Why SA property investors love London

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14 Jun 2013

According to Knight Frank, average rents across the UK rose by 0.2 percent in April and are up 3.9 percent year-on-year (y/y) as demand continues to outstrip supply in many areas.

Houses in South West London, in Sisters Avenue in Clapham, are selling for between £1.725 to £1.925 million.

Greater London leads the way, with rental growth of nearly 8 percent, while other regional areas have seen more modest growth, says Gráinne Gilmore, head of UK residential research at Knight Frank.

However, Gilmore points out that in prime central London average rentals for luxury homes edged down by 0.1 percent in April and are down 3.2 percent y/y, reflecting how this market is more closely aligned to the City jobs market – a sector which has been turbulent since the financial crisis.

“Despite the fall in rents, activity in this market still remains strong, with the number of new tenancies agreed up 30 percent in the first four months of the year compared to the same period last year,” says Gilmore.

South Africans investing in London

According to Dr Andrew Golding, chief executive officer of the Pam Golding Property group, over the years, South African residential property investors looking for international property investment destinations, have tended to favour the London buy-to-let market perhaps more than any other international market and this remains the case in the current market.

Apart from the natural and historical affinity South African buyers have for London, investors continue to be attracted to this market because of its strong fundamentals.

“London has an extraordinary track record of rental and capital growth which makes it an ideal long-term investment - and inflation hedge, not to mention potentially a currency hedge - for a residential buy-to-let apartment which provides monthly rental income,” he says.

Golding points out that London is considered one of the biggest rental markets alongside New York, contributing 20 percent of the GDP of the whole of the UK and home to approximately 75 percent of the Fortune 500 companies’ offices.

Greater London covers 620 square miles and has a population of just over eight million, and with 13 000 people who live on every square mile of London, tenant demand is strong and consistent.

 “South African investors are interested in the rental yields which average at six percent annually, with rent increasing at approximately three percent per annum.”

According to Dr Andrew Golding, chief executive officer of the Pam Golding Property group, over the years, South African residential property investors, looking for international property investment destinations, have tended to favour the London buy-to-let market perhaps more than any other international market and this remains the case in the current market.

He explains that this is in a low inflation environment with a strong and stable currency, with long-term predictions of good yield growth making rent-related investments even more attractive.

Capital appreciation is also sound with the housing index growing at nine percent compounded per annum over the past 17 years, including the 2008 economic crisis.

And since the credit crunch, increasing demand over supply has driven rental growth despite a weak economic recovery, while low levels of residential building activity mean the supply of rental accommodation has not kept pace with rising demand, particularly in employment hotspots, according to Golding.

Furthermore, London attracts South African investors and other international investors because of its entrenched property laws which protect landlords, combined with an efficient industry of property related professionals such as solicitors, agents, property managers and lenders.

Property prices

Knight Frank reports that prices in the prime central London market continued to climb in April, marking consistent monthly price rises since November 2010.

Prices rose by 0.7 percent during the month, taking the annual rise to 7.7 percent and are now nearly 20 percent higher than the previous market peak in March 2008.

Meanwhile, Savills report that prime central London property has recorded an unprecedented two and a half years of steady annual growth of up to 10 percent, marking a period of stability not seen since Savills’ index was established in 1979.

Prices in the South West are 17.6 percent above their former peak driven by domestic buyers who are either making money in the private financial sector in the West End, or by sellers from prime central areas relocating out of the core.

This ripple effect has led to annual house price growth in the prime South West of 5.6 percent, which seems to be accelerating, with three percent seen in the first quarter of 2013 alone.

Jane Clough, London sales manager for Pam Golding Properties’ (PGP) International & Projects Division, points out that South West London is an area with a proven history of strong rental demand and capital growth.

It’s an area favoured by local families and professionals seeking quality accommodation so they can live and work in London.

Savills reports that all 15 of the one and two bedroom units in Cavendish Building, the second phase in the increasingly popular Clapham Park, were recently quickly snapped up mainly by London buyers – mostly young professionals, indicative of the desirability of the location and the development. Cavendish Building is close to the trendy cafes and shops of Abbeville Road, and within walking distance of Clapham Common and Clapham South tube stations. The units were priced from £250 000.

“What makes for a successful investment opportunity is acquiring a property with consistently strong rental demand and at a favourable yield, and the other key aspect is to have strong letting and property management in place to ensure maximum rental growth with minimal vacancies,” according to Clough.

She says an investment strategy that is increasingly gaining interest among savvy global investors is to establish a portfolio of residential properties which can be rented out, thereby achieving a long-term passive income stream.

“In pursuit of market and currency diversification and stability, many of these investors are establishing residential portfolios in London.

Clough notes that Census data show that the number of households renting privately increased from 2.6 million to 4.2 million between 2001 and 2011 across England and Wales.

The figure for the UK as a whole is estimated at 4.8 million for 2012, up from 3.4 million five years ago and private renting now accounts for almost 20 percent of the total value of the housing stock of the UK.

The key reason for this is the increased difficulty in accessing home ownership. As house prices increased relative to incomes through the late nineties to 2005, so the cost of raising a mortgage deposit increased.

The shift to renting, which began at the turn of the millennium, gathered pace post credit crunch as the size of mortgage deposits required by banks rose, increasing beyond the capabilities of many, explains Clough.

“This increased demand for rental accommodation, seen against a lower level of supply, has driven rental growth despite the underlying challenging economic conditions.”

Rental growth has been highest in London and the South East, particularly in markets attractive to more affluent young households.

Savills anticipates average rents in the mainstream market to increase by 18.2 percent by 2017 and even higher in certain areas of London, and demand for London buy-to-let properties is further enhanced by foreign investors who see London as a ‘safe-haven’, not only in terms of a secure property location but also regarding its well-established property legal and finance environment.

PGP is currently marketing properties in One and Three Riverside in Riverside Quarter in South West London – overlooking the River Thames and priced from £365 000.

Houses in South West London, in Sisters Avenue in Clapham are selling for between £1.725 to £1.925 million and at South Bank Tower,  studio, one, two and three bedroom apartments and penthouses are priced from £625 000 to £3.1 million.

Liam Bailey, global head of residential research at Knight Frank, reports that in May rentals rose by 2.6 percent in Kensington and by 1.9 percent in Marylebone in 2013 to date

In St John’s Wood, rentals rose by 1.4 percent, Belgravia by 0.3 percent and Knightsbridge by 0.2 percent.

“Our view, informed by a positive outlook for employment and business sentiment, as well as the cost barriers to owning a home, remains that rents in prime central London will increase by 1 percent this year, before posting stronger growth in 2014 and beyond,” according to Bailey. – Denise Mhlanga

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