London property market: Political stability offers haven for investors

Niche foreign private banks are emerging as a growing force in the £1m-plus mortgage market, as they follow the huge flow of money from rich international buyers into prime London property, viewed by many as a safe haven for wealth.

Once the preserve of traditional UK-based private banks such as Coutts & Co, the private bank that counts the Queen among its clients, and Barclays Wealth, the past few years has seen a growing number of overseas private banks entering the large loan market in the UK.

This surge of foreign entrants ranges from Nordic banks such as SEB Private Bank and Nordea Bank; to Asian banks, including OCBC, a Singapore-based private bank. Other entrants have included Butterfield, a private bank established in Bermuda; EFG, a Swiss bank; and First Bank of Nigeria (FBN).

In total, there are more than 40 private banks active in the UK lending market, says Mark Harris, director of SPF Private Clients, a high-end mortgage broker.

“Over the past two years, there has been a noticeable increase of foreign private banks. London is seen as politically safe and the property market in particular is viewed as robust,” he says.

Mr Harris believes these new lending entrants are following the movement of global wealth to the London property market, as overseas buyers continue to snap up trophy homes in the capital.

According to Hamptons International, an estate agency that specialises in selling homes in the affluent property markets of London and south-east England, as much as 75 per cent of all purchasers in the prime London property market are now international, up from 50 per cent in 2007.

In the 18 months to June this year, a net £6bn flowed into the second-hand and new-build markets of prime London from overseas buyers.

Savills, another high-end property agent, believes this demand from wealthy international buyers is likely to continue. It is forecasting prime property values in the capital to rise 22.7 per cent in the five years to 2016, making the million-pound mortgage market appear a safe bet for many private banks.

“Prime real estate has proved itself a stable safe deposit in uncertain times and in an investment world searching for yield and security, the five-year outlook for prime property is compelling,” says Yolande Barnes of Savills.

Jack Jones, head of specialised banking at Investec, the South African private bank, says most of its lending is to clients in Kensington and Chelsea, and Mayfair. “The super prime property market is attractive because it is large and growing. Our research shows that there were more than 21,000 residential properties on the market for £1m or more during the second quarter of 2011, which is 10 per cent higher than the same period in 2010,” he notes.

Butterfield, a private bank established in Bermuda in 1858, has recently increased its property lending to take advantage of the surge of interest in trophy homes in the capital. While the bank entered the UK market in 2001, it has only recently become active in the large loan mortgage market.

“I think we’ve found over the past year or so that lending high-value loans, particularly against prime central London properties, form a useful part to a banking relationship,” says Andrew Jackson of Butterfield Private Bank.

“We quite often find lending is the first step along the road that hopefully leads to a wider relationship with investment management and other wealth management services.”

Mr Jackson says the bank typically lends only on expensive properties in the prime locations of London. It will consider lending on properties outside of London only to existing customers that already have a relationship with the bank.

“We’re particularly focused on prime central London property. You don’t have to look at many of the property reports, such as Knight Frank or Savills, to see that these areas continue to increase steadily and surely in value,” he notes.

Nigel Bedford of Largemortgageloans.com, a mortgage broker, says property location is a common theme among all the private banks active in the large loan market. “Outside prime central London, they are not really interested,” he notes.

Although there has been an increase in the number of overseas private banks entering the market, many of the most competitive rates are offered via well known, more established private banking names.

According to mortgage brokers, Deutsche Bank, UBS, Royal Bank of Canada and JPMorgan offer some of the most competitive rates to customers that will transfer assets to the private bank.

Barclays Wealth and RBS Private Bank are among the private banks that are attractively priced for those that do not have assets to invest.

The big attraction of offering loans, for both traditional players and the newer entrants, is the ability to create a long-term asset-based relationship with wealthy individuals and their families.

Most private banks believe providing a mortgage for an individual’s home will help form the cornerstone of a longer lasting relationship and open the door to a larger share of the client’s future asset management and banking.

To access the lowest rates via a private bank, clients will usually have to invest other assets with the bank’s wealth management arm – but the amount of funds will depend on the bank.

Simon Gammon of Knight Frank Finance says some banks will price their rates based on how much in assets the customer will invest with them. For example, Deutsche Bank will offer mortgage rates at about 1.25 per cent over three-month Libor to those that invest 25 per cent of the loan amount, dropping to 1 per cent over three-month Libor to those that invest as much as 50 per cent.

Most private banks will err on the safe side and lend at lower loan-to-values of about 50 to 60 per cent. Mortgages via a private bank will also be much more flexible than through the high street banks and building societies. Loans can be secured against a variety of assets, including property, shares, investment holdings and offshore deposits, and are available in a number of currencies.