CAPITAL GROWTH: THE LONDON PROPERTY MARKET

THE PRICE RISE IN LONDON PROPERTY

As investment vehicles go, London property has been a star performer in recent years. Nimbly side-stepping recessions and global credit crunches, prices have risen by 31.6% since the pre-crisis peak (January 2008). And with exchange rates on their side, foreign buyers have seen profits of up to 39% over the past year alone according to Knight Frank research, while Savills forecasts continued growth of 23.1% over the next five years.

With London ranking at number two in the A.T. Kearney Global Cities Index, it is clearly a key player on the world stage. Owning a property here is not only a good investment, it offers a wonderful lifestyle opportunity. Those who can afford prime areas of central London, such as Mayfair, Knightsbridge and Belgravia, have a choice of some of the world’s most beautiful period homes or cutting edge new developments.

Meanwhile, the inevitable ripple effect has pushed up values on the fringes of central London, and once no-go areas are becoming increasingly sought after, offering a more interesting range of options for property investors, especially for those seeking the capital’s next hotspots.

London’s position as a major international centre ensures overseas buyers will continue to be drawn here

Concerns over the property bubble bursting have been largely downgraded to something more akin to a slowly deflating balloon – London house prices saw a fall of 0.1% in September, with 5% of the capital registering falls compared to less than 1% seeing higher prices, according to residential property analysts Hometrack, while an upcoming election, potential mansion tax and interest rate rises, the mortgage market review and a strengthening pound taking away the currency advantage for most overseas buyers will no doubt take more heat out of the market, in the short term at least.

So, the question arises, is there still room for growth in prime central London? ‘PCL continues to show very strong investment potential, probably the greatest in the country over the long term,’ says Naomi Heaton, Chief Executive of London Central Portfolio (LCP). ‘Average annual growth since 1996, when HM Land Registry first published their data, has been 10.5%, including the credit crunch. There is no reason to consider that this trend will not continue over the foreseeable future, as demand continues to outstrip supply.

‘In the last year, there have only been 6,546 sales in the centre of London, which is only six square miles, and on average only 289 new properties are brought to market each year. Until an affordability threshold is reached, this growth will continue.’

Johnny Morris, Head of Research at Hamptons International, believes there is little room for much further growth over the next year or two, however. ‘The drivers for investment in prime central London have changed,’ he says. ‘With global recovery there’s been a shift away from investors protecting their wealth, and other investments are being given a chance again. Many investors have decided to hold on to their property for 10-15 years, and that has slowed the market down.’

‘A moderation in house price growth looks likely over the coming months as supply and demand become more balanced,’ agrees Halifax Housing Economist Martin Ellis. ‘The recent sharp rise in property prices in London means that affordability constraints are expected to dampen demand as will the prospect of interest rate rises.’

In the long term, he expects London property to remain a good investment though. ‘Demand for homes in the capital should remain firm, supported by the continuing strength of the London’s economy, a growing population and the city’s position as a major international centre.’

While prices are stabilising, London never stands still and there’s plenty of action to come, both in established addresses and those undergoing gentrification. Underway after decades of consultation, the new high-speed rail line Crossrail will bring many locations significantly closer to central London, and property prices alongside it have already started rising several years before it opens.

‘Crossrail will have a tremendous impact in linking the west of London to the east of London,’ says Naomi Heaton. ‘The West End will benefit most, as Crossrail comes up for air in Paddington and Tottenham Court Road. Fitzrovia, traditionally a fairly commercial and rundown area, benefits from being right by Crossrail, Oxford Street and having a fashionable W1 postcode. A real investment hotspot but investors will have to move quickly to get a bargain.’

The line will benefit areas east and west of central London, including Farringdon, North Acton and Ealing. ‘They won’t be the first markets on overseas buyers’ lips but if they’re prepared to look beyond the obvious they offer opportunities for value growth,’ says Lucian Cook, Head of Research at Savills. ‘However, if you invest on that basis you have to ask if there is enough existing wealth in the area and if the housing stock is sufficiently good to gather momentum.’

Even in central London, there’s still room for growth. It’s hard to believe that less than a mile from the Houses of Parliament a 195-hectare site is being developed – the transformation of Nine Elms, including the iconic Battersea Power Station, is less a regeneration, more the creation of a completely new London district. Home to the new American Embassy, the site will provide 16,000 new homes as well as retail outlets, offices, restaurants, schools and green spaces.

Then there’s Earls Court (7,500 new homes will take the place of the exhibition centres, along with shops, work spaces and schools), Kings Cross (2,000 new homes on the 67-acre site by 2020) and even Elephant & Castle (3,000 new homes), which despite seeming a million miles from the salubrious addresses of PCL is still in Zone 1.

While there is definitely an opportunity in regeneration areas, especially for buyers who get in early, there are potential risks too, especially with larger developments where high numbers of properties in the pipeline could lead to an oversaturation of the market. Investors, therefore, need to choose carefully where and what they buy.

‘You need to take a long-term investment horizon, at least 10 years, when looking at any significant level of regeneration,’ advises Lucian Cook. ‘The regeneration has to occur, the housing stock that comes with it has to be absorbed into the housing market, and then you have to see value growth on top of it. It’s not a quick in, quick out.’

Away from the formal regeneration zones there are areas that have been evolving more quietly. Stephanie McMahon, Head of Research at Strutt & Parker, believes Victoria is one to watch. ‘It is evolving from being the hub of government to offer more of a leisure mix,’ she explains, ‘and because you’re so close to Belgravia and the West End it’s a prime residential location.’

Developments within Victoria’s prestigious SW1 postcode include 800 new apartments in Wellington House, and 102 new homes at Kings Gate House, formerly Westminster City Council’s base.

Johnny Morris points to two areas of central London with potential. ‘One that has been changing significantly but has been a bit of a second class citizen for a long time is Pimlico,’ he says. ‘It’s seen a lot of wealth displaced from Knightsbridge and Chelsea, and the quality of stock is improving, many of the B&Bs have been replaced by refurbished flats, and the whole area’s had a new lease of life. If the proposal for a bridge over the river goes ahead, this will join Pimlico to the wider area and would have a further impact on the local market.

‘Paddington Basin is another central area that’s seen a lot of development over recent years and has been really popular with investors, as well as with people moving further out looking for more value.’

Other relatively undervalued districts include Whitechapel and Farringdon, with Morris calling the latter ‘a transport superhub, with Crossrail going through, the new Thameslink service, and the existing trains. Whitechapel has been rather scruffy, but because of Crossrail there has been a lot of redevelopment,’ he says. ‘It’s benefiting from the spread of demand out from central London.’

Tom Bill, Head of London Residential at Knight Frank, believes Queensway offers plenty of potential: ‘It runs on to Hyde Park, the epicentre of prime central London, with Kensington to the west, and Mayfair and Knightsbridge to the east. All the golden postcodes of central London are around Hyde Park and yet there’s still potential in the Bayswater Road further north – so there are overlooked pockets right in the middle of prime central London.

‘Even a market with such international renown as Mayfair has potential for high quality residential price growth,’ he adds. ‘It’s been an office district since WWII, but prime residential is coming back.’

He points too to ‘overlooked areas like Bayswater, Fitzrovia and the Midtown area around Holborn, the long corridor between the City and West End which is becoming residential’.

Shirley Humphrey, Director at Harrods Estates, believes Mayfair, Knightsbridge, Kensington and Chelsea will remain strong areas for long-term capital growth, but she notes ‘a rise in interest and investment in Marylebone, Pimlico, Fulham, Wandsworth and Clapham, where families in particular are looking to get more for their money’.

Research from LCP indicates four zones on the outer edges of prime central London which still post average prices under the £1m mark, compared with the market average of £1.64m. ‘These zones are unified by what historically, has been a downside – the ‘commuter effect’ – but which is now an upside, as people wish to have easy access to transportation links and amenities,’ says Naomi Heaton. ‘The main pockets are in the more rundown areas in Bayswater/Notting Hill (close to Paddington Station); around Marylebone station; in Pimlico and Westminster (close to Victoria station); and Earls Court (close to the Cromwell Road linking to the M4).

‘The ingredients for success are lower than average prices together with existing infrastructure and amenities, coupled with pockets of attractive, albeit decaying, architecture. All this adds up to good, long-term growth potential.’

Even Chelsea could offer potential, in the form of the Chelsea Barracks development. ‘It will be a big opportunity when it does eventually happen,’ says Johnny Morris.

WHERE TO BUY IN LONDON NEXT

When identifying areas ripe for investment, Lucian Cook points to ‘novel, new or next door’ locations: ‘Novel is where an area has become fashionable amongst highly paid working Londoners – Hoxton, Haggerston, Spitalfields and areas around Dulwich are examples of where people have gone beyond what might be considered prime London, and where growth has been significant.
‘Then there’s ‘new’, any form of regeneration which unlocks an area’s latent value potential, so examples kicking in now would be Earls Court and Victoria, where if you’re prepared to take a longer term view you’ll get value uplift through regeneration.

‘Finally there’s ‘next door’. If you drew a ring around PCL and said you shouldn’t buy beyond that then you have a shrinking pool of stock because essentially it goes into overseas ownership and doesn’t re-enter the sale pool very often. Therefore, PCL expands at its fringes – Fulham, for example, which has a high proportion of overseas buyers.’

While Fulham saw the best performance in 2013, prices have now stabilised. The areas that showed the strongest growth have been the lower value core prime markets of Islington (prime north) and Canary Wharf and Wapping (prime east of City), according to Savills research, reflecting confidence among young financial sector employees and investors targeting City-based renters.

‘Recently the strongest price growth wasn’t in Kensington & Chelsea or Westminster as you might expect but in Hackney,’ points out Cook, although this is from a relatively low base. ‘Right now the east of City market is one of the strongest performing prime markets but that’s because it didn’t perform well early on in the cycle.’

The City Living report from CBRE, the world’s largest commercial real estate services and investment firm, focuses on how the City is evolving: ‘In recent years price growth in the City has outpaced that in prime London. The gap is closing with new-build schemes in the City now achieving in excess of £2,000 per sq ft. If current trends continue, the City will have caught up with the West End in five years time.

‘Beyond the Square Mile, there are a number of sub-markets that have also outperformed. For example, Wapping had one of the strongest property market rebounds, with a 188% increase in sales over the last five years and Clerkenwell has experienced capital growth of 53%.’

Jennet Siebrits, Head of Residential Research at CBRE, anticipates that total household growth in the City and City fringes will rise substantially throughout the next decade, and will exceed the rate of construction by over 60%. ‘Given this increasing supply and demand imbalance, we expect property prices in this area to continue to rise,’ she says.

Meanwhile, further east 12,000 new homes are being built in Stratford and the Olympic park, with access to the Olympic Velodrome and swimming pool. Transport links are key here though, with a choice of Overground, Underground and Javelin trains, and potential future connections to Europe via Stratford International.

Since Georgian times grand London townhouses have been the ultimate status symbol but in recent years there’s been a new contender for the throne – large lateral flats with flexible open-plan living space. Developers have taken this into account, creating high-end residences such as One Hyde Park in Knightsbridge, which offers hotel services and is believed to be the world’s most expensive block of flats with prices over £6,500 per sq ft.

LATERAL LIVING IS ON THE RISE

According to the property market analysts Lonres, flats represented 60% of homes valued at over £10m which sold last year in Mayfair, Knightsbridge and Belgravia.

‘It is simply a penchant of the global rich that they love flats,’ says Andrew Scott, Head of London Residential at Strutt & Parker. ‘The ‘high set’ as they call them in Sydney, and the wealthy in New York and Paris, all have flats and that taste has come to London.’

Nick Candy, Chief Executive of Candy & Candy, the developers behind One Hyde Park, believes new lateral apartments are the property of choice for the world’s jet set. ‘I think it depends on who you are as to whether you want a townhouse or a flat,’ he says.

‘In general, international owners living in London just want a place that they can lock up and go.’

While Middle and Far Eastern investors tend to associate new-build property with upmarket projects, Naomi Heaton believes that as they ‘understand the London market better – the importance of scarcity and our architectural heritage – they will be drawn to the style of properties in PCL. The ideal property would have a historic exterior but a new interior and should reflect the style of the most fashionable boutique hotels’.

Overseas buyers are now more willing to go where the right property is, north of Oxford Street and Marylebone, believes Tom Bill, rather than the established areas like Knightsbridge. ‘Developers are realising that if you build high-quality large lateral flats, these buyers will come to you,’ he says.

Anyone returning to London after a 10-year absence would be struck on how much the London skyline has changed. ‘In the last decade, tower schemes have generated just under 10,000 new homes,’ says Mark Collins, Chairman of Residential at CBRE, ‘but there are a further 70,000 units in the planning pipeline, all of which help to play an important role in meeting the requirement for new homes in the capital.’