By Vernon Baxter, freelance writer
Scope for capital appreciation and popularity among overseas investors drive demand for units in UK capital’s posh neighbourhoods.
Even the world’s top property markets have their ups and downs. Despite central London’s reputation as one of the safest property markets around, the wealthy residents and property owners of Mayfair and Knightsbridge in July experienced a phenomenon the rest of the world knows only too well: negative equity. When the figures are compared with the rest of the world, however, owners of prime central London properties won’t be expecting much sympathy. Since the London market bottomed out in March 2008, owners have experienced a steady period of recovery, according to the Knight Frank Prime Central London Index. For 15 consecutive months, the market has rebounded strongly until prices dropped by a staggering 0.5 per cent. As property crashes go, there’s been worse. Indeed, Knight Frank is still confident that its forecast of 5 per cent price growth for 2010 across central London remains on track.
It is a testament not only to the inherent strength of the London market, but to its enduring popularity with overseas buyers. In fact, in its report, Knight Frank attributes the 15 months of strong growth to the continued demand for property from overseas buyers. “There are always international buyers, who are making money and will invest in London, irrespective of general market conditions,” comments search agent Simon Barnes, owner of Simon Barnes Property Consultants. But, there is no great secret to success when buying in London, says Barnes. “I would advise buyers to go for as central as they can afford. It is better in most cases to buy a smaller flat in a prime location, than spend the same amount on a house in the suburbs, but avoid large developments. Prime locations such as Mayfair, Belgravia, Notting Hill, Knightsbridge, Kensington and Chelsea will always do well.”
The thing about investments overseas, however, is that—by definition— you’re not going to be around to enjoy them all year long. Which is why the majority of international buyers who are attracted to London properties subsequently let them out to high quality tenants. If anything, the rental market is stronger than the property market itself, claims Tim Hassell, director of Draker, a prime Central London lettings agency. “From a landlord’s point of view, London is considered by tenants to be one of the most desirable cities in the world to live and work in,” he says. “This means that, providing they have purchased intelligently, they will always have an abundance of reliable, high-calibre tenants to choose from.” Indeed, letting properties in prime central London tends to be a straightforward process as the majority of tenants are ‘white collar’ professionals. However, these white collar professionals have not been entirely sheltered from the global economic storm and Hassell reminds investors that boom times don’t go on forever. But, sometimes stable can be just as good as spectacular. “Even through the recent economic downturn, the lower to mid-range lettings market has remained comparatively stable with only a slight drop in rents,” says Hassell.“But, it is, in fact, the stability of the lettings market combined with low interest rates that have enabled many investors to keep hold of their property portfolios. This is especially true with developers who have not normally been involved with the lettings market. When things get tough in our city, people turn to a more temporary solution—they rent rather than buy.” Still, as with any market, the London rental sector can ebb and flow and it is worth bearing this in mind when deciding when to enter the market.“The rental market is always relatively fast paced, with things reaching fever pitch in September and early October,” Hassell adds.“That is the best time to let out a property as demand seriously outstrips supply.”
But, what sort of returns should investors expect from the London market? Hassell says that values of central London properties have historically risen by between 8 and 9 per cent each year, but he points out that — even in this remarkably stable market — there are no guarantees. “The return is not a straight line and can consist of a great many years of flat prices followed by one or two years when prices increase by 20-30 per cent per annum,” he says. Which is why the long-term letting of properties is a good way of ensuring you don’t sell in a fallow year, he argues. “As long as you are able to hold the asset over a market cycle, then central London property should be a good investment. Importantly, the asset could provide a yield of 4-5 per cent per annum as long as you have a good lettings agent involved who can find the right tenants and manage the property for you.” Camilla Dell, from independent property search agency Black Brick Property Solutions, agrees that letting out a London investment can be the most effective approach for overseas buyers.“It is very active,” she says.“As well as the corporate tenant market, London also has a large private tenant sector, consisting of people who would ultimately like to buy but can’t afford to get onto the property ladder.”
Of course, letting through an agent is going to cost money. But due to the competitive nature of the London market, the agent costs are not prohibitive, says Dell.“Typically, you are looking at paying between 8 and 11 per cent per annum of the total annual rental income received on the property to a lettings agent to rent the property for you and then an additional 5 to 6 per cent to a managing agent if you decide to have the property professionally managed,” she says.“Many of our overseas clients choose to have their properties professionally managed.”
Expert opinion counts
So, if London is the market for you, how do you get started? The London market is clearly no stranger to international buyers, but it is always worth seeking advice, says Hassell.“Purchasing property in a foreign country is never easy. However, as long as you have a good solicitor acting for you, then the process should run smoothly,” he says.“There are no restrictions on foreigners buying property in London but, dependent on the purchaser’s country of origin, there may be certain benefits in buying in a company name rather than an individual name.” It is also preferable to arrange finance in the UK—or at least in UK sterling —rather than a foreign currency as it will remove the risk of currency fluctuation. “Large international banks should be able to provide sterling finance in any country and, therefore, it depends on the purchaser’s preference and the interest rates available,” says Hassell. Buyers should beware, however, if they plan on getting directly involved in the property search, warns Dell.“Remember, estate agents in the UK act on behalf of the sellers. So, without seeking a source of impartial advice elsewhere, buyers have little way of knowing whether they are getting a good deal or making a sound investment,” she says. “At Black Brick, we have witnessed the fallout from several misguided purchases where the buyers failed to seek independent advice on their investment. One West African client came to us having significantly overpaid for a property, on the premise that it was located in a prestigious area in central London—St John’s Wood —when in reality it was located in the less sought-after adjacent neighbourhood of Kilburn. He experienced no growth in this asset and is now seeking our advice on his next property purchase. “Likewise, many foreign buyers invested in a new build development in Fulham, south London, which experienced a 20 per cent decrease in price during the downturn. We advised our clients not to buy in this development as in our view, high-density apartment blocks in secondary areas do not represent good investment.”
Nevertheless, Dell insists that canny investors should have no problem with the market.“With the right advisers, it’s very straightforward,” she says.“The most common mistake foreign buyers make is not to seek proper advice before making a purchase, which can end up being costly.”
An investment for life
Even then, there are very few investments in London that time can’t heal. And once you buy in London, you won’t be in any hurry to leave the market, says Gary Hersham, director at top-end London agency Beauchamp Estates. And an investment in London can be an investment for life and beyond.“In terms of safety of assets and capital, there is nowhere safer in the world,” says Hersham. “No one can or ever will take your asset away from you. If you have ownership or title of a property, effectively it is yours forever, unlike other countries were such entities as ‘tax police’ or ‘the State’ can come along and appropriate your property.” It may sound dramatic, but given that many London investments from overseas buyers stay in the same family for generations, it is certainly reassuring. “We have the best and most secure property title in the world,” says Hersham. “Once a property is conveyed and title deduced, no one can claim thereafter that they, not you, own it.”