RESIDENTIAL RESEARCH - Knight Frank

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RESIDENTIALRESEARCHINTERNATIONAL residential INVESTMENT IN LONDONInternational Project Marketing 2013

International residentialinvestment in londonInternational Project Marketing 2013“ The economic andfinancial changessince 2007 havecreated a fresh modelfor overseas investmentin new-build property.”Gráinne Gilmore, Head of UK Residential ResearchThe global economic and politicalturbulence evident since the startof the financial crisis has createda new impetus for cross-borderinvestment in prime propertyassets around the world.Key findings:The movement of capital into residentialproperty is most notable when looking at thekey global cities, with overseas investors keenfor a slice of premium real estate in locationsoffering more than just excellent investmentopportunities, such as lifestyle and education. Buyers from Singapore and Hong Kongaccounted for 40% of purchasers ofnew-build property in central LondonIn this report we investigate the factors thatmake London property such an attractiveinvestment. While international interest inLondon property is not a new phenomenon, theeconomic and financial changes since 2007have created a fresh model for overseasinvestment in new-build property.In this report we share the most up to dateanalysis of these market trends. Overseas investors channelled 2.2 billioninto the new-build sector in central Londonin 2012, up from 1.8 billion in 2011 A third of investors buying off-plan buyproperty with their children’s education inmind, planning to use at least one propertyfor their children to live while they attend aLondon university China and Indonesia are among the biggestpotential new markets for UK propertyinvestment from 2013.London: a global cityThere has long been a trend for overseas buyers to purchase homes or investmentproperties in central London. In the 1980’s, Americans dominated the internationalmarket, as did those from the Middle East. Over the last decade or so, Russian andAsian buyers have become more active.The crisis in the Eurozone has only boostedinterest in London bricks and mortar amongEuropeans – there was a sharp rise in buyersfrom Italy, France and Spain in late 2011 andearly 2012 as investors looked for ways toFigure 1London: a global citydiversify away from Euro-denominatedNationality of inhabitants by country of birth(Inner London)assets. A weaker pound served to make theopportunity even more attractive.Buyers from Asia have also risen inprominence in recent years; the pound comesinto play here too, as Asian buyers benefitfrom an effective discount on London property(figure 2). In addition, the new-builddevelopments around central London appealto buyers who are comfortable buying off-plan.It is perhaps not surprising that Londonattracts international attention, given thatUnited KingdomEuropeAfricaMiddle East and AsiaAmericasOceania58%15%8%11%6%2%Source: Knight Frank Residential Research, Census 20112it is such a multi-national city. As figure 1shows, there are large overseas communitiesliving in the UK capital. The number ofEuropeans living in London far outnumbersthe total population of Frankfurt, while thenumber of French nationals living in Londonrivals the population of Cannes.The diversity of London’s population isreflected everywhere, for example thefoundation of French Lycée schools in SouthKensington and Clapham – areas popularwith French families.Knight Frank lettings agents rented outproperties to tenants of 77 differentnationalities in 2012.The financial crisis has had an impact onthe banking industry across the world, andLondon is no exception. But the UK capitalis still a leading player in the financeindustry, topping Y/Zen’s Global FinancialCentres index in 2012, ahead of New York andHong Kong.At the other end of the scale, London alsoboosts a flourishing entrepreneurial sector,with small tech companies edging into theCity of London, a traditional bastion of banksand insurance houses.That is not to say there is not competitionfrom other global cities, including New York,Sydney and Paris, for property investment butLondon boasts some unique benefits.

www.KnightFrank.comBelow we examine these financial andThe pound also fell against many othercurrencies in the immediate aftermath of theeconomic crisis, and remains weak, offeringbuyers, especially those buying in US dollarsor currencies linked to the dollar, an effectivediscount on purchasing property in Londonand the rest of the UK.socio-economic factors in more detail:1. Safe-havenLondon is often hailed as a ‘safe-haven’location. But what does this mean?On a pure investment basis, London has atransparent property market. Property tenureis clear cut and underpinned by the legalsystem. Given that it is such an establishedmarket, there are also good liquidity levels inevery price band compared with some lessestablished global hubs.London is also physically and politically safe.There is clear rule of law and transparency inthe political system that is not replicated insome emerging economies. An independentjudiciary burnishes this reputation.While there have been some property taxchanges recently, there have been no widespread ‘wealth taxes’ imposed unlike inFrance or Spain.2. CurrencyUK investment also offers a currency play.The surge in European buyers in recent yearscan largely be attributed to the crisis in theEurozone. Buyers looked to diversify awayfrom Euro-denominated assets, given theinsecurity about whether the Eurozone wouldremain intact.Figure 2Exchange rates and pricingPrime central London price change relative to2008, allowing for currency fluctuations50Forecast4030% change10-10-20-30PCL in GBPPCL in CL in USDSource: Knight Frank Residential Research, EIUWhat motivates overseas buyers ofLondon new-build properties?*However it is worth noting that a suddenstrengthening in the pound could affect thecurrent market dynamics.3. EducationThe lure of world renowned schools anduniversities in and around London cannot beoverstated. As figure 3 shows, a third of buyersof off-plan new-build properties do so with theirchildren’s education in mind. In many cases, theproperty or properties will be used by theiroffspring while they study at a university, andthen rented out once the child or children moveelsewhere or return home. If the children are notyet at the correct age for university, the propertymay be rented out until they are.London is among the top cities when it comesto tertiary education – it boasts 12 universitiesranked in the top 700 world institutions,according to QS – rivalled only by Paris with16. Berlin, Zurich, Milan and Amsterdam havefewer than five. The popularity of theseestablishments is clear, as London has thehighest number of overseas students anywherein Europe. At the London School of Economics(LSE), a highly regarded institution across theglobe, international students make up morethan 65% of the student body. Two-fifths ofstudents at Imperial College, London and UCLare from outside the UK.The most recent data from UCAS, the UK’suniversity application system, showed that thenumber of applications from overseas studentsrose again for the academic year 2013/14.0Figure 3Forecasts show that the pound is likely toremain relatively weak in the years to come.The benefits for purchasing London propertyare shown in figure 2.The fact that courses are taught in English isseen as an added advantage.20SnapshotInvestment (rental)Children then investment(or vice versa)Second home65%33%2%Source: Knight Frank Residential Research* Based on survey of IPM teams selling off-plan developmentsFigure 4Age of overseas buyers of Londonnew-build property*25-3435-4445-54over 553%40%50%7%Source: Knight Frank Residential Research* Based on survey of IPM teams selling off-plan developmentsThe lure of a British education is nothing new,and many investors may have been educated inthe UK themselves, or have family or friendswho have done so. In fact, when we surveyedhigh-net-worth individuals about whatattracted them to invest in London property,one of the main reasons given was the networkof contacts they already had in the City.3

International residentialinvestment in londonInternational Project Marketing 2013Figure 5New-build central London propertybuyers nationalitiesMarket fundamentals:who is buying?UK buyers accounted for the majority of property purchases across the primemarket in London in 2012, with 58% of homes being bought by domestic purchasers.Europeans accounted for 13% of sales during the year, while one in ten sales wereto Asian buyers. Nearly 5% of sales were to Russian purchasers.But when we focus solely on new-build sales,rather than sales of all new and older housingstock, the picture changes quite significantly.UKSingaporeHong KongChinaMalaysiaRussian FederationTurkeyNigeriaIndiaSaudi ArabiaUnited Arab Source: Knight Frank Residential ResearchUK buyers remain the largest segment,accounting for 27% of transactions in thenew-build market in central London, broadlysimilar to 2011. Buyers from Singapore andHong Kong were integral to the market in 2012,with a 23% and 16% share of the marketrespectively. Chinese and Malaysian buyersaccounted for 5% and 4% of sales in 2012, asshown in figures 5 and 6.Overseas buyers purchased new-buildproperty in London worth some 2.2 billionin 2012, according to Knight Frank analysis.This is up from 1.8 billion in 2011.When ordered by total investment rather thannumber of transactions in 2012, Singaporeand Hong Kong still top the charts,although Russia pips China to third place.By average investment per property,Hong Kong investors tend to spend slightlymore than those from Singapore or China.The typical purchase price for new-buildproperty in prime central London amongAsian buyers stands at around 680,000.The average spend by Russian buyers tendsto be the highest.Some overseas buyers, especially Asianbuyers, are more comfortable with the ideaof buying a property off-plan, as this practicemore closely reflects the property market intheir own countries.This trend has had an important impact onthe market in London, allowing developersto secure funding to develop schemes in aFigure 6Capital flows:Investment in new-buildcentral London propertyTop 12 countries, 2012UKRussiaTurkeyChinaTotal overseasinvestment 2012: 2.2 billionSource: K night Frank Residential Research4IndiaSaudiArabia UAENigeriaHong KongMalaysiaSingapore

www.KnightFrank.comhousing market largely starved ofdevelopment finance. This has been a crucialpart of financing many developments, whichhas resulted in London’s construction levelsholding up relatively well compared to the restof the country in the wake of the financialcrisis, although there is still a significantundersupply of new housing in the capital.But not all developments will meet thecriteria of exacting investors. Neil Batty,head of International Project Marketing atKnight Frank, said: “Investors preferproperties based in zones 1 or 2, and ideallyin close proximity to a tube station. Schemesclose to the river are also popular, as well asregeneration schemes which guarantee thatthe public realm surrounding the propertywill be attractive and well maintained.”Areas that have opportunity foroutperforming on price because of localfactors are becoming more sought after.TaxesIn March 2012, the Chancellor increasedthe stamp duty charge for properties worthmore than 2 million from 5% to 7% forindividuals and 15% for those buyingthrough a company structure.Other tax structures for individuals, suchas capital gains tax treatment, remainunchanged, but for those buying througha company, additional charges will applyfrom April 2013. The scope of the chargesis narrower than was initially expectedhowever, with investors welcoming the reliefson offer for those renting out a property to athird party.However the uncertainty over the new rules,which were not published until December,created an effective multi-speed market inprime London property for much of last year.Activity remained strong under the 2million threshold but there was a notabledecline in transactions above this priceband. This is expected to remain the case,with the sub- 2m market outperformingin 2013.Purchase price/leasepremium or transfer valueUp to 125,000SDLT rateZero 125,001 to 250,0001% 250,001 to 500,0003% 500,001 to 1 million4%Over 1 million to 2 million5%Over 2 million7%Over 2 million (purchasedby certain corporate bodies)15%Future marketsOne of the key questions facing developers is where future demand for new-build schemes will come from. Perhaps counterintuitively, we see domestic demand for new-build properties in prime London rising from the current rate of 27%.We expect the core Asian markets of HongKong and Singapore to remain strong,especially for the very best developmentsin the most desirable areas in London.But we forecast that some overseas marketsmay also rise in importance.Perhaps the biggest growth is expected inChina. There has long been talk of a surge ininvestment in London property from China asthe rising middle classes look for alternativeinvestment opportunities, but this has yet tofully materialise. Knight Frank forecasts thatthe medium-term outlook for the Chinesemarket is strong, as while it may take sometime for restrictions on overseas investmentto be eased – a move which would openoverseas property markets up to moreChinese investors – there is real interest inthe region for prime London property.Turkey is also an emerging market in termsof buyers of prime London homes. Healthyeconomic growth during the last threeyears – far outperforming crisis-hitWestern economies, has led to continuedwealth creation.Buyers active in the market are largely drawn toLondon because of their existing connectionswith the UK, whether they were educated orhave family in the country.52Number of nationalitieswho bought new-buildproperty in primeLondon, 2012India has often been hailed as a rising marketfor new London developments. While there isno doubt there is a long-standing connectionto London, and a strong interest in Londonreal estate among Indian investors, buyers arenot solely drawn to new-build developments.In terms of marketing, buyers are often keento visit the UK themselves before purchasing,rather than doing so off-plan.Indonesia is tipped to become a stronger playerin the investment market in the coming years.For example, the number of searches for primeLondon property from Indonesia on KnightFrank’s global property search jumped by 22%in 2012, compared to 2011.The future of the overseas investment marketis not without risks however. Any sudden andunexpected weakening of the dollar againstthe pound could undermine the effectivediscount enjoyed by many investors.However, the lure of London does extendbeyond the currency play. Despite thecurrency discount being eroded forEurozone buyers, there is still strong activityfrom French, German, Spanish and otherEuropean buyers in the wider London market.Another risk is tinkering by politicians.The effect on the market of the new taxesfor 2m properties owned by overseascompanies was clear, and is explored inthe box above. Political rhetoric also hasthe scope to damage the market. Recentcalls by the Liberal Democrats party to curbpurchases of property by overseas buyersin London gained little traction, but riskedsending a confused message to internationalbuyers. However, the majority ofpolicymakers understand that overseasinvestment is playing a crucial part infinancing new developments in London.5

International residentialinvestment in londonInternational Project Marketing 2013Private rented sectorGiven the interest that most overseas buyers have in renting out their property, it is important to consider the fundamentalsof this market in London.The rising demand for rented property haspushed up average rents in recent years.This coupled with strong capital growth,has resulted in enviable returns on Londoninvestments, as shown in figure 07200820092010201120123Source: Knight Frank Residential Research, Census 20116However the consolidation in the financialsector had a knock-on effect on rents in primecentral London in 2012, with modest declinesin average rents which ended the year down3.2%. Yet the picture is much more localisedthan this. Some areas saw rents rise last year,including Kensington (0.6%) the City (3.2%)Canary Wharf (1.3%) and Notting Hill (1.5%),Proportion of households in the privaterented sector 1991-2011Based on census 2011 data30252015105019912001Wales/CYMRU15Figure 8South WestAverage prime central London totalreturns since purchase, calculated fromyear of purchaseThe census data shows this trend clearly(figure 8). London has seen the biggestrise in the number of households, whichrange from people living alone to largefamilies, in the PRS over the last 20 yearscompared to every other region. Since 1991the number of households in the PRS in the13 inner London boroughs has more thandoubled, climbing by nearly 190,000 to372,000. There are more than 100,000households in the PRS in the four boroughsof central London, up 50% from 1991.There is also potential for more capitalgrowth, coming on the back of a 53% risein prices since the market trough in 2009.After pausing this year, we forecast that primecentral London property prices will climb by afurther 17% by the end of 2017, which will becoupled with increased demand in the privaterented sector as the economy gets back ontrack, and the sector grows in importance asa whole.LondonFigure 7Forecast capital growth for primecentral London property 2013-2017Investors have typically been more interestedin a central location than an extra percentagepoint or two in annual yield however.South EastThe relative economic outperformance ofLondon is certainly reflected in its employmentdata, with a quarter of all jobs created inEngland in 2012 being generated in London,further underlining its attraction to workersfrom all over the UK as well as further afield.17%The recent dip in average rents, coupled withhigh capital values has put a further squeezeon yields. Finding a yield of more than 4% inprime central areas is now the exceptionrather than the rule.North WestYorkshire &the HumberEastMidlandsWestMidlandsEastIn fact, recent analysis showed that while theUK as a whole fell back into recession in 2012,there were some notable regional differences ineconomic performance. Indeed, on a localisedbasis, the data suggests that London and theSouth East did not see a ‘double dip’ recessionlast year, registering continued, albeit modest,economic growth throughout 2012.Add to this demand the current constraintsin the UK mortgage market, which has becomea major challenge for first-time buyers tryingto buy their first home, and it is clear how thePRS has grown in importance.while Belgravia saw rents climb by 0.9% inthe last three months of 2012 alone. Theappetite for rental property also remainsundimmed, especially in the sub- 1,000 aweek price band.North EastMigration within the UK has played a part in therising population. The draw of London for thosemoving to the capital becomes clear whencomparing the economic forecasts for Londonand the UK, as London is expected to continueto lead the way in terms of economic growthover the next four years.The demand and supply dynamics of housingin London, especially in central areas, is alsoboosting the private rented sector (PRS).Knight Frank’s recent London DevelopmentReport showed that supply for propertyacross London was set to be far outstrippedby demand in the coming years – furtherexacerbating a shortage of housing alreadyaffecting the capital.%London’s population growth is outpacingthe increase in its housing stock. Recentlypublished data from the 2011 census showedthat the population in London has grown muchfaster than expected since

International residential investment in london International Project Marketing 2013 2 Gráinne Gilmore, Head of UK Residential Research “The economic and financial changes since 2007 have

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