A new report published today by Savills research estimates that foreign capital is being injected into the prime London market at a rate of £3.3 billion annually, with a further £0.4 billion into the capital’s prime newly built stock.
Taken together, these sums are sufficient to buy all privately owned stock in the whole Greater London area within 157 years at today’s values, the report says. Most of the annual cash injection (£2.7billion) of new funds from overseas finds its way into the resales market in the prime central area (Mayfair to Kensington, Notting Hill to Chelsea).
This sum equates to just under 2 per cent of the total value of all the prime housing stock of this area and accounted for 34 per cent of all the stock sold in 2010. Last year, overseas nationals were responsible for buying 28 per cent of all resale properties across all prime London but 54 per cent by value in the prime central London area in the over £5 million price bracket.
A new ‘World in London’ report from Savills research has analysed international buyer activity in the prime London market since 2007, and estimates that a total of £16.5 billion will have been invested over the 5 year period by the end of this year (2011).
This cash injection means that prime London values now move more in line with other global real estate, commodities and investment markets than domestic UK housing markets. London’s high value, niche markets are becoming increasingly detached.
In examining how the world behaves in London’s residential real estate markets, Savills has identified three key factors:
1. The equity brought into London by overseas buyers migrates out of the central areas into outer London and down the UK market, as UK owners in London are net disinvestors. They call it ‘the champagne tower effect.’
2. If Chinese mainland billionaires were able / willing to bring their wealth to London, they could move ultra-prime prices by as much as 15%.
3. Some lower profile buyers in prime London have been overlooked in media stories, while others have been over-hyped. Savills found that western Europeans were by far the biggest group of international buyers, that North Americans are as large a group as Middle Easterners and bigger than ex Soviet Union buyers.
Not all Russian buyers are Oligarch billionaires. The Chinese are coming, but only in relatively small numbers – and they don’t all buy new build. There are more buyers coming from India and Pakistan than China – and they’re spending more. It is this group that Savills identifies as most important to the London market among the emerging economies.
How wealth spreads through the market
Yolande Barnes, head of Savills residential research, says:
"The real story behind the headlines is that this inflow of equity at the top of the market is creating a champagne tower effect, pushing wealth out beyond the very central London locations. We have not seen, since the 1960s, a time when foreigners have become net disinvestors (although overseas funds did stop flowing in 1998 and in 2002/3, causing temporary downturns in values).
"Meanwhile, UK owners have been disinvesting and moving out of the central areas, taking their equity with them. As a result, central London is becoming more international as these buyers tend to hold their stock for longer than their UK counterparts.
“UK nationals carry the foreign equity out of prime areas and gentrify new areas or buy prime country and regional properties, thereby pushing out the boundaries of prime London, using foreign equity.
"Where they lead, the more mature markets, such as western Europeans and North Americans, often follow. It is this migration of capital that has created new prime areas and fuelled price growth – particularly in prime south west London.”
There are signs that, in other housing market recoveries, equity has dispersed quickly out of London to prime regional markets. There is less evidence that this is happening currently, Savills reports, although prime townhouses outside London have ticked up, rural properties have not yet benefited from London equity outflows.
“It is as if the equity is getting stuck in prime south west London; of the £3.3 billion into prime London, only £0.5 billion left via the large Southwest markets in 2010”.
Close link to international wealth creation – Chinese buyers could create a 15% boost International wealth generation has become a key indicator of prime central London values, with price movements of the ultra prime (£15million plus) sector being very closely linked to the number of newly created billionaires in a given year, but in the past year, the creation of new billionaires has outpaced price growth of the most expensive properties in the capital.
The global billionaire effect across prime and ultra-prime London
The biggest increase in global billionaires since 2007 has been from China and the CIS (Russia and ex Soviet Union).
While CIS buying activity has been strong, accounting for 15 per cent of prime central London purchases by value, the Chinese billionaires have yet to have a real impact, accounting for just 3 per cent of prime central London resale purchases by value.
Barnes says:
“If the money from China were to start flowing into London at the same rate it does from billionaires in other countries, we would expect the values of ultra prime London properties to grow by as much as 15 per cent.
“The issue at present is that Chinese buyers aren’t taking, or can’t take, their money out of China.”
The big spenders – the hyped and the rarely mentioned The highest spenders in the past five years have been buyers f
