Housing: Foreign players in the property game

Foreign property buyers may be looking beyond London’s most pristine streets to purchase in less desirable parts of the capital but some estate agents argue they are not distorting the housing market for one simple reason: most live and work in London. As mansions on the streets of Kensington have been bought up by Russians and Italians, and even new-build developments in less prestigious areas are being advertised in Singapore and Hong Kong, some have feared a new housing bubble fuelled by foreign money.

Tales abound of whole blocks of flats left empty by arm’s-length investors awaiting capital return, but estate agents insist that changes in the market simply reflect the international metropolis that London has become. Yolande Barnes, director of residential research at the estate agent Savills, argues that blaming foreign investors for fuelling a boom in London house prices is “verging on the xenophobic”.

“There’s a lot of money in London, whether it is from UK nationals or foreign nationals, and simply not enough housing,” she says. “It’s true that the middle class has never been able to live in Mayfair. But ‘Mayfair’ has now become a lot bigger – and includes Bermondsey.”

She says the number of foreign buyers – about 38 per cent of purchasers of prime London property overall – is close to the 35 per cent of Londoners who are born overseas. As few are predicting the mass departure of migrants, analysts do not think the bottom is likely to drop out of this market any time soon.

The housing charity Shelter says the UK is building half of the 250,000 homes required each year to meet rising need. A shortage of housing has meant the proportion of homes in the capital owned with a mortgage dropped by 18 per cent in the decade to 2011, while private renting rose by 63 per cent, according to census data.

Some in the property market do worry that the surge in overseas buyers causes problems for domestic would-be homeowners.

“It is fantastic that London has this magnetism, but the reality is that prices have skyrocketed and are, for many locals, simply out of reach,” says Charles McDowell, an estate agent specialising in prime London property. “It has existed at the top end of the market for a long time, but the overseas interest in the mid and low market housing is relatively new.”

Liam Bailey, global head of residential research at Knight Frank, the estate agents, says foreign buyers might be looking beyond traditional areas such as Kensington and Chelsea precisely because they live and work in the city. The eurozone crisis has drawn more European professionals to London to develop their careers or businesses, he adds. “This is especially noticeable in areas like the City fringe and the Southbank – areas which were not on the radar of wealthy foreign buyers a decade ago.”

Foreign buyers are more dominant in the new-build market, purchasing nearly three-quarters of new homes in central London. Most of these are advertised at overseas events in places such as Singapore and Hong Kong before being offered to UK buyers, according to research from Knight Frank.

But the new-build market is a small section of the whole, about 20 per cent of all transactions in 2012, and buyers do rent out the flats they purchase, says Savills’ Ms Barnes. “It seems to be a popular notion but if the lights are out at 8pm it is because the residents are out in London enjoying themselves or working long hours – not because they are empty properties.”

Mark Prisk, the housing minister, warns not to “throw the baby out with the bathwater” when talking about foreign buyers. He says money from foreign buyers willing to buy off-plan helps developers get new schemes built – which leads to a greater supply of housing for everyone. “It is a mistake to think if we bar people from abroad from investing in housing, this will help. All it will do is it will never get off the ground.”

For Henry Overman, a professor of economic geography at the London School of Economics, there is a simple explanation for London’s house prices: you just need to “do the maths”. “In the [2011] census the population went up by 4m but we built 1.4m homes in a decade,” he says, adding that the trend was seen outside London where there were far fewer foreign buyers. “In southern Manchester, property prices are pretty high relative to incomes, which is put down to a supply constraint and domestic demand …prices are high in most successful places in Britain.”

While few dispute that there is a shortage of housing in London, some argue there are areas of the market that appear overheated. Analysts at Fathom Consulting, the research and consultancy company, say valuations of prime central London property are more vulnerable. The price of a typical property in the most expensive parts of London is 6.5 times the national average – up more than 20 per cent in the year from mid-2012.

Danny Gabay, director of Fathom Consulting, says prices of high-end central London property are more driven by global equity prices and currency flows than house prices in the rest of the UK. He believes that the withdrawal of quantitative easing by the US Federal Reserve is the biggest threat to house prices in the most expensive central London areas, which he thinks are about 10 per cent overvalued.

“The gradual withdrawal of monetary stimulus by the world’s central banks risks removing one of the key supports to global asset prices, including prime central London,” he says.

But owners of some of London’s most prestigious properties could put their faith in the new governor of the Bank of England, according to Mr Gabay. If Mark Carney can convince markets that policy tightening in the UK remains a “very distant prospect”, prices could just about stay steady, he says.