London property can’t shrug off declines in city business

Spring 2011:- Estate agents expect stability in 2011, recovery in 2012, but economists cautious.

 A FLOOD of new prime developments are boosting the supply of London residential property and foreign investors are the targeted potential buyers.

In hyped-up promotions, enthusiastic developers and agents have been seeking super-rich buyers for One Hyde Park Knightsbridge, a mammoth sparkling new complex that overlooks Hyde Park. Others aimed at the seriously rich for The Lancasters, nearby.

Some apartments in One Hyde Park, alongside the Mandarin Oriental Hotel, which provides them with services, have reportedly changed hands at £6,000 (S$12,300) per square foot. One of the penthouses, a 30,000 sq ft property, is rumoured to have been sold for a record £135 million (S$277 million). So far about 55 per cent of the 86 units have been sold, says a spokeswoman.

Super prime

The Lancasters, with a mid-19th Century Victorian facade, on the other side of the park, has sold 46 out of 77 apartments at £1,800 to £2,900 psf with prices ranging from £900,000 for 650 sq ft flats to £16.5 million for four-bedroom units occupying 5,400 sq ft.

Besides these super prime developments are prime ones that are completed or under construction in diverse areas ranging from Covent Garden to the City of London and Bankside near the Tate Modern art gallery.

According to Drivers Jonas Deloitte’s London Residential Crane survey, construction levels have turned around from the bleak period in 2009. More than 28,000 units are under construction within 169 developments. Drivers Jonas Deloitte’s unconventional research, which counts the number of cranes on residential schemes with 50 units or more, concludes that new-build real estate in London in the pipeline, is heavily dominated by flats which account for 95 per cent of all units.

Most of these new apartments are aimed at the average working person, but given their current financial pressures, cannot be described as cheap. Newham, Tower Hamlets and Greenwich, boroughs which are near the site for the 2012 Olympics, comprise about two-fifths of the new apartment units. Greenwich Wharf near the former Naval College and Observatory, for example, completed 260 units out of some 667 apartments a few months ago. Prices range from around £250,000 for one bedroom to £375,000 for two.

Following a recovery in prices in 2009 and 2010, most estate agents generally believe that the market will be relatively stable in 2011 and recover in 2012. The UK, however, is currently under the straitjacket of high unemployment and rising inflation and with more supplies coming on to the market, independent economists are more cautious. Savills estimates that after rising by 3.8 per cent in 2010, prime central London property prices will fall by one per cent in 2011, recover by 10 per cent in 2012 and appreciate by a further 8 per cent in 2013. Knight Frank reckons that price growth for central London residential real estate was as much as 10.3 per cent in the 12 months to January 2011. It forecasts that prices of prime property will be flat this year and rise by around 4.5 per cent in 2012.

Several economists, however, are forecasting slides as high as 10 per cent in 2011 and forecast unexciting, potentially falling markets in 2012 and 2013. They believe that the Olympic Games impact is already factored into the market.

UK economic stagflation, slower trade and deal volumes in the City of London, public sector spending cuts and high joblessness of the young will curb demand, cautions Ed Stanfield, chief property economist of Capital Economics. Moreover, new units coming onstream show that buyers should question the sales spin of agents, he says. While there has been a shortage of property in London, especially houses, demand will not overwhelm supply of residential apartments, maintains Mr Stanfield. There is a shortage of houses because it is cheaper to finance them, but with savings low and economic uncertainty there are potential sellers, he warns.

The Bank of England’s quantitative easing, resulting in almost zero savings rates and much lower mortgage costs, helped the UK and particularly the London market to recover. But general inflation has accelerated and swap rates have risen, raising tracker mortgage rates to between 3.2 per cent for two years and 4.3 per cent for five, while fixed rates are around 5 per cent and are expected to rise further in the short run.

Moreover, banks are much more cautious about lending and are demanding deposits of 25 to 30 per cent from potential buyers, reducing their capacity to buy at prices which are still far above annual earnings.

The chart (above) from the UK Land Registry shows that despite the recovery from the 2009 lows, prices of average London houses and apartments are still lower than the 2007 peak and sales volumes substantially down. Much, however, depends on the area.

According to the Land Registry house price index, the weighted average prices of the wealthy London boroughs of Kensington and Chelsea are £886,000, Westminster, £623,000 and Camden, including Hampstead and St Johns Wood, £559,000. These levels are higher than their peaks during the 2006 to 2007 property bubble, but are still lower in real terms.

Central London house and apartment prices have rebounded by 20 per cent since their 2009 trough, while average house prices in the whole of London recovered from their trough by 16 per cent, and prices in England and Wales by 10 per cent. House prices of £1 million or more, in wealthier areas, are commonplace, albeit a small percentage of total turnover.

Residential real estate prices are too expensive for young professionals who are first-time buyers or have growing families who need bigger and much pricier space. The majority of locals are seeking accommodation in cheaper areas, further out of London or in commuting towns. The new prime property very much depends on foreign buyers who account for 60 per cent of recent year volumes, agents estimate.

With more people forced to rent in central London, the increase in rentals last year was 11.5 per cent, estimates Savills. Despite the rise, gross rental yields in central London are 3.8 per cent for apartments and in the north, east and south-west of the city around 5 per cent.

Rental yields

Gross rental yields on houses are slightly lower. After agents fees, maintenance and allowance for void – gaps between tenant occupation – net rental yields in central London are below 3 per cent.

Foreign buyers also incur a currency risk. In the past year, sterling fell by 8 per cent against the Singapore dollar and by a much wider margin since 2007. Agents say that sterling property is relatively cheap for the foreign buyer, but with quantitative easing, a deteriorating trade balance and a weak economy, there is a risk that sterling could fall further.

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