With the prices of London’s prime residential properties at historically high levels and rising, a new report, commissioned by Development Securities PLC and carried out by Fathom Consulting, today identifies the principal economic drivers behind this staggering price growth and reveals that since 1995, up to 75% of the increase in value relative to the rest of the UK can be attributed to safe-haven flows.
At a time when the wider UK economy is in the doldrums, Prime Central London residential prices are currently tracking at a record six times multiple relative to the price of UK residential property according to this new report.
Prime Central London: In a Class of its own? for the first time identifies the three key economic drivers behind PCL’s price movements, which are materially different to those affecting house prices in the rest of the UK: global equity prices, the relative value of sterling and safe-haven flows.
Of these three drivers, 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, and their influence has intensified in the past four years with growing fears about the demise of the euro following the 2008 crash.
Foreign money seeking a refuge from wider economic difficulties has been key to the increase in PCL property values in recent times, and 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 boroughs that contain the bulk of the prime market – are from overseas.
These figures almost perfectly match the levels of foreign ownership of prime City office buildings as reported in Development Securities’ Who Owns the City report in November 2011, emphasising the significance of London’s prime properties to foreign investors.
Looking to the future, and against the backdrop of the euro zone crisis, the report shows that demand for PCL residences can go down as well as up. Exploring various scenarios that could impact on their pricing, 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%.
Michael Marx, Chief Executive of Development Securities PLC, said:
“The prime central London 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:
“Prime Central London property has intrinsic value as an investment, with clear fundamental drivers. But in recent years it has also established itself as a safe-haven for international capital flows, retaining its attractiveness despite a number of global storms, most recently as fears about the euro’s viability have intensified.
"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.”
Nigel Lewis, property analyst at PrimeLocation.com said:
“A breakdown in the Eurozone would be extremely painful, though it is very unlikely that it would cause a 50% fall in London property prices. The London property market is extremely resilient – Even in the depths of the 2008 crisis, London prices dipped by only 5%, and they have since rapidly recovered, to the point where they’re now 19% higher.
“While there is a growing amount of international investment in the capital’s top properties, it’s a relatively small proportion of the market and only one of a number of factors causing rising prices. As long as London’s population continues to grow faster than new properties are built, we expect prices to continue to rise in the long term.”
