The Chinese Invasion
Despite reports of the London property market cooling, there are at least some strong under currents which will help to reverse the tide. One which is new Chinese money flowing in, there are also the strong fundamentals underpinning the market. Thirdly, the myth of the foreign buyer which has been reported by nationality rather than residence has given the perception that most of the buyers in the market are based abroad.
A recent Knight Frank report demonstrates that there is a momentum building in the property market which most people are unaware of. London property has now come under the radar of the wealthy Chinese and although in early stages, there is a slow inclination of this. The government policy of reducing the spending on luxury items, combined with the strength of the Chinese Yuan Renminbi against the Sterling, means that Chinese funds are finding their way into London.
A litmus test is the Rolls-Royce, an ultra-luxury car brand which is expected to experience slow sales growth in China this year as an austere push by President Xi Jinping dampens luxury demands.
By comparison, Rolls-Royce sales rose 16 percent to 998 vehicles last year. The Chinese prize London for its heritage schools and universities and the fact that currently residents are not taxed on their global wealth unlike the US. Another driving factor is Canada has scrapped its immigrant investor program this year, this will increase the attraction for London investment and the country had been a popular destination for the Chinese.
Two milestones were passed last year that demonstrate the growing importance of mainland Chinese buyers in London. First, China replaced Greece as one of the ten largest groups of buyers in prime central London. China was in joint fourth place with Italy. Second, China overtook Russia as the country granted the most tier one investor visas in the UK since the scheme started in 2008. The UK government grants the visas in exchange for investments of between £1 million and £10 million and 187 were issued to Chinese nationals in 2013, notably the highest ever total to a single nationality in one year.
All of that comes against the uncertain backdrop of a US$10 trillion economy that is shifting its focus away from heavy industry towards consumerism.
Burgeoning wealth levels in China suggest demand will remain strong. Reports indicates the number of US dollar billionaires in China will grow 80% by 2023, placing the country second behind the United States by number of billionaires.
Several major commercial and development deals in the last year underline the appeal of London in China, including Chinese developer Greenland buying the Ram Brewery in Wandsworth for £600 million and a deal by Advanced Business Park for a 35 acre site at Royal Albert Dock. Despite strong demand, controls on outflows of capital from China suggest there won’t be a sudden step-change among buyers in the prime London residential market. Instead data shows a steadier buildup is underway. It is most noticeable in the sub – £1 million price bracket, where the percentage of Chinese buyers in prime central and outer London grew to 7.5% last year from 2.7% in 2010. It is the highest percentage of any foreign buyer since 2008 in a price bracket that typically marks an entry point to the London market. This is a massive growth, the demand has nearly tripled over a 3 year period, and point to note is this signifies the entry level into property meaning the investment levels are likely to grow from here.
Chinese nationals bought more sub – £1 million London homes in 2013 than over the previous five years combined. Over the same period, the figure grew to 2.7% from 1% in the £2 million to £5 million price bracket, and from zero to 1.1% for properties between £5 million and £10 million, indicating Chinese buyers are increasingly active in the higher price brackets as they become familiar with the market. The fact Chinese buyers are the fourth largest group in prime central London even with outflow restrictions in place suggests minor changes in Beijing in future could well have a significant positive impact in London.
It is also worth keeping in mind the fundamentals of the property market in London, there is a chronic lack of supply against a local and international high level of demand. Here are some reasons which argue the case as to why medium to long term property in London will rise due to local demand.
1) Undersupply of new homes: with circa 20,000 homes per annum being delivered against need, which the Greater London Authority has set at over 42,000 per annum.
2) London is foreign, foreign is London: 25 of the 33 London Boroughs have more than 30% of residents born outside of the United Kingdom, and in four of them – including Westminster and Kensington & Chelsea – over half of residents are from outside the UK. International demand for residential is a reflection of the existing international dimension of the London population.
3) International investment has a limited impact on price growth: Difficult to estimate, but recent reports suggest international purchasers make up only 6% of London market. In other words, the 94% of transactions made by British buyers make up a far more significant proportion of demand, which drives price movements.
It is important when assessing international demand in London to define what exactly is a “foreign buyer”. Most analysis to date has concent rated on the nationality of purchasers; but this is misleading definition in a city as diverse and globally connected as London, where 38% of inner London residents were classified as foreign born in the 2011 census.
Is a French banker who has lived and worked in London for five years a “foreign” buyer when he decides to stop renting and buy his first home? Or a software engineer from India who has been living and working in the Shoreditch tech cluster for two years? Rather than looking at nationality as a way of assessing foreign demand for London property, it is more accurate to consider a buyer’s residence. Over the 12 months to June 2013, 49% of all £1m+ sales in prime central London went to foreign buyers by nationality, but only 28% of buyers were NOT resident in the UK. This latter group are largely composed of investors, looking to earn an income by letting.
The above serves to illustrate the central London property market is driven by many diverse and complex factors, it is not as simple as if interest rates go up then prices must come down; despite the need for many to have an overly simplified model and to paint the whole property market with one brush.
Hampstead, London, NW3 Purchase Price: £550k
- A large one bedroom raised ground floor flat
- High ceilings
- Share of freehold
- Can be converted into a two bedroom flat
- Close to the leisure facilities of Finchley Road and Hampstead Heath
- Comparable properties are priced at around £1,000 per sq. ft. while this comes at around £770 per sq. ft.
- Expected resell value after works to be around £700k
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Sow & Reap
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!Tips of the Week
While Letting your property you must protect the tenant’s deposits via an approved Tenancy Deposit scheme, failure to do so may affect eviction proceedings.
Under current law the local authority are within their rights to take over a property if it is left vacant for a long period of time; it’s important to be mindful of your local authorities policy on this matter.