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For London-based estate agent Cici Dong, these are busy times indeed, as more and more Chinese investors flock to the UK capital in search of good property buys. Dong, who works for international estate agent Savills, is in charge of what is believed to be the first dedicated China desk of a London estate agent, which was launched in November to handle increasing interest from mainland Chinese investors.
London continues to see an influx of property investors from Asia not just drawn by the continued weak sterling to search for bargains, but who are also frustrated with government curbs aimed at containing overheated property markets in their home countries. And, while estate agents estimate that a quarter of Chinese investors purchasing property in London do so for their own use (or that of their children studying or working in the city), they are no doubt also attracted by the strong rentals commanded by central London property in the past year and a half.
Last year, rentals for central London residential property rose 16%, a considerable figure, estate agent Knight Frank's London Lettings Index for 4Q10 shows. Central London rents are also at their highest in 18 months, having grown 19% since mid-2009, when declining house prices turned many potential sellers into landlords and caused a significant oversupply of rental properties that dampened the market. In fact, rental rates are now just 5% below the peak achieved in March 2008 before the credit crunch impact was fully factored into the market, says Knight Frank.
Property agents largely attribute central London's strong rental recovery in the past 18 months to several factors, including much healthier employment conditions in the capital (compared with 2009) that fuelled demand for rental property. More pertinently, owing to barriers to owner-occupancy, such as a tight mortgage market and limited supply of properties on sale, a large number of prospective homebuyers in London — particularly first-time buyers — are resorting to renting. Knight Frank's Prime Central London Index for January 2011 shows that while Central London housing stock volumes are 3% higher than they were a year ago, they are still down more than 20% compared with January 2009.
Renting has undoubtedly become increasingly popular in London; research by specialist buy-to-let mortgage lender Paragon Group reveals that 40% of landlords recorded growing tenant demand in 4Q10, compared with 36% in 3Q, with 45% foreseeing demand continuing to grow in 2011. The demand has been so great that agents have apparently had to conduct sealed bids for some properties.
This increased demand for rental property versus the limited supply of housing stock — both for sale and rent — will continue to keep rentals buoyant this year, estate agents say. Rental rates in Central London are forecast to continue to grow in 2011, albeit at a slower rate of between 2% and 5%, compared with 2010.
The continued positive effect of rental growth on landlords' returns will, however, encourage even more investors to enter the market. Already, the UK buy-to-let market is registering signs of recovery; recent figures released by the Council of Mortgage Lenders show that while mortgage lending continue to remain constrained, buy-to-let investing grew 7% in value in 2010, compared with 2009, as the total lending volume rose 22%.
Eager investors looking to jump into the London property market for the attractive rental yield should, however, take note of several factors that could impact their investment decisions. One is rising interest rates; UK interest rates are expected to increase from mid-2011, making mortgages more expensive and reducing yields. And, while landlords can still raise rentals to cover these costs, some estate agents feel that tenants may be price-sensitive, particularly given overall rising living costs. According to Andrew Stanford of property consultants Cluttons, there is considerable resistance among tenants for rental increases of more than 5% in most locations.
And, as always with any property investment, location is a pertinent factor. Unsurprisingly, the strongest areas of rental growth in 2010 were the super-prime locations of Knightsbridge and Mayfair. Nevertheless, this does not discount the strong rental potential of other areas; according to Stanford, returning expatriates to London's banking sector now have lower budgets compared with the market peak in 2007, and are considering neighbourhoods that offer good value for money, such as Pimlico in central southwest London.
Other locations to look out for are the Midtown, City and Docklands areas, which have also held up well. Rentals increased 11% in 2010, bringing them back to pre-credit crunch peak levels of December 2007, reports Hurford Salvi Carr, a property advisory firm specialising in those areas. The rental potential for these areas remains strong, particularly as the 2012 Olympic Games draw closer, as a premium is likely to be attached to rental property with good access to the Olympic Park in East London. Hurford Salvi Carr sees potential for rents in these areas to increase a further 8% to 10% by end-2011.
It is hardly surprising then, to find that savvy Chinese buyers are also zooming in on property in Canary Wharf and the Olympic boroughs with good transport links, keeping the market humming and Savills' Dong busy fielding calls. — The Edge Singapore
Lim Yin Foong was editor of Personal Money from 2001 to 2006. She is currently a freelance editor based in the UK.
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