IN SEARCH OF POCKETS OF OUTPERFORMANCE IN LONDON

London still retains its magnetic charms to the international investor due to its many advantages.

“When a man is tired of London, he is tired of life; for there is in London all that life can afford” – Samuel Johnson

london

When Samuel Johnson uttered his oft-quoted phrase in 1777, it might have been true, but it is most certainly true today. Judging by the numbers from all around the world who are seeking to acquire their own piece of London, many would appear to agree.

While there were no real surprises in UK Chancellor George Osborne’s 2015 Budget, there remain some changes that will affect property investors from overseas.

You will recall that in 2012, the world was invited to witness London in all her glory as we celebrated the 60- year reign of our sovereign, Queen Elizabeth II, and hosted the Olympic Games. Billions marvelled at the pageantry and the sporting heroism, against the scintillating backdrop of one of the world’s greatest and most dynamic cities. At a time of economic difficulty for the UK, the world was reminded just what a special place London is. The legacy of those heady summer days is still being felt today.

The qualities that position London as one of the great global cities have also positioned it as one of the best places in which to invest in real estate. London is arguably still the world’s largest financial centre and a significant business centre with over 75% of Fortune 500 companies having their European headquarters located there.

London’s demographics are also favourable to investors with the population rising more steeply than in any other European capital and with a steady increase in the number of individual households. There exists a structural shortage of property, with insufficient new homes being built to keep up with demand, and this will be supportive of valuations until such time as supply can be significantly increased.

“Safe haven”

london2Investors derive great confidence from the highly evolved legal system, the strictly imposed building regulations and the lack of corruption. Many are also attracted by the history, heritage, immersive sporting and cultural attractions, and the concentration of elite schools, colleges and universities.

Having said that, the London market has undoubtedly entered a new phase. But to properly understand where we are now, we need to look back to the collapse of Lehman Brothers and the Global Financial Crisis that ensued. The crisis heralded a significant correction in residential valuations, resulting in a deep and protracted recession. It also triggered a flight to quality – London property which is perceived as a “safe haven” asset class became a major beneficiary. It was hardly surprising given that property prices in London had fallen by 25% and the currency had depreciated by as much as 40% against the global basket. In short, London represented a considerable bargain to the international investor.

This set off a recovery as early as the third quarter of 2009 and prices rose steeply until last summer. Since then, prices at the upper end of the market (GBP3 million and above) have been falling and this has depressed the reported average growth rates. There also exists considerable uncertainty around the General Election to be held in early May. There is no doubt too that affordability constraints have become a factor in the current slowdown.

‘Best to Worst’

After years of strong growth, on a fiveyear projection, we expect London, on average, to go from being the best performing UK region to the worst. We are therefore spending a great deal of time looking for pockets of value and outperformance in the London residential market in order to buck these trends.

We believe that they are still very much in evidence if you know how and where to look. One of the key investment themes of the next few years will be the displacement of domestic buyers from less affordable to more affordable locations and, following this logic, we have identified three strong contenders for continued outperformance.

“We believe that pockets of value and outperformance in the London residential market are still very much in evidence if you know how and where to look.”

  • The stratospheric growth of central London over the last few years has created a significant and, in our view, unsustainable value gap with outer London and the commuter towns that surround London. After careful research, we concluded that the best opportunity for investment returns exists in carefully selected commuter towns to the east of London. The reason for this is the highly favourable interaction of journey times and prices. To take an example of a small city we favour; Chelmsford in Essex is a mere 33 minutes by train to London Liverpool Street station, but prices at around GBP300 per sq ft are a fraction of those within the capital.
  • The construction of Crossrail is the largest single infrastructure project currently underway in Europe. When it opens, London’s rail capacity will have increased by over 10% and for the first time, it will be possible to travel across London east-westeast without having to change trains. We have looked carefully at how the neighbourhoods close to Crossrail stations will be impacted. We have concluded that the most significant impact on prices will occur in properties that experience the greatest reduction in journey times as a result of the new train line. Studies suggest that the western suburbs between Southall and Acton will benefit the most. To provide an example from the leafy suburb of Hanwell, it currently takes around 40 minutes to travel to the West End and over 50 minutes to the City of London. After the inauguration of Crossrail, the journey times will be cut to 13 and 20 minutes respectively. It is hard to overstate the effects such improved connectivity will have on an overlooked suburb like Hanwell.
  • The transformative effects of rapid urban regeneration and gentrification have always had the potential to boost property valuations in affected areas. The band of neighbourhood immediately to the east of London’s financial district has witnessed breakneck transformation over the last few years. Many of them have already become very expensive due to advantages such as convenience, and range and quality of new amenities. By looking just a little further afield, we have identified pockets of value, and would suggest locations such as Hackney Road, London Fields and Whitechapel as being excellent places to invest right now
PaulPaul Woodward is Managing Director of The Real Asset Boutique, a specialist in property investment and management in the UK, especially London.

He can be contacted at: info@therealassetboutique.com

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