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THE London residential market has been a good investment destination for investors around the world. Nicholas Holt, Knight Frank’s Asia-Pacific head of research based in Singapore, believes that this trend will continue, albeit a slight bump in the road by way of a capital gains tax on non-residents selling their property.
“This change [of capital gains tax] in many ways brings London in line with other markets such as Australia and France,” Holt says. “In 2015, while we expect the new capital gains tax for non-resident purchasers to bring about a slight slowing of the market, we believe that just as the increase in stamp duty was absorbed without too much impact, it will be the same for the capital gains tax.”
Even with this tax and a UK general election next year, he does not see demand weakening, considering how the London market performed in 2013.
“The London property market will continue to perform well. Its status as a safe haven for numerous foreign buyers, the solid demand-and-supply dynamics and low mortgage rates have led to strong price growth,” he says. “In 2013, prime central London saw a 7.5% price growth. Overall, growth in prime central London is now outpaced by that in Greater London, the first time this has happened since the [2008 global] financial crisis, with price growth hitting 15% in 2013.”
While 2013’s performance was good, Holt says the demand and supply for homes also played a big part in the general health of the market.
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| Holt says new capital gains tax will be absorbed without too much impact |
“To understand the demand-and-supply dynamics, we recently made a comprehensive assessment of the planning pipeline for Greater London and set this against the government’s forecast for household growth,” he explains.
“Over the decade to 2022, the government forecasts an additional 525,000 households will require homes in London. This does not include second homeowners, foreigner buyers and students. Therefore, it’s a conservative estimate of demand.
“When we map this pipeline, we can see that the majority of supply is in the east of London, especially Tower Hamlets, Newham and Greenwich. Central London accounts for around 12% of all future supply.
“So, there is likely to be a significant shortfall in supply over the coming years which will underpin price growth.”
This is probably good news for foreigners looking to park their funds in the London market. However, not everyone is looking to make a quick buck as Holt points out that many foreigners buy residential property for their children who are studying in London. Some also buy homes there because they like the lifestyle that London offers.
Some quarters may argue that with house prices being so healthy, it will eventually turn London into a renter’s market with very little homeownership. Holt doesn’t believe this will happen.
“There is a strong rental market in London,” he admits. “This is due to numerous factors and indeed affordability could be one of them as it is in many markets. Britain has a history of homeownership compared with mainland Europe where many rent [homes] for life and this is unlikely to change.”
At present, yields in London are estimated at between 3% and 4%, but Holt asserts these figures depend on factors such as size, location and quality.
For those looking to diversify their portfolio, he highlights three potential areas that one should scout out. The first is London city and its fringes, which he says outperformed in 2013 and are increasingly being viewed as prime residential areas.
The next is Marylebone, which is in prime central London but slightly further out from the traditional centre. It performed well in 2013 and he believes it is a good place to look for deals.
The last area is Farringdon. “This is a key crossrail station that will likely outperform the wider market,” he opines.
Holt will share more information about the London residential market during his presentation titled “Investing in London — is it too late?” at The Edge Investment Forum on Real Estate 2014 to be held at The Royale Chulan Damansara in Mutiara Damansara on April 19.
This article first appeared in The Edge Malaysia Weekly, on April 7, 2014.
