London/UK residential property revives

By Neil Behrmann

September 06:- After a lull in the past two years, London’s residential property market is growing in confidence. Demand and prices of prime apartments and houses in fashionable areas of Kensington, Chelsea, St Johns Wood, Hampstead and Richmond are particularly buoyant.

Hefty bonuses paid to stockbrokers, traders and investment bankers have helped fuel purchases of penthouses and other luxury properties. Estate agents Savills and Knight Frank, which cater for the wealthy, have also detected a sharp increase in demand from Russia, US, Middle East, Hong Kong and China, India and Africa. They estimate that prices of houses and flats quoted at pds 1.5 million (S$4.3 m) or more soared by 8 to 10 percent in the first quarter of this year. Purpose built apartment prices at pds 250,000 to pds 750, 000 (S$1.5 m) have so far increased by less than 5 per cent, according to agents. But now mood of the market is bullish those gains could accelerate when the spring buying season gets under way. Agents observe a growing desire to purchase quality real estate that is in relatively short supply.

“A recent showing of flats in a new Victorian development was packed to the rafters,” said an investor with lengthy experience in the London market. “Sales eventually went 10 to 20 per cent above guide prices.”

Olympics 2012 boosting demand in the East

Meanwhile in the less expensive Eastern parts of the city, such as Hackney, values have surged in anticipation of development for the 2012 Olympics.

London prices aren’t cheap, following a spectacular increase in the past decade. According to estimates of Hometrack, which monitors sales of property in the UK, the average price of Kensington and Chelsea apartments and maisonettes are pds 463,000 (S$1.3 m) compared with pds 204,000 (S$580,000) in Greater London. Terraced and semi detached houses in the two boroughs average between pds 1 million and pds 1.3 million (S$3.4 m) against around pds 250,000 (S$700,000) in Greater London and detached houses, pds 2 million (S$5.7m), compared with an average of pds 418,000 (S$1,2m) throughout London. The average property price throughout the United Kingdom is pds 185,000 (S$530,000). Prices have surged in the North and midlands. But since business conditions are much weaker in those areas, London and south east England are believed to be better areas for investors, despite the much higher prices.

Rental yields well down

Since capital values have risen to high levels and rental growth has increased by a smaller proportion, average gross yields on quality London residential property situated in good areas have slipped below 5 per cent, according to Savills and Knight Ridder. After deducting agent, maintenance and other expenses and allowing for “void” or vacant periods, the net yield has slid to only 2.5 per cent. Despite these relatively low yields, Yolande Barnes, head of research at Savills believes that carefully researched purchases could still prove to be profitable in the medium and long term. Rentals are on an upward trend, she believes.

London rentals have generally been depressed since the September 11 terrorist, but during 2005 residential rentals rose by 5.7 per cent and rents of prime properties jumped by as much as 7 per cent, Savills estimates. The turnaround in the rental market started in mid 2003 because London’s financial sector began employing more people from Britain and abroad. Multi national corporations are also renting more homes for growing numbers of senior employees who are being transferred to London again. Ms Barnes expects further rental growth this year as activity, employment, and remuneration in the City of London’s financial services firms are expected to remain buoyant. Following a change in pensions regulations, growing numbers of UK investors are investing in property to take care of their retirement, she says.

Liam Bailey, head of residential research at Knight Frank contends that rental growth was lower than the estimates of Savills. But he agrees that it should rise in 2006, although capital gains will remain a strong driver behind the rationale for residential property investment.

“The UK residential market is an attractive target for foreign investors, partly because the size of the market and relative liquidity compared to other European nations, enables investors to sell fairly swiftly,“ he says. Since the number of viewings has risen sharply, it is taking much shorter timespan to sell a property than a year or two ago, he says. Approximately 1.5 million residential transactions take place in the UK each year, excluding portfolio deals. The current UK housing stock of nearly 26 million dwellings and each year supply rises by approximately 186,000 new or refurbished units, he calculates.

The big question is whether the present boomlet in London prime areas will peter out, because of price resistance, fears of an interest rate increase and slacker conditions in the London economy. Despite these fears the recent past illustrates that it is unwise to become overly pessimistic about the great London metropolis which attracts people from all over the world.

Optimistic mood contrasts with pessimism

Contrast the optimistic mood in the London property market with the gloom and cynicism a year ago. The market had cooled considerably in 2004 following a boom that peaked in 2003. The Bank of England had raised interest rates and the market feared bearish reports from Durlacher Bank and Capital Economics, which had predicted a major downturn. Indeed in 2004 and the first half of 2005, property investors were able to beat down unrealistic prices of sellers. They obtained discounts on some new developments that were sprouting up in regeneration areas along the Thames in south east London and Paddington and in the more expensive prime locations such as Swiss Cottage and Chelsea.

Trading prices were around 6 per cent below asking prices in prime areas of London. During that gloomy period, shrewd property analysts and agents said that the lull in the market would prove to be timely for selective buyers. Those cautiously optimistic property specialists proved to be right. As the stock market and City activity first revived and then boomed, the London real estate market began to turn around in the fourth quarter of last year and those who invested in the past two years have proved to be right.

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