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City & Country: Investment Forum on Real Estate 2014: London market to go from strength to strength

THE LONDON residential property market is set to see continued growth, thanks to demand outstripping supply, said Nicholas Holt, Knight Frank’s Asia-Pacific head of research, in his presentation titled “Investing in London — is it too late?” at The Edge Investment Forum on Real Estate 2014.

In line with the forum’s theme for this year, “Buy, Sell or Hold?”, Holt told an audience of more than 650 that there are still investment opportunities in the London market and the city isn’t going to see a price drop in the next 10 years.

He explained that between 2008 and 2013, the UK and even London’s economy took a beating, no thanks to the global financial crisis, eurozone slump, recession in the UK and anaemic recovery in the UK economy, among others.

“Yet prices in prime Central London are 27% above the pre-crisis peak,” Holt said. “So what does this tell us? It confirms the fact that properties in Central London are one of the safe havens … They have outperformed domestically, both in greater London and the UK market, and also on an international level.”

Pointing to Knight Frank’s Prime Global Cities Index, where 90 prime cities were surveyed over the last five years, Holt revealed that London saw a 64% growth in price, placing it third behind Beijing (82%) and Hong Kong (73%).

“London is the highest ranked Western city,” he said. “It has seen more growth that any of the other European and North American hubs. What we have seen is that the recovery in the UK property market is starting to spread, very much in parallel with the recovery in the UK economy.

“And mainstream markets all across the country, which had been stagnant in the past four to five years, have started to recover over the last 12 months, spurred by government intervention measures such as the Help to Buy scheme, which has really supported first-time homebuyers. The prime Central London market is seeing a slowdown in its growth but it is still growing at a very respectable 7% to 8%. In 2013, it grew 7.5%.”

Interestingly, traditional addresses such as Chelsea, Mayfair and Knightsbridge — which saw price growths of 2.7%, 5.8% and 6.7% respectively in 2013 — were overshadowed by non-traditional addresses in the prime Central London vicinity.

“What we are seeing is outlying Central London boroughs such as the City and City Fringe (15.7%), Marylebone (12.3%) and Islington (11.8%) experiencing the strongest growth in 2013,” Holt said.

However, this was not caused by a lack of demand, he added.

“Recent land registry data confirms our in-house Knight Frank data that volumes in 2013 had hit new heights. In the £1 million to £2 million bracket and in the £2 million plus bracket, volumes in 2013 exceeded volumes in 2012 by about 25%. So the market is very much in demand, even though price growth is slowing in some central boroughs.”

Future demand and supply issues

At the end of the day, price growth will be determined by demand and supply. Holt said, “You have to think about future demand in two ways.

“There is domestic demand — the portion of the market that is dependent on London’s economic performance — and what you might call the global wealth market, of which many high-net-worth individuals in Malaysia are members. It is important to take note of both … In Knight Frank’s annual flagship Wealth Report released last month in Malaysia, there were a couple of results from the surveys we carried out which revealed that London is pretty well positioned, both in terms of domestic and foreign demand, going forward.

“The first is the Global Cities Survey, where we ranked cities around the world in terms of political and economic power, knowledge and influence, lifestyle and so on. In terms of economic power, London was only second in the world to New York. London is a massive economy; it is a global city with leading financial institutions, media and technology, and services industries,” he said.

“And on the foreign wealth segment of demand, London is exceptionally well positioned. We carried out an attitude survey, where we surveyed 600 advisers to 23,000 high-net-worth individuals around the world, and one of the questions we put forward was which city matters the most to you in terms of a place for business, to educate your children, to raise finance and to network, and London consistently came in at number one, not just this year. Many high-net-worth individuals around the world chose London.”

Thus, Holt opined that London’s property market is set to continue growing. He said there is a diverse range of foreign property buyers in the city — they come from Asia, Europe, Russia, Africa, Australasia, the Middle East and the Americas.

“One of the real strengths of the London market is that it is not dependent on any one nationality coming into the market.”

So, is there a risk of an oversupply situation in the London market? Not likely.

“At Knight Frank, we undertook a comprehensive assessment of the existing planning pipeline and set it against the government’s forecast for household growth over the next 10 years.

“Over the next decade to 2022, the government has forecast that an additional 525,000 households will require housing in London. That does not include students and second home owners — a very conservative estimate,” according to Holt.

“On the supply side, we looked at all the schemes with total or outline planning permission, even those at the appeal or application stage … There will be a huge shortfall in supply over the next 10 years, and this is compared with a conservative estimate of demand.

“When we think of where the supply will come from, if we map them on Greater London, you will see that most of the supply will be concentrated in East London such as Greenwich, Newham and Tower Hamlets.

“So, our response to the question of could there be a risk of oversupply — absolutely not. There will be sufficient demand to absorb all new supply in the pipeline.”

One aspect that could affect demand is government intervention. “Two years ago, the government increased the stamp duty for properties priced at over £2 million from 5% to 7%,” Holt said. “What we saw was softer demand in the £2 million to £3 million bracket — a reaction to the increase in the stamp duty. We saw a lot of properties sold for £1.999 million because it is a ‘slap’ tax that taxes the whole of the property and not a progressive tax.”

A more recent government intervention is the introduction of capital gains tax for non-resident buyers. “We think the legislation will be finalised in autumn and be introduced in April 2015, but we don’t know the details yet,” he said. “But this introduction will bring the UK in line with what we’re seeing around the world. This new tax is similar to what you would pay in France, Australia and even in the US.”

However, this is not expected to dent demand. According to Holt, Knight Frank forecast that prime Central London properties will see a 4% price growth this year. “Last year, we forecast a 6% growth in prime Central London and it grew by 7.5%, so we are not far off in our forecasts.”

In 2015, prices are expected to be flat due to the general elections. This, coupled with the introduction of the capital gains tax, will hold price growth down, but from 2016 onwards, prices are expected to see an upward trend again.

For those looking to put their money in the London market, Holt said to follow the infrastructure. The largest infrastructure project in London after World War Two, Crossrail, will see residential properties in areas around key stations outperforming the general prime central market by 6% by 2018.

“Crossrail is an East-West railway line with under and over-ground tracks essentially linking Heathrow to Canary Wharf,” he said. “The key stations are Canary Wharf, Whitechapel, Liverpool Street, Farringdon, Tottenham Court Road, Bond Street and Paddington, and we’re expecting a 1% outperformance within a 10-minute walk to these stations, and a 1.5% outperformance in the key interchanges of Farringdon and Tottenham Court Road.

“If we map the cumulative price growth against our forecast over the next five years, the areas around Crossrail stations are likely to outperform the general prime Central London market by up to 6% by 2018 and possibly more beyond that.”

As a result, Holt said there is still an opportunity in the London market. “London is one of the true global cities; it attracts demand from around the world and with the recovering UK economy, it is boosting demand. There is also a huge undersupply situation, not only in London but the whole southeast of England.”


This article first appeared in The Edge Malaysia Weekly, on April 28 - May 4, 2014.

 

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