Although 2012 had strong beginnings for the property market, i.e. January mortgage approval levels were the highest since late 2009, many economists still do not consider the London market’s future prospects optimistically. Earlier this month Halifax published a series of gloomy figures which further diminished confidence in the UK housing market. A combination of reluctant sellers and nervous buyers has resulted in stagnation. Low and fragile consumer confidence, muted earning growth and relatively high unemployment have all played a big part in the current market gloom. The stamp duty introduced in March 2012 also caused the property market to stir, resulting in the collapse of high value deals. The latest figures for the UK indicate that house prices fell 0.6% to £161,094 in July 2012.
Some estimates show that UK house prices would have to drop by between 40% and 60% to reach their real value, arguing that in comparison to the US, the UK housing market is sharply overvalued. London properties however bear little relationship to the underlying momentum of the market, instead taking on a somewhat arbitrary worth, similar to that of precious stones or fine wines.
For some time now, the Prime Central London (PCL) residential market has seemingly defied the laws of gravity. Whilst the UK and Europe are generally showing, at best, weak economic growth, this particular central London market is booming. Prices are now far above the levels they reached at the height of the bull cycle in 2007, prior to the crash and, in contrast to residential markets in the rest of the UK, they have resisted any major volatility and pricing weakness. Meanwhile, the global flow of money into PCL dwellings has continued to strengthen against the wider backdrop of fitful and timid equity markets.
The stock of prime housing in London’s most desirable postcodes is now valued at around £130 billion. Prices for residential property in PCL have outperformed Greater London by 30% and the UK as a whole by 34% over the past three years. This has led to a growing belief that PCL is special and entirely separate from the rest of the UK property market.
Favoured districts of the UK capital have become the destination of choice among investors seeking a safe place to store their wealth. The combination of a wide variety of schools, a stable political environment, a respected legal system and, crucially, a clear framework for property ownership has turned it into an investment lagoon in a world beset by economic and political tempests. As a result, property development in London’s most exclusive and expensive neighbourhoods has soared over the past year, with a total of 20 million square feet set to be built over the next ten years.
Along with the wealthiest in the UK, the PCL location attracts residents internationally. Foreign money seeking a refuge from wider economic difficulties accounted for 60% of acquisitions by value between 2007 and 2011. Since 1995, safe-haven flows have boosted the relative price of PCL by a little over 30%. Over the period from 1995 to 2011, they have been by far the most important driver. More than half of the resident population of Westminster and Kensington and Chelsea – the two boroughs that contain the bulk of the prime market – comes from overseas.
Economic turmoil in Europe and political uprisings in North Africa have given rise to the property market phenomenon. The PCL prices could initially be boosted, only to be swamped later due to the appreciation of the sterling against other European currencies and a potential global equity price collapse. Property market prices could halve if the eurozone breaks up; other risks include the further devaluation of the euro, which makes the UK market look more expensive, and changes to the UK planning system, which would make it easier to convert offices into homes and add to the pipeline. If the European Central Bank decides to recapitalise, either through the purchase of impaired assets or quantitative easing, it will put downward pressure on PCL housing prices as the sterling would again appreciate against the euro. However, this effect would not be as substantial as investor confidence may increase if there is confirmation that the single currency system is set to stay in continental Europe. In short, the runes remain difficult to read, but many investors appear to be calculating that the relative risks of remaining in the London property market remain more acceptable than other options.
Gherson acts for many foreign investors seeking access to the UK, advising on entry visa requirements and the future status of individuals who wish to remain in the country. Its sister firm Discreet Law advises on subsequent activities, sourcing appropriate advice on all other aspects of UK law, including comprehensive advice on property acquisition.