London property is a safe haven investment asset
- London property is a safe haven asset when it comes to real estate in general, with minimal risk tied to London as a city and property being a collateralized asset.
- The general demand and supply mismatch drives property prices and recent international demand surges (from mainly Russian, Chinese, Italian and Arab investors) have created hubs in London.
- The market presents the opportunity to either ride the equity gain as prices increase, or enjoy greater rental yields in the event of weakening prices driven by local demand shifting to the rental market as opposed to the sales market.
Exhibits strong historic and projected price growth
- Historic price growth is strong and accounting for forecasted pricing, CAGR is healthy at 8.1%.
An unregulated market
- London is the most cosmopolitan city in the world and it has the most de-regulated property market. Unlike other major cities, New York or Tokyo for example, anyone can invest in property in London and, if they choose, let that real estate investment out. In London there are no rent controls or real estate restricted ownership rules that the property investment individual needs to worry about.
Global demand creates a fiercely competitive London property market
- Given it is a free market, the world’s wealthy real estate investment moguls are looking for the opportunity to acquire a very limited stock of prime property investment assets in central London real estate. Their strategy means that competition for the best property investment assets is fierce. This level of demand impacts local demand with associated shifts to peripheral areas outside of prime central London to other parts.
Fast market – success requires speed
- Much of what is sold is off-market and much is sold so quickly after it is marketed that, unless you are very quick and looking full-time, you will miss it. This is why investing in the best assets can become a full-time job and why many potential investors decide that it makes more sense for them to delegate the real estate investment process to specialists.
Imperfect information – information arbitrage possibilities
- Like all imperfect markets, every investor does not have access to the same information and real estate investing guide. There is no one stop shop for seeing every property available in the market – this presents opportunities that can be capitalised on.
- Stocks are widely advertised on exchanges with prices well known, thus an investment needs to be based on the belief that the price will move for a gain to be made at a later date. However, with property, the gain can be made immediately at the purchase price point if deemed to be below market value.
Prime Central London values are correlated to the growth in wealth of global High-Net-Worths (HNWs)
- Between 2007 and 2011 60% of the Prime Central London residential market by value was bought by non-UK residents. Asia Pacific is the fastest growing area for HNWs but is under-represented as a percentage of Prime Central London buyers.
- Deloitte’s forecast HNW wealth to double by 2020 (7% Annualised); click here for the report.
Exposure to the world economy and indirectly to emerging markets growth
- By having your investment in London property you are not only exposed to the London economy but the world economy.
- It is the worlds’ rich who come to London to buy these prize properties and so as they get richer, so they want to own in the most sought-after real estate market in the world – prime London.
- For 20 years, London residential property has been, and will continue to be, an asset-backed, legitimate way to play emerging market wealth creation.
London versus the rest of the UK
The rationale for investing in London, as opposed to UK plc, is underpinned by a structural domestic interest rate imbalance.
- The UK’s anaemic GDP numbers would, without London’s contribution, be deeply concerning reading for the UK government. This has always been the case.
- No G20 country is so dominated by the economic activity of one city. This has led the Bank of England interest rate more often than not to be wrong (i.e. too low) for London.
Demand clearly outstrips supply
- On the whole, demand for land will in the long run never disappears. Real estate asset attractiveness is derived from the fact that demand for land is resilient throughout the ages with more stable fluctuations versus other marketable securities.
- Let’s look at the supply and demand basics. Demand for housing in London has been growing but supply is stagnant. Demand is up because London’s permanent population is growing through natural increase and migration (from abroad and elsewhere in the UK) and there’s an increasing group of part-timers: wealthy foreigners who want a London base.
- In terms of construction, the rate of new build has increased, but still doesn’t come close to match the number of new households in London—so in pure numbers term the housing deficit is growing, which tends to push up prices. There are many reasons for this, and each commentator has his or her favourite. They include the greenbelt, NIMBYism and ‘land hoarding’ by developers.
- Cheerleaders for a price crash want one thing: to buy. With such a large reservoir of potential buyers, it’s difficult to envisage much more than a pause in prices.
- The London Plan acknowledges the evidence that housing requirements are higher than this minimum; indeed the latest household projections indicate an annual requirement of 36,000. More new homes are needed to house London’s expanding population which could increase by 1.2 million people to 8.6 million by 2031, according to the London Plan. Since publication of the Plan, the most recent population projections from the Office for National Statistics have put London’s population in 2031 at a staggering 10 million people.
- Despite plans to increase housing supply, the fundamentals that have driven London price spiral are deeply restricted supply, a fast-growing population, cash buyers, investor-landlords and the capital’s role as a safe haven for the global elite’s billions.
Transport and Infrastructure projects
- Boris’ London Infrastructure plan 2050 proposes expanding the Overground and commuter rail lines to carry around twice as many rail passengers by mid-century, providing a capacity boost ‘equivalent to a second Underground network’. There are plans for a £30 billion new inner ring road tunnel that would be tolled and could reduce congestion by 20% in the heart of the capital.
- The plans build upon the existing transport strategy proposals running up to 2031 and include familiar pet projects such as Mr Johnson’s desired four-runway Thames Estuary airport and a call for Crossrail 2 – a new north-south line linking Wimbledon to Hackney – to be delivered by 2030 (though the former seems like it has just been dumped!)
- It also lists a multi-billion Bakerloo line extension, new East-London river crossings, four-tracking the West Anglia lines, a South London Metro and 200km of new cycle highways.
- Crossrail 1, Crossrail 2 and Northern Line extensions, are making once seemingly inaccessible parts of London reachable and accordingly driving prices upwards. Additionally, money pumped into Liverpool Street’s Spitalfields, Battersea development, the Elephant & Castle regeneration programme, as well as foreign investment into Bayswater, demonstrate examples of greater investment to improve infrastructure, with expected gentrification of London’s pockets raising property attractiveness. Deprived southern and eastern parts of London are coming to the fray as better investment options versus traditionally sophisticated northern and western parts of London. London is expanding with developers rushing to zones 3 and 4 to cater for greater demand to further parts of London, having been shifted out from unreachable prices in central London.
- Mortgage conditions, tightened in the wake of the Global Financial Crisis, have now begun to relax and loans covering 95 per cent of property value are again available. Underpinning these is London’s pre-eminent position as a national and global centre of governance, finance, education and culture. Persistently maintained low interest rates and encouraging lending from banks have increased cheap mortgage lending. Next, Help to buy schemes and SDLT adjustments show politician staunch efforts to prop up the property prices for the foreseeable future.
London Property Overall
- Investment Highlights
- Unregulated market – arbitrage
- Foreign demand, resilient market
- Supply and demand dynamics
- Attractive leading city, thus market completely different to rest of the country
- More liquid than other real estate investments with strong likelihood of being able to liquidate fast
- Lots of infrastructure projects driving pockets of growth
- Investment Risks
- Relatively more expensive versus other real estate assets around the country.
- Competition between buyers often strong
- Illiquid aspect for real estate assets in general versus stocks
Read on by clicking here for Londonpropertyanalyst’s recommended guide on what makes The Successful Investor Mindset.
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