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London’s property market has boomed since the global financial crisis receded, but many in the real estate sector are wondering how long the flood of investment cash can last.
The city’s popularity among investors is the product of a confluence of factors, several of which have arisen from the aftermath of the financial crisis itself.
Low base rates around the world have driven investors to seek returns in alternative asset classes, while the rise of the global middle class has created a savings glut, triggering the growth of institutional investors that compete for opportunities. Political instability from Russia to the Middle East has also sent wealthy foreigners on a search for safe havens to stash their cash.
The fall in the value of sterling over the past half-decade has made London property look cheap in international terms. Meanwhile, the political environment in the UK has also been stable, with broad cross-party consensus and a transparent legal system giving investors confidence that their assets will be safe and free from political interference.
On top of all that, the presence of buyers and sellers in the market has attracted more participants, making it more liquid – a positive feedback loop.
London has not simply accepted this inflowing tide passively – Boris Johnson, the mayor, has actively set out to court it in his six years at City Hall. Last autumn he made his latest trip to Asia, where he has put particular effort into wooing the Chinese.
“Boris Johnson has been a massive champion for the city, a great global ambassador,” says Jace Tyrrell, executive director of City and Westminster Property Associations, which lobby on behalf of the industry.
Chinese companies are some of the biggest buyers in the capital. Chinese developer Advanced Business Park has partnered with Stanhope, the British developer, to create a £1bn financial district in London’s rundown Royal Docks, to attract Asian businesses into Europe. China Life, the insurer, recently took a majority stake in Canary Wharf skyscraper, 10 Upper Bank Street, while Chinese state-owned developer Greenland Group bought the historic Ram Brewery site in Wandsworth, south London, at the start of this year.
Companies from countries other than China have also made high-profile acquisitions. Indian developer Lodha bought the former Canadian High Commission building on Grosvenor Square, Mayfair, in November 2013. Oxford Properties Group, the property arm of Canadian pension fund Omers, has backed construction of the City’s newest high-rise, the Leadenhall Building (known as the “Cheesegrater”). And big US private equity firms such as Blackstone and Lone Star have also been very active.
The latest entrant to the market is Taiwan. Taiwanese life funds have long been expected by London property advisers, and Cathay Life’s August purchase of Woolgate Exchange in the City was the first step. Analysts at JPMorgan Cazenove hailed the deal as “the first of what is expected to be a stream of Taiwanese investors into London’s commercial property market”, after Taiwan’s regulators ruled last year that insurers could invest in foreign real estate. The move was an attempt to limit rapidly rising property prices in their home market.
“Now we see capital coming into London from a more diverse range of locations than ever before,” says Toby Courtauld, chief executive of Great Portland Estates, one of the West End’s biggest landlords. “If you’re coming from a lot of Asian, Middle Eastern or former USSR economies, the absolute rule of law is massively important. Also the central timezone is very important, because you can trade with Asia and the US in one day.”
These long-running factors are unlikely to change quickly, but other aspects behind the London boom could go into reverse very quickly. With campaigning for the 2015 UK general election getting into full swing this autumn, all it would take is one misplaced policy announcement to send jitters across the property world, say analysts. “The key risk is political uncertainty, in particular with regard to the tax regime, appealing to overseas capital and the immigration rules,” says Tyrrell.
Courtauld singles out the prospect of a referendum on Britain’s membership of the EU – something the Conservative party has promised to deliver if it wins in May next year – as an additional political risk. “It would introduce huge uncertainty, and investors don’t like uncertainty,” he says.
It is not yet clear exactly what will be the tipping point that ends London property’s moment in the sun as the world’s asset class of choice. But it seems likely, whether this year or in a decade, that point will come. Old hands in the London market can remember not so long ago when they were out of favour – and they know that will happen again, Courtauld says. “It would be an error to assume this time it’s different. It isn’t – it is still a cycle.”
Five potential tipping points:
WHAT? Ultra-low interest rates
HOW? Many countries’ interest rates are at historic lows. As a result, mainstream investment classes are generating low yields. Fund managers who need to deliver certain levels of performance to their investors are searching desperately for assets that will produce higher returns. With London property averaging yields of 5-6 per cent, the sector looks very attractive. As a result, cash is pouring into property assets. But this trend is not expected to continue indefinitely. As countries begin to consider raising interest rates in the coming years, other investments are likely to start looking more attractive again.
HOW QUICKLY COULD IT CHANGE? Years to decades.
WHAT? Currency effects
HOW? After the global financial crisis, the pound became relatively cheap compared with property buyers’ domestic currencies. Between 2008 and 2013, sterling fell by nearly a quarter against the dollar and by 11 per cent against the euro. As a result, London property prices that looked eye-watering to locals seemed perfectly affordable to foreign buyers. But this trend has already begun to wane. The pound is appreciating once more, up 5 per cent against the dollar over the past 18 months and 8 per cent against the euro. This has taken some heat out of the London property market. For example, in March 2013 a £1m London home cost 1.86m Singapore dollars; today that is S$2m. If this trend continues, investors whose assets are denominated in other currencies could switch to other property markets.
HOW QUICKLY COULD IT CHANGE? Weeks to months.
HOW? London is often seen as a safe haven by wealthy investors when they want to move money out of their home markets. Property in the capital is a popular choice as a store of value because its ownership structures are relatively opaque, making it harder for assets’ ultimate ownership to be traced. Property owners who hold their homes through a company structure need only to register the name of the company with the Land Registry, not the name of the beneficial owner. Short of the outbreak of world peace, it is hard to see how this trend will change. Given the various Middle Eastern conflicts and rising tensions between Russia and the west, safe-haven effects are likely to continue for the foreseeable future.
HOW QUICKLY COULD IT CHANGE? It is hard to say.
WHAT? Domestic politics
HOW? The UK has seen little political turbulence in recent years, making it feel safe and reliable to international investors. But with the Scottish referendum, next year’s general election and a possible European referendum, political uncertainty has been rising. The increasing political rhetoric in the run-up to the 2015 election could have a particularly strong impact, investors and their advisers say.
For example, the clampdown on foreign property owners who own assets through a company structure has already had a negative impact on building new homes for rent. It has also been blamed for signs of cooling in London’s high-end luxury housing market.
But some property owners regard the new rules as a fee for privacy, which they are willing to pay.
HOW QUICKLY COULD IT CHANGE? Months to years.
WHAT? The global savings glut
HOW? International investors from developed countries with high savings rates, such as Taiwan and South Korea, are finding that their domestic property markets are saturated with cash seeking a home. As a result, they are increasingly looking for investment opportunities abroad. Investors can find yields in London of 5-6 per cent, while in their home markets these can be as low as 2 or 3 per cent. But with yields already near pre-crisis lows for prime property and investors increasingly focusing on secondary assets, rising prices and falling yields could reduce the attractions of property in London.
HOW QUICKLY COULD IT CHANGE? Months to years.
Those worried about the inaffordability of London housing are perhaps better off avoiding Kensington Palace Gardens, writes Feargus O’Sullivan.
The city’s most expensive street, this mansion row behind Kensington Palace made headlines in 2004 when steel magnate Lakshmi Mittal bought a house here for a record-breaking £57m. Last December, the average price here was estimated at £36m.
The street’s florid Italianate houses are only part of the picture, however.
Beneath its lawns, space-hungry owners have excavated large basements containing car parks, cinemas and swimming pools, creating the world’s most luxurious catacomb.