.”

According to research, while prices for prime central London property increased 0.5 percent since November, currency movements mean that for euro-denominated buyers property values have actually declined by 4 percent in that time, making entry into the market more affordable for European buyers, he explains.

“Euro denominated buyers who purchased property late last year have seen the value of their investment fall in recent months.”

The Prime Central London Index report reveals that demand for luxury London homes from overseas buyers looking for a safe haven for their money, as well as a slice of London life, has helped drive price increases over the last few months.

However, as the Eurozone crisis continues to drag on, the long-term appeal of owning property in a ‘safe haven’ such as London is unlikely to diminish.

Bailey notes that South Kensington drew the largest number of international buyers as a percentage of sales in 2012, with Knightsbridge, Kensington, Hyde Park and Belgravia also attracting large international interest.

Buyers from France and Italy were the most active Europeans in the market in 2012.

Knightsbridge remains the best performing region in terms of price growth, with a 1.5 percent rise in January. Notting Hill, which has seen prices steadily decline since September, reversed some of these losses with 0.8 percent price growth in January.

On rentals, he says despite a further fall in average prime central London rents in January, an improved outlook for employment and business sentiment should provide landlords with better news in 2013.

He notes that London’s long-term investment appeal can be seen by the recent growth of the technology and media which accounted for almost 30 percent of all office take-up across central London in 2012, a trend that should ultimately serve to increase tenant demand.

Rental applicant numbers were up 23.2 percent year-on-year in the three months to January, although, as has been the case in recent months, the demand was strongest in the sub-£1 000 per week bracket.

Across prime central London rents were either flat or declining in all areas with the exception Kensington where rents increased by 0.9 percent, the first time in 10 months that rents increased, he says.

Average rents in St John’s Wood declined 1.2 percent, compounding the 9.7 percent decline seen in 2012.

“Rents in prime central London will increase by 1 percent this year, before posting growth of 3 percent.”

He adds that they expect to see no significant price movement in the prime central London property market this year, before more moderate price growth from 2014 onwards. - Denise Mhlanga

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