Over the last two years, our clients have enjoyed some of their highest returns on their investment properties in London. For this reason, London has remained as one of our key investment markets for the past four years. Extreme undersupply and high rental yields are just two of the reasons why we favour this market.
First and foremost the London property market has continued to perform well over the last twelve months with property prices forecasted to grow 29.1% in the next four years. Secondly, the exchange rate continues to favour foreign investors with the pound currently undervalued making it relatively cheaper for foreign investors to purchase London real estate. Thirdly, rental values are at high levels and have increased by 16% year-on-year. It is likely that interest rates will increase in 2011, which will have an impact on rental yields, however we are still seeing a very strong uptake of rental with an average of five tenants competing for every property in the UK. This demand-supply disequilibrium in the market means investors are able to demand higher rents to offset higher interest rates. The final confidence factor on the London market is how attractive it is compared to the rest of the other real estate investment opportunities around the globe. Real estate in Singapore, Hong Kong and China is inflated and overregulated which makes purchasing in these markets difficult and very expensive. London has shown consistent capital value growth and good levels of leverage which has not always been present in Singapore, Hong Kong and China.
Leveraging your property investment especially in London can really push up your returns. Take this example: over the last 11 years property prices in London have increased 109%. If you were to leverage your investment at 70% in 2000 i.e. took an average loan of 70% of the property value, then you would have made a 376% return on your investment compared to the price growth of 109%. This indicates the importance of leveraging assets to optimise the returns on your investment. Leveraging is always sensible from the point of using your capital wisely and generating better returns, but also for reducing any tax liability. For instance, if you have GBP 1,000 rent and GBP 800 mortgage, you only pay tax on net income of GBP 200 and of course that is not taxable because of this low band of income. Therefore, your monthly rental will be offset against mortgage costs.
With so many London products in the market, one may be overwhelmed or confused as to where or what to invest in. To keep it simple: focus on prime Central London. Over the past few years, prime Central London property has performed better than the general London market and there are a few boroughs which have outperformed the rest. The likes of Kensington, Chelsea and Westminster are examples of prime Central London. Even during the recession, if you were to have leveraged your investment property in Kensington and Chelsea in 2006, you would have seen a return of 189% compared with 55% unleveraged. This shows the kind of return in prime Central London and how leveraging property can more than double your ROI.
Prime Central London is a perceived as a store of wealth with investors turning to these markets as a safe haven in the midst of ongoing global political and economic uncertainty. From Asian investors seeking to buy in Europe to investors from Russia looking for top quality product in an undersupplied market, prime Central London ticks all these boxes with a forecasted growth of between 5% and 10% for this year. To date, we have invested over GBP100 million in London on behalf of our clients.
To find out more about Tim Murphy and investing in global real estate click here or contact IP Global.
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4 Nov
Avoid the Eurozone Property Market Until Situation Becomes More Clear
The turmoil in the Eurozone countries continues to command centre stage, with principal players such as France and Germany still grandstanding about how best to solve the region’s debt problems. Against that backdrop, we would caution against investing in “euroland” until there’s some indication of a resolution to the crisis.
That’s not to say Europe is entirely out of the question when it comes to real-estate investment. Non Euro cities such as London still look worthy of attention and is one of the most attractive property plays, with the relatively weak pound making the British capital the most attractive city in Europe for property plays. For investors with slightly more risk appetite, we would also throw Prague and Istanbul into the mix.
Assuming the debt crisis in the euro zone is resolved without a major national default, and with certainty rather than a long, lingering drip-feed of debt extensions, we favour Germany as the most attractive euroland play. Major cities such as Munich, Hamburg and Berlin offer the best opportunities, with robust market fundamentals. There’s also the long-shot possibility of currency appreciation if Germany elects to bail out of the euro and return to the Deutsche Mark.
Perhaps surprisingly, investment in the euro zone remains active. However, the market has been dominated by local investors, while international investors remain on the sidelines, waiting for resolution of the sovereign-debt crisis in Greece and spillover into the banking sector.
According to DTZ, France saw commercial real-estate transactions rise 33 percent in the second quarter, 2011. The pace was even more hectic in Scandinavia, with Nordic countries posting a 79 percent increase in activity.
On average, investment activity across Europe rose 14 percent in the second quarter. Investment into Britain was up 16 percent, while Germany saw only a 5 percent gain.
Cross-border investment however all but dried up, down to €7.5 billion, or 29 percent of all commercial deals. That was the lowest level of international interest since 2002. Investors from outside Europe remained on the sidelines, with investment volumes down 14 percent.
We are of the view that London will continue to command the attention of international investors. The United Kingdom has evolved into a two-tier market, with the capital behaving very differently from the rest of the nation. London’s property market is up 11.4 percent year to date, while average prices nationwide are down 6 percent, and off 20 percent from their 2007 peak.
Overseas buyers have spent just under £6 billion in the capital over the last 18 months, seeking London properties as a safe haven at a time there are few certainties in the real-estate outlook.
The Czech capital is also seeing relatively stable growth, and should continue to attract interest from property investors and developers alike. Property investment is up 3.7 percent compared with last year. Rents, though, continue to struggle, down 7 percent last year.
Istanbul has also been drawing significant international interest. The main supportive factor being the rising affluence of the city’s residents. Istanbul prices are up 7.4 percent compared with last year, driven by high demand and limited supply. The annual demand for new property in Turkey’s largest city is estimated at 250,000 homes or more, but only 180,000 units are due to come on the market this year. This gap is expected to remain for a number of years. Rents are edging ahead, up 1.1 percent in September.
It’s best to wait before exploring any investment in the euro zone. But Germany’s low unemployment and robust labour market, combined with relatively healthy economic prospects compared with other parts of Europe, make it the most attractive euro zone market.
Berlin, Frankfurt and Munich all featured in Ernst & Young’s ranking of the top 10 cities in Europe for new investment. Germany as a whole has the highest proportion of rented property, at 57 percent of the country’s stock.
Property prices and rents are on the rise in Munich, the country’s most expensive market, where prices are up 12 percent since the first half of last year, to €3,440 per square metre. Rents are averaging €12.10 per square metre per month, an increase of 3 percent compared with last year.
France has so far bucked the trend of deteriorating property markets seen in the rest of the euro zone. But slower growth is weighing on consumer sentiment. Together with consumers who are growing ever more cautious, it suggests recent price rises won’t be sustained.
Other euro zone markets such as Spain and Ireland continue to suffer horribly. Spain has seen a price correction of almost 25 percent since 2007, but there’s no relief in sight. There’s also no sign of a light at the end of the tunnel in Ireland, where prices are down more than 40 percent from their 2007 peak. That’s the deepest slump in Europe, and one that shows no signs of letting up.