Greater London set to outperform prime in 2016

Singapore

STRONG growth in home prices has rippled outward from prime central London to Greater London.

So far this year, prices in the 32 boroughs in Greater London have risen 10 per cent, compared to just one per cent in prime central London.

Liam Bailey, Knight Frank's global head of research, who was recently in Singapore for a client event, told The Business Times in an interview that he expects prices to grow 2 per cent in central London in 2016.

This is after taking into account a slight uptick in base interest rates from 0.5 per cent to 0.75 per cent by Q3 next year. Just a couple of years ago, central London home prices were growing at about 8 per cent per annum.

For Greater London, he forecasts a much stronger price growth of 5 per cent next year.

Home prices in London began their strong ascent from 2009 with the end of the global financial crisis, when the pound slumped against the dollar and euro and made London real estate very affordable. Later during the eurozone crisis, Europeans also thronged in, viewing it as a safe haven outside their troubled currency bloc.

Mr Bailey said: "Central London started the cycle, and now it has spread out to Greater London and the southeast and the rest of UK. It normally takes 3-4 years for the property cycle to complete.

"If you look at the London Tube map, people are buying more aggressively in Zone 3 and beyond. This is the growth area for the next two years. Prices in Zones 1 and 2 are slowing."

London is divided into transport zones that radiate from the centre, with Zone 1 being the most central, and Zone 9 being the outermost area.

"Those buying for pure investment can be open-minded, because you can secure something close to the Tube at a fraction of the price in central London," he said.

He added that the Crossrail - a railway line under construction which should start operating in 2019 with a new east-west route across Greater London - should make the biggest impact on prices in the far east and west, because it will make these places that much more well connected.

He named Richmond, Barnet and Canary Wharf as some areas that should continue to rise more rapidly than London's prime markets. Other agents are also bullish on East London, Camden, Islington and new markets like Croydon.

On the transactions front, volumes have plunged 20 per cent this year from 2014, but should pick up and rise about 5 per cent in 2016.

The plunge was due to pre-election nervousness (the May UK elections eventually saw the incumbent prime minister's party win by a clear margin) and changes in stamp duties levied on home sales, announced last December.

The levy changes meant that buyers of homes worth under £937,000 (S$2.01 million) pay less tax, but people buying more expensive homes face a much higher bill. The change has hit high-end properties in the £2 million-plus range the hardest.

"That certainly undermined confidence at the end of last year and beginning of this year . . . That's certainly cooled the market. London is most affected because that's where the most expensive properties are in the UK," Mr Bailey said.

The Bank of England in mid-2014 also implemented caps on loan-to-value limits for mortgage lending, which has made it more difficult for first- time buyers to obtain loans.

On the rental front, home rentals have grown about 2 per cent this year, keeping pace with wage growth, and are likely to continue at this pace in 2016.

Tenant demand in London tends to come from short-term corporates staying in London for 3-6 months.

In the next few years, IT giants Google, Amazon and Facebook will be moving to new headquarters at King's Cross, Shoreditch, and Fitzrovia respectively, together employing about 9,000 staff in London, which should provide a pool of new demand.

"The growth in demand for workers' accommodation is exponential. In the European context, if you compare to Berlin or Paris, London has been and still is more successful at attracting new businesses than other big cities. The outlook for tenant demand is very strong," Mr Bailey said.

"One of the biggest complaints that employers make is the inability to attract staff. There isn't enough accommodation for people living in London. In fact, there is overcrowding in London . . . Employers want more accommodation in London. The push from governments and businesses will drive more development over the next decade," he added.

Asked what Asians like to invest in in London, Mr Bailey said new-builds, because they are much easier to buy long-distance than a property in the secondary market. Most Singaporeans are comfortable buying in the £500,000 to £1 million price bracket.

About 60 per cent of homebuyers in central London are UK nationals; 40 per cent are foreigners, a sizeable portion of whom reside in the UK. Of that 40 per cent, 30 per cent come from Asia.

The biggest group of Asian buyers are indisputably the Chinese, followed by those from Hong Kong, Singapore, the Middle Eastern countries like the United Arab Emirates and Saudi Arabia, and India.

There has been some shift in the Asian make-up over the years. For example, from 2010-2015, the percentage that Singaporeans made up of all the buyers in prime central London went down from 7 per cent to 2.1 per cent, but Chinese investors went up from one per cent to 9 per cent.

"Volumes may be down across the board, but Asian interest as a share of all interest is still as strong as it was," Mr Bailey added.