Investing In London Property?
For quite some time now London has been the de-facto property investment capital of the world. The EU’s biggest city and the worlds 32nd most populous is considered as the most secure choice of bricks and mortar bank of any major international metropolis. Many locals own buy-to-let investment properties in the UK’s capital and over the past two decades, there has been a massive influx of foreign capital investing in London property. A recent London School of Economics study estimated that between 2014 and 2016, 13.2% of all property transactions in the capital involved a foreign investor. That figure hits 16% for inner London boroughs.
The super-rich began buying up exclusive addresses in London’s most expensive neighbourhoods some time ago but since then a wider range of foreign investors have chosen to invest in London bricks and mortar. Well off middle-class investors from places as far flung as China and Singapore are now regularly among the buyers of ‘normal’ properties in boroughs all over Greater London.
Despite regular predictions that property prices in London have peaked and rental returns being pressured by high sales prices, British and foreign investors keep putting their money into London property. Here’s a summary of the data underpinning the investment case behind the enduring appeal of London property:
Home to an estimated 8,674,000 residents, London is more than twice the size of Berlin, the EU’s second largest city and is behind only Moscow and Istanbul in continental Europe. And as well as being by far the UK’s biggest city, Birmingham in 2nd place has a population of 1.1 million, London’s population also has the fastest growth rate. Office of National Statistics data puts London’s population growth rate at 5.7% between 2011 and mid-2015. The UK had an overall population growth of 2.9% over the same period and the next most quickly growing city by population was Bristol at 4.5%.
Tower Hamlets had the largest population increase in the country – increasing 34.5 per cent over just 10 years. 56,300 people came to the area from abroad to 12,000 leaving the area, giving a net migration gain of 44,400. A further 32,700 more people were born in the area than died, the figures showed.
Eight of the 10 UK regions with the biggest population growth between 2004 and 2014 were in London.
London is also the youngest city in the UK with an average age of under 34, compared to a UK-wide median age of 40. The city has a huge student population with just under 400,000 of the UK’s 2.28 million students living in London.
While Greater London may seem sprawling the city is also densely packed. The 19 most densely populated areas in the UK are all Greater London boroughs, with Islington and Tower Hamlets leading the pack.
And London is still growing quickly. The Brexit vote and the UK’s impending exit from the EU has slowed the rate of growth over the last year, down to around 2.3% in 2017 from over 6% between 2010 and 2015. Nonetheless, steady population growth is still forecast with Greater London’s population projected to have reached almost 11.5 million by 2030.
The London Economy
London’s economy within the relative political and legal stability the UK offers that has led to the strength of its property market. With a GDP of £565 billion, London’s economy is as big as those of Sweden and Iran, accounting for 17% of the UK’s total GDP despite only around 13% of the population living there.
London is one of the world’s finance and commerce capitals. Defying Brexit fears, London again topped the most recent edition of the bi-annual Global Financial Centres Index, holding its lead over New York in second place. More US dollars are traded in London every day than in New York and more euros than in every other European city combined.
Financial and business services are at the centre of London’s economy and one in every three jobs in the city is related to the finance industry, which employs 1.25 million Londoners. The London Stock Exchange is the world’s largest with 32% of all international stock market transactions taking place on it. 85% of London jobs are in the wider services sector.
However, it’s not just finance and services. 48 million tonnes of cargo passes through the Port of London every year. London is also a digital economy and e-commerce world leader and the industry ranks as one of the fastest growing sectors of the economy.
Just under 2 of every 3 Fortune 500 companies count London as their centre of operations and 1 in 3 large global conglomerates have London as their European base.
The city has five major airports with a combined 162 million annual passengers and is also linked to mainland Europe by rail and road via the Eurotunnel. Part of London’s commercial appeal is that it can be reached by more people, from more destinations, in less time than any other city in the world. However, despite the already impressive infrastructure, the growing population and booming economy means that additional capacity is required.
London’s 2050 infrastructure plan, published by the Mayor’s Office in 2015 has targeted a 50% increase in public transport capacity. Extensions to underground lines such as the Bakerloo line and the huge Crossrail and Crossrail 2 projects are expected to account for a large part of this requirement. New stations and more convenient transport links are the single most influential factor in London when it comes to localised economy strength and property prices. This makes investing in London property a natural destination for many investors.
Investing In London – The Residential Property Market
Despite years of strong house price (500% in 20 years) and rental rates (18% in 10 years ) growth, investing in London residential property market remains robust. House price growth has cooled over the past year and dropped to 1.2% between April and June this year, though was still at a steep 5% over the first quarter of 2017. Capital gains on London property have dropped behind the UK average of 2.8% for the first time in several years.
While a slowdown has been inevitable against the huge growth over the past two decades, there is little chance of investors in London property losing gains. Investing in London ’s contemporary residential property market is, in the eyes of most investors, the equivalent of a high-quality government bond: it might not provide the highest potential return available but it is low risk. During the 2007/08 global financial crisis, London’s house prices and rents dropped by far less than anywhere else in the UK and recovered far quicker, surpassing their 2007 peak by 2012.
Housing market research group Hometrack believe that any future housing market downturn in the UK will again be more muted in London. Lower loan-to-value ratios for London mortgages will, their research indicates, protect homes values. Demand to supply ratios are another factor with mortgage brokers and civil service experts in the capital unanimous in their view that the capital retains a residential housing deficit. Despite high prices and rents, the top end of the London housing market is less sensitive to interest rate changes than the property market as a whole.
The average house price in London stood at £491,000 in early 2017 against a UK average of £218,000. Certain areas of London also still retain the potential for significant capital gains. Watford, in the north of Greater London, comes in second in Lendinvest’s Buy-to-Let Index ranking for UK-wide capital gains. First place Romford is also on the periphery of London, sitting to the east of the capital in Essex and a 25-minute train journey into Liverpool Street. Several of the other top 10 postcodes are also in and around London.
According to Your Move’s Buy-to-Let index, earlier this year average rental yields in London were 3.2%, down from 3.6% in 2016. However, with Greater London such a diverse area there is naturally considerable variation between regions and boroughs.
As a general rule, the more exclusive the area and expensive the property, the lower the rental yield an investor might expect. These areas are considered a safe-haven investment rather than one expected to deliver a healthy ROI from rental income. The less expensive areas are generally those offering the best ROI and, recently, also capital growth.
Infrastructure developments play a major role in price trends in London and areas with stations on the new Crossrail Elizabeth Line, due to open late 2018, are currently seeing strong price growth. West Drayton in the west and Woolwich in the South East are outlying areas that until now didn’t have particularly good transport links to central London, Heathrow etc., which will change with the opening of the Elizabeth Line. Sutton in the South, where homes are around £100,000 less than the London average is the second most demanded location in London currently and the area with the biggest change in demand seen between 2016 and 2017. There is still plenty of value and the potential for strong capital gains in the capital by looking to areas that will most benefit from new transport infrastructure while the already more expensive areas are unlikely to suffer greatly from future market downturn cycles.