Investing in Super Prime London and the Importance of Leveraging Your Investments

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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