Risks to prime London property grow alongside its safe haven status
The value of Prime Central London (PCL) property has soared along with the city’s safe-haven status, but any challenge to that standing could see property values plunge steeply, according to a report commissioned by Development Securities, and carried out by Fathom Consulting.
London’s prime residential properties are at historically high levels, and rising. Prices are tracking at a record six times multiple relative to the price of UK residential property.
Since 1995 up to 75% of the increase in value relative to the rest of the UK can be attributed to safe haven flows, the report says. It identifies three key economic drivers behind PCL’s price movements: global equity prices, the relative value of sterling and safe-haven flows.
Of these, safe-haven flows have contributed the most, boosting the price of PCL relative to the rest of the UK by just over 30% since 1995. That factor has intensified in the past four years with fears about the demise of the euro following the 2008 market crash.
Foreign money seeking refuge in PCL real estate accounted for 60% of acquisitions by value between 2007 and 2011. Now, more than half of the resident population of Westminster and Kensington & Chelsea – the two London boroughs that contain the bulk of the prime market, are from abroad.
The figures almost perfectly match the levels of foreign ownership of prime City office buildings reported in Development Securities’ “Who Owns the City?” report in November 2011.
But the latest report suggests that demand for PCL residences can go down as well as up. Exploring various scenarios that could impact prices, the report indicates that a full break-up of the euro zone is, “perhaps counter-intuitively”, the single greatest risk.
“In this worst-case scenario, sterling would appreciate against the newly formed currencies, global equity markets would tumble and once the crisis had passed, the safe-haven factor linked with PCL would diminish. Consequently, investment would flow out of London and into ‘cheaper’ capitals in Europe causing PCL prices to fall by up to 50%,” the report warned.
Michael Marx, Chief Executive of Development Securities PLC, agreed PCL residential market has seemingly defied the laws of gravity in the past few years.
“The ‘safe-haven’ effect has clearly played its role in attracting foreign money into London’s most desirable post codes. However, the property industry knows, perhaps better than most, that nothing goes on forever. There are powerful forces at work that may have a considerable impact on prices going forward.”
Danny Gabbay, director of Fathom Consulting, said PCL property has intrinsic value as an investment, with clear fundamental drivers, but also a status as a safe-haven for international capital flows. “Its role, now established, means that even after the present crisis resolves itself one way or another, it will again offer investors shelter against future storms.”
To download a full copy of the report, visit: www.developmentsecurities.com/devsecplc/en/home