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Why the London property market is in a league of its own

The response I have been getting from property agents on the streets of central London is there is very little stock on the market. From what little there is no one is desperate to sell.

Central London has completely bucked the national trend. Savills prime London index grew by 8.7% in 2011, adding to the 27.9% gains it had already made since March 2009. It now stands 9.7% higher than its former 2007 peak.

According to Knight Frank average prices for prime central London property rose by 0.7% in February.

Prices are now higher by 11.6% over the past 12 months.

Prices have risen 43% from their post-Lehman collapse low-point in March 2009, and are 8.9% higher than their previous peak in March 2008.

The volume of sales has risen 85% in the year to February, prices are now 8.9% above their previous peak of March 2008, and they have risen at a rate almost double that seen in previous upturns. This has been a very strong upturn.

This is in stark contrast to the rest of the UK property market. Why is this?

Where is this money coming from to ensure the central London property market remains buoyant?

Back in the boom period of 2006 the money was flowing in from Stock market bonuses, probably much of it from the back of reselling mortgages which has been blamed for the current collapse, these have now disappeared.

Over 2006 and 2007, City bonuses were a key factor in the 47% growth in prime London over this boom period. It is estimated around £8 billion flowed into the market from this source.

City bonuses are unlikely to reach this level again, although other types of equity (share capital, profits and sale proceeds) could easily replace them if the economy prospers.

In London, the old drivers of the property market have changed significantly. The domestic money being pumped into London property is still originating largely in the financial sector but not from the big banks in the City and Canary Wharf.

City bankers’ bonuses have been curtailed – not just by the lack of performance of the big banks but also by changing methods of remuneration and deferred payment.

It is now the small hedge funds and private offices based in Mayfair and its close vicinity that are generating the most cash to the property market now.

The difference in the London economy to the rest of the country used to be explained by the strength of the financial sector. Now top properties in the capital are clearly driven by a different set of factors to the rest on the property market.

Global East to West migration of money have boosted the London market. The London economy is an international economy and equity is flowing from the cash-rich nations.

London is now operating as a global city almost completely divorced from the surrounding nation.

London is seen as a safe haven for funds in an uncertain economic world. Funds are coming in from Europe, the Far East and increasingly India. We have had much interest from Indians living in India to invest in Prime central London. This is not motivated purely by the growth prospects London has to offer, but more from a case of diversifying their new found wealth. It also is a status symbol to own a property in Mayfair.

An important point of note is there are no barriers to entry for global investors. They can purchase as many properties as they wish without any restriction. This is not the case with say India where only an NRI or a PIO may purchase property and there is tight regulation by the RBI over repatriation of funds. London property is a transparent market in stark contrast to say the Indian Property market although with regulation this is changing.

Prime London property has developed a status of a wealth preserver. During the time of the Greece crisis one agent whom I know well had a call by an investor to purchase four properties by a certain date, the properties were to be purchased in cash and blind meaning the purchaser did not even want to see the properties. In times of turbulence people park their money in prime property stock.

When property is being used as a store of wealth like this, its income producing qualities are of little importance to these investors. These are secondary. When you look at the way these properties increase in value it is easy to see why.

A couple of examples I have come across will illustrate this point. Recently a prime freehold block was on sale in Victoria for £1.25m. It had been picked up for around £1m only a few weeks before it was put on the market. The property was then purchased by a second investor for £1.25m and is currently on the market for £1.5m. In my opinion the property will sell as with some work I feel it can be resold for £2m and perhaps a little over.

Another property which came on the market middle of last year comprised of two attractive inter-linking freehold Grade ll Listed period buildings located in Marylebone: 105-107 GLOUCESTER PLACE W1. The square footage was 11,500, the asking price was offers in excess of £4,000,000, subject to contract, reflecting a low capital value of £545 psf based on the net internal area.

The block was a rarity and was being sold by a Jewish charity. The interesting point here was they were happy with a six month completion as the block was occupied. This allows the purchaser to resell and apply for planning. The property not surprisingly went for well over the asking price at £5.25. This block was resold before completion for £7m. That’s a lot of profit for six months. Even more so considering only 10% was put down to exchange. This means from a deposit of £525,000 the return was £1.75m!!

A similar principle can be applied on the blocks we have on sale in Harlesden and Shepards bush. The time period involved can be used to leverage your investment. Call the office now for further details. These blocks can be sold separately to reduce the amount of investment.

The Real Deal

WESTBOURNE TERRACE, LONDON, W2

Purchase Price: £1,200,000 – Share of Freehold3 Bedrooms, 2 Reception Rooms, 3 Bathrooms

A stunning three double bedroom apartment, recently refurbished to a very high standard forming part of this impressive period stucco fronted building. The property further benefits from three ensuite shower rooms, an impressive reception room with skylight, a beautifully fitted kitchen and its own private entrance. Westbourne Terrace, close to the open spaces of Hyde Park

We can arrange finance at a competitive rate of 4.125%, 60% LTV. This means your monthly payment will be £2475pm against a rental income of £4333pm

You will need £480,000 to purchase this property. The aim would be simply to put it back on the market for £1.4m+ in the summer

Currently a similar property lower ground has come on the market on the same road at £865,000 and is 1100 Sq Ft. This equates to £786per Sq Ft. This is on the less desirable side of Westbourne terrace and is a leasehold. The one we are selling is 1800 Sq Ft and equates to £659per Sq Ft is a share of freehold, is in the more desirable end of the road and is in much better condition.

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment Company

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