12 Apr 2013
Prime central London residential prices increased by 0.9 percent in March and by 2.2 percent in Q1 2013 with the biggest price rises in March seen in City Fringe (1.8 percent), Islington (1.5 percent) and Mayfair (1.1 percent).
Homes worth between £1 million and £2.5 million have increased in value by 3.4 percent so far this year, while prices of homes worth up to £1 million are up 2.2 percent.
According to the Knight Frank Prime Central London Index March report, over the past 12 months, price growth in prime central London totalled 8.1 percent and gold fell by 2.3 percent in value over the same time.
Writing in the report, Liam Bailey, global head of residential research, says London’s prime property market continues to be an attractive destination for overseas investors looking for a safe haven to protect against global economic uncertainty.
Bailey explains that many investors would baulk at applying the term to anything other than gold, but the behaviour of the central London property market since early 2009 has shared some pretty compelling similarities to a safe haven.
As the Eurozone crisis worsened, so prices in the wider UK housing market began to weaken as consumer confidence was undermined.
But in central London, demand and prices moved steadily higher.
“Gold has comfortably outperformed prime central London property in the last decade, with prime central London residential prices having risen in value 124 percent in the 10 years to Q1 2013 against gold’s staggering 379 percent growth,” says Bailey.
He says a similar pattern can be seen in the wake of the financial crisis, in the five years to Q1 2013, prime central London homes increased in value by 19 percent, while gold – boosted by an increase in demand in the years following the financial crisis and its safe haven tag – climbed in value by 125 percent.
However, shorten the timeframe and a different outcome is apparent. If you had purchased a property in prime central London 12 months ago, it would have appreciated by an average of 8.1 percent.
Over the same timeframe the value of gold has fallen by 2.3 percent, explains Bailey.
Furthermore, since 2003 the price of prime residential property in London has plunged in gold terms.
In 2003 it would have taken you 4 122 ounces of gold to buy a £2 million property in SW1 while in 2013 it would set you back just 1 893 ounces, he says.
To put this into context, Bailey says 1 893 ounces is just under five of the standard gold bars held as gold reserves by central banks.
In 2002 you would have needed more than 10 bars for the same purchase.
“News that prime central London property rose again in value by 0.9 percent in March should serve to increase its appeal among those looking for a secure asset in which to place their money,” says Bailey.
Buying property in London
According to Mike Smuts, managing director of Smuts & Taylor the London property specialists, for some time now, the Prime Central London residential market has seemingly defied the laws of gravity.
While the rest of the UK, Europe and the United States are generally showing, at best, weak economic growth, the Central London market is booming.
“Prices across London overall have risen 2.2 percent in the past three months, continuing an unprecedented upswing of 10 consecutive quarters,” says Smuts.
Unsurprisingly, given the continued economic uncertainty in much of the world, High Net Worth Individuals (HNWI) around the world continue to favour more tangible and straightforward assets like property as an investment – often seen as safe havens during times of turmoil.
The main international buyers in London in the last three years were from Russia, India, the US, Italy and France. South Africans are sixth overall, he explains.
Asked what is driving price growth in Central London, Smuts says it is undoubtedly the continued growing demand for London property from international buyers.
London has fundamental advantages from its time zone to its native language, its young and growing population to safe, improving transport infrastructure.
“Add to this a financial services industry that retained its global status even in the wake of the financial crisis, the enduring attractions of the city's excellent education and the strong economic and social factors – then it’s easy to see why London remains the investment destination of choice for the world's wealthy.”
According to Smuts, property prices are ultimately driven by supply and demand, and it isn't just the demand side of this equation that has led to the growth.
“Strict planning controls and the lack of land for development in central London are a constant brake on supply.”
London’s population growth is the fastest in the UK, yet new houses are being constructed at a far slower rate.
He says the government estimates a rise in household numbers in London of between 34 000 and 38 000 annually up to 2028.
Based on development levels over the last decade, a realistic estimate of the number of homes which will actually be delivered each year is 21 000.
The Institute for Public Policy Research expects a shortfall of 750 000 homes in England by 2025, with a 325 000 deficit in London.
London's population is expected to grow by 1.3 million by 2031, from seven million at present, while the number of households will increase by 900 000 in the same period, he notes.
“This severe lack of good-quality housing means that London has historically been the first market in the UK to show a price increase, and the last to fall in a downturn,” says Smuts.
South African buyers in London
Smuts says their HNWI buyers have shown that wealthy South Africans are highly sensible with their investments and view London property as a safe haven amid the weak domestic economic outlook, political insecurity and continuing uncertainty about the timing of the global economic recovery.
Yet, buying offshore is not driven by Afro-pessimism but rather by sound financial planning that included diversification across asset classes and markets.
He says while many of their clients buy second homes or properties for their children to use while studying abroad, the vast majority have no intention to formally immigrate and are merely making use of the greatly relaxed foreign exchange regulations to migrate a portion of their wealth to a stable economy with a strong currency, such as the UK.
According to WealthInsight data, there are an estimated 215 000 South Africans living in the UK, approximately 4 500 of which are HNWIs and over 150 of which are ultra HNWIs (UHNWI), with the bulk of these living in London.
Data also reveals that 21 percent of South African HNWIs have second homes abroad as of end of 2011, which is below the global HNWI average.
This reflects the impact of exchange controls which make it difficult for South Africans to move money out of the country.
A large proportion of the HNWIs with homes abroad are individuals who emigrated during the 1990s but have since returned, according to research.
Furthermore, WealthInsight’s research shows that a large proportion of local wealth is currently held offshore as at the end of 2011 and it is estimated that over 20 percent of South African HNWI wealth was held offshore.
Most of this wealth is held in the UK, Switzerland and Channel Islands.
Smuts says property within Central and South West London remain firm favourites with HNWI South Africans and most of these individuals buy in the price range of £400 000 to £800 000 for investment purposes and generate a gross yield of 5.5 and 6.5 percent.
For those buying properties for personal use, trophy properties in the most desirable locations such as Kensington, Mayfair and Knightsbridge are often at the top of their shopping lists.
“We have had a number of instructions of late for residential properties in the £1 million to £3 million price bracket,” he says.
Smuts says those buyers looking to enter the market can take a look at a new development, Providence Tower, located on the River Thames next to Canary Wharf.
Prices start at £430 000 for a 630 square foot one bed and around £600 000 for a two bedroom apartment measuring 821 square foot.
Completion is scheduled for the fourth quarter of 2015 allowing ample time for strong capital growth, he says.
The estate benefits from outstanding public transport links with short journey times to the City, West End and Airports. Moreover, Canary Wharf and the new Crossrail Station is just a few minutes' walk away.
Designed by international architects Skidmore, Owings and Merrill, Providence Tower is the final building on the successful New Providence Wharf estate, a high-end residential community located next door to Canary Wharf, the world's banking centre.
Standing at 43 stories tall, the apartments will have panoramic views across London, as well as outstanding interior finishes.
Residents will also enjoy exclusive use of a Sky Lounge and Sky Terrace atop the tower, which will serve as a place for quiet relaxation as well as a hospitality suite for private parties, according to Smuts.
The estate is anchored by a Radisson Blu Edwardian Hotel with a full suite of services, including spa services available to all residents.
Smuts says despite the volatility of the last few years, the UK firmly remains a place to generate and hold wealth, and London has retained its crown and credibility as the world’s financial centre.
“Limited stock and strong demand from both international and local investors have pushed prices to new records highs.”
He adds that this sustained pressure on both the supply as well as the demand side of the equation shows little sign of abating any time soon, and with Sterling at relative weak levels, international property investors will be well advised to act sooner rather than later. – Denise Mhlanga
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