From Special Report: Luxury Property - May 2012
London’s prime property boom
Neither recession nor stamp duty hikes has so far dampened demand for the capital’s super-prime property
In spite of soaring prices and rising stamp duty, international demand for luxury London properties is still increasing.
Overseas investors are turning to London residential real estate to preserve wealth as they face political, economic and financial upheaval in their home markets.
According to London-based broker Knight Frank, the value of houses and apartments costing in excess of £3.7m increased by an average of 11.4 per cent in the year to March 2012. Prices in March alone gained 1.1 per cent, in the midst of the UK’s double-dip recession.
Although the UK government has raised stamp duty on properties costing more than £2m from 5 per cent to 7 per cent in its latest Budget, previous hikes suggest this may not do much to curb London’s mini boom. Sales of properties valued at more than £2m were subdued in April 2011, after the April stamp duty hike cause a rush of pre-emptive sales in February and March, according to Liam Bailey, Knight Frank’s head of residential research. However, the quieter period yielded quickly to the rises of the past 12 months.
Research by Knight Frank for Investment Adviser’s sister newspaper the Financial Times shows that foreign buyers now dominate sales of “super-prime” homes – typically defined as the top 5 per cent of the most valuable properties – in the world’s major cities.
Mr Bailey told the Financial Times: “The reality is the super rich who buy these properties live increasingly global lifestyles. The super-prime market wouldn’t exist without a global market. It only really got going in the past 15-20 years as Russian money poured into London and Monaco.”
This has led to many countries’ super-prime property markets being increasingly dominated by international buyers, according to the FT. The international rich have long favoured Monaco, confirmed by figures showing 100 per cent of the principality’s super-prime property is sold to international buyers, but this demographic now buys as much as 95 per cent of the expensive homes in Paris and 85 per cent in London.
Compared with the rest of the housing market, the higher priced properties have done well in the slump. In fact, the million-pound house has not only survived, but thrived.
There were 739 sales of properties worth £1m or more in the UK in the first half of 2011, 75 per cent higher than in the same period in 2006 and 29 per cent higher than in the same period in 2010. This contrasts with the total number of home sales across Britain, which fell in 2011 by 4 per cent year on year, to 698,200.
In the upper stamp duty bracket, the UK houses roughly 45,000 homes estimated to be worth at least £2m. According to Lloyds TSB, the number of property sales worth at least this has risen by 75 per cent in the past five years. There were 1,518 sales of such properties in 2011, a 5 per cent rise on 2010 and the highest number of sales in this price bracket since records began in 1995.
In the ultra-high £5m-plus category, the number of properties rose by 22 per cent year on year in 2011 to 156, which the study claims shows further evidence of the strength of top-end sales.
For London, these figures are especially significant, as more than three-quarters of multimillion pound sales come from the capital.
Suren Thiru, housing economist at Lloyds TSB, says: “Overall, house price performance among the postal districts that are in close vicinity to the Olympic Park has been generally positive since London’s successful bid in 2005.”
Furthermore, the Lloyds TSB study found that up until 2011, the very top end of the market has been “largely immune” from the problems experienced by most UK buyers, who face tougher borrowing criteria to obtain a mortgage.
Mr Thiru adds: “The impact of the increase in the stamp duty rate for homes sold for more than £2m on the housing market is very limited. However, strong demand from wealthy cash-rich buyers, as well as limited supply of such properties, is likely to continue to boost the level of activity at this end of the housing market.”
Sean McCann, personal finance specialist at NFU Mutual, agrees, but voices concern over the effect of the stamp duty hike on rural economies. “Many country dwellers are asset-rich but cash-poor and a further tax on property could damage rural areas,” he says.
“Many people living and working in the countryside will live in larger homes than their urban counterparts, but this does not reflect the daily struggle many country people have with low wages and a high cost of living.”
“Farmhouses, for instance, may typically be larger than the average urban property but they’re often not just a home but [also] a fundamental part of a working farm or agricultural business.”
With or without stamp duty, the boom in luxury property continues, and those who can’t afford to invest £1m or more into a single property can still gain access to the market – that is, if they don’t see it as another bubble in the making.
The British Property Opportunities fund (BPOF), based in the Cayman Islands, launched a new share class in April to enable investors to invest in prime real estate in central London and take advantage of the substantial gap between the supply and demand for property.
The fund’s London Growth share class aims to achieve long-term capital growth from a market that has remained robust, even during a downturn that affected the rest of the UK.
Bill McClintock, chairman of BPOF’s investment committee, comments: “The whole of London’s property market is going through a mini boom. In the past two and a half years in particular, demand for purchasers and tenants has hit record levels, forcing rental yields up by more than 25 per cent in that period.”
Alternatively, the Prime London Capital fund, which is the only fully authorised, listed and liquid fund that is committed to prime London residential property investment, allows clients to invest as little as £1,000.
However, even overseas investors may look for the latest phase of the financial crisis to pass and the market to settle a little before committing new funds to another sky-high real estate boom.
Jenny Lowe is features editor at Investment Adviser