Is London property losing its investment allure?

Is London property losing its investment allure?

Property in the UK capital has been the most highly sought after in Britain for a generation. But is buying in London now losing some of its appeal?

UK bricks and mortar is one of the most in-demand investments in the world right now.

Chinese equities are currently the epitome of volatility. The once reliable property markets of Hong Kong and Singapore are stuck in losing streaks they don’t seem likely to rectify anytime soon. While investors in South Africa are desperately searching for a rand-hedging asset to protect themselves from a domestic economy that the country’s finance minister recently described as “in crisis”.

Meanwhile property investors in the UK continue to see the value of their assets rise and the level of their monthly returns grow, in an economic environment that’s stable.

For many, particularly international investors, London has historically been the go-to property market to buy British assets. From the widely-reported high levels of capital appreciation and its availability of luxury real estate, to its global standing as an important financial centre, there have been many reasons why London has historically been the number one destination for UK property investors.

However, overseas buyers now face a problem. Newly elected London mayor Sadiq Khan last week vowed to crackdown on the sale of real estate in the city to international investors. What’s more, his words came at a time when buyers were seeing a fresh spiral in the cost of buying in the capital.

So has London lost the strength of its investment credentials?

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No: It boasts a proven track record of returns

In 1998 the average London property cost just under £100,000. Fast forward 18 years to 2016 and that figure now stands at just over £450,000, representing an ROI of 350%.

And that rate of growth is particularly significant when compared with the rest of the country. Between 2010 and 2013 London values had risen 13%. In contrast just two regions in the rest of the UK registered even marginal growth, as Britain’s real estate sector began its recovery from the 2008 global economic crisis.

No: Home to the UK’s largest rental market

High property values continue to price many Londoners out of the owner-occupied sector.

At the turn of the millennium 60% of people living in the capital owned their home. Now, however, one in four people living in London rent, while over the next 10 years the proportion of homeowners is expected to fall to just 40%.

Investors will also be aware that London boasts Britain’s highest rents. Even unconventional lets such as converted cupboards under staircases have been reported to command as much as £400 per month in London, underlining the imbalance between the supply and demand of London rental property.

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No: It is the UK’s economic heartbeat

London’s location naturally makes it a strong investment prospect.

It’s home to the UK’s largest economy. London is Britain’s largest employer and the country’s financial centre.

And the exclusive real estate many international investors seek is found here, too. The highly desirable postcodes of Chelsea, Kensington and Mayfair offer plush Georgian mansions and opulent penthouses.

Such is London’s desirability, as well as its record of driving returns, overseas investors bought almost one in two new homes built in central London in the two years to June 2013.

Yes: London’s growth cycle is ending

Demand for property in London is falling – and that’s having a detrimental impact on the performance that established London as a property investment stronghold.

In April analysis provider Propcision reported that some properties in the prime central London sector have seen asking prices slashed by as much as 40% since coming onto the market. It was supported by Savills’ research which found that prime London property suffered a 0.6% fall in value in the first quarter of 2016.

This slowdown triggered PricewaterhouseCooper to downgrade London in its Urban Land Institute’s Emerging Trends in Real Estate index from a top 10 city to 15th, lower than even the volatile Turkish capital of Istanbul.

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Yes: It’s reached an affordability ceiling

As mentioned, the average value of a London home is now over £450,000. Invest in a prime central London property and you must be prepared to pay as much as £600,000 to secure it.

For many global investors looking to enter the London for the market for the first time, those values are simply too high for a cash investment. Whether you’re an investor from the Far East currently trying to come to terms with a fluctuating Chinese yuan, or an investor in South Africa in search of a rand-hedging asset but unable to move more than R10 million (£445,000) out of the country each year, London is fast becoming unaffordable.

And that’s before investors must consider the new rates of stamp duty land tax (SDLT) that came into force on April 1st. Both international investors and domestic investors purchasing an additional home must now pay a 3% increase in SDLT, meaning that those buying an average priced prime central London property must now pay £38,000 on top of the sale price.

Yes: Higher net yields can be found elsewhere

London may have the highest rents in the country, but with the initial cost of acquiring property substantially higher than the rest of the country, monthly returns are actually higher in other parts of the UK.

Online property marketplace LendInvest believe investors could achieve 200% higher yields by leaving London and turning to cities such as Manchester, currently ranked number one for property investment yields in Britain.

Yield growth in prime central London also fell to an 18-month low in December, as investors now struggle to find tenants willing to spend over 60% of their monthly income on rental costs.

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Yes: There is now a clampdown on London’s international investors

Newly elected London mayor Sadiq Khan has made housing one of his top priorities in his new role.

His initiative, Homes for Londoners, aims to “build the genuinely affordable homes” the capital needs across all property sectors. It means that the people who live in London will have the first access to newly available property, while those investors and developers who buy up land and homes and leave them empty will be issued with ‘use it or lose it’ warnings.

Investor summary

London boasts an enviable track record of growth. For years its been a key global market for the international investor community, one that assured them high returns in a stable economic environment.

But all indicators suggest its growth cycle is coming to end, while performance in other key UK cities are quickly lessening the strength of London’s investment argument.

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