Jeremy Helsby, Chief Executive of Savills, has describedLondonresidential property as a "recognised asset class". Research into second-home prices demonstrates thatLondonhas become a second-home "hotspot". A 2012 wealth report prepared by Knight Frank and Citi Private Bank places theUKas the second most popular second-home location for North Americans and the most popular second-home location for Europeans and Russians. WithLondonat the centre of this trend, the question follows as to why investment inLondonresidential has reached such unprecedented levels?
CBRE's latest 'Real Estate Investor Intentions' survey, completed by more than 340 leading property investors, places London head and shoulders above other named cities as the top target for investors in Europe, with 37% of investors pin-pointing it as the premier investment destination in Europe in 2012. CBRE commentators have highlighted that "London has always been seen by global investors as the key European location for property investment, with its liquidity, prestige, size, stability and transparency seen as key drivers and attributes, as well as being a springboard location into other European property markets." However, the sudden influx of investment and its effect on property prices is exceptional: EGi has forecasted that average residential prices will rise 7% during 2012 and Jones Lang LaSalle anticipates that growth in greaterLondonhouse prices is expected to be in the region of 8.5% during 2012-2015.
So who are the major players contributing to the influx of investment in primeLondonresidential property? According to EA Shaw's residential market update for Spring 2012, Eurozone buyers were the most dominant international buyers of prime centralLondonproperty, accounting for 36% of all purchases. The update highlights that international buyers accounted for an unnerving 56% of acquisitions, with the domestic market making up the remaining 44%. New-build sales are still further dominated by foreign investment, with domesticUKbuyers accounting for just one-fifth of sales. The prime residential market is particularly dominated by international investment, for example, in the ultra-prime segment ofMayfairapproximately 75% of sales are currently accounted for by foreign purchasers (Chesterton Humberts).
International investment, coupled with the continued relative weakness ofSterlingagainst foreign currencies, has underpinned the healthy performance of the prime and super prime centralLondonmarkets. So what is it that attracts wealthy foreigners toLondon? What seems clear is thatLondonresidential continues to enjoy a reputation as the perfect long-term wealth preservation asset for affluent overseas investors. The resilience of the prime segments of theLondonresidential property market is demonstrated by their performance since the recession. Londonresidential property is acknowledged to be a portfolio balancer offering enhanced returns and diversification of risk.
Liam Bailey, head of Knight Frank's residential research tem, identifies tax reasons as another big incentive for foreign investors. "If you are a non-resident, you don't pay capital gains taxes on property," he says. "If an investor buys a property for £1m and sells it for £1.2m, the £200,000 profit is tax free." Since Francois Hollande's inauguration in May, bringing with it heightened concerns about the aggressive taxation policies of the new President, there have been increasing reports of wealthy French looking across the channel, and specifically toLondon, to invest some of their wealth.
As numerous commentators have highlighted, economic and political turmoil have ironically proven an impetus for growth, with a pronounced increase in the number of investors seeking to diversify away from euro-dominated assets and looking for a safe-haven location for part of their wealth portfolio. Consequently, as a recognised "safe-haven" location,Londonstands to benefit from continued global uncertainty. This is borne out by the flow of international equity entering the prime residential market during the Arab Spring and the deepening Eurozone crisis, as buyers fromEuropeseek a haven from economic instability thereby driving prime residential property prices to record highs.
A weaker pound has also encouraged investors. Paddy Dring, head of international residential property at Knight Frank, has noted that "when the crash in the property market came in the UK in 2008 a lot of the European buyers were looking at a potential discount total of up to 40%, because the UK currency had come down by 20% and the property market itself was down by up to 20% in some case. This was a good buying opportunity..." International buyers ofLondonproperty continue to be able to capitalise on the weakness of sterling to acquire assets at a favourable rate. The flipside of this is that any strengthening of the pound will erode the favourable entry point for international purchasers in theUKmarket: the current situation is clearly a window of opportunity rather than a permanent state of affairs.
The passing of the Legal Aid, Sentencing and Punishment of Offenders Act will only serve to further reinforceLondon's status as a second-home "hotspot" by rendering squatting a punishable legal offence.
What seems clear is that the remarkable popularity of prime London residential property (despite the recessionary climate) is the product of its long-standing status as a recognised asset class, its position as a safe-haven investment in a time of global political and economic instability and the financial opportunities offered to overseas investors by the UK's tax structure and the weakness of the pound.