Capital Gains

What’s happening with house prices in London?
That depends what you mean by London. Last year prices in the best areas rose fast — by 10 per cent or so in Kensington and Chelsea, for example, and in Westminster. But prices fell in some of the city’s 32 boroughs, and overall the market was more or less flat. So while ‘super-prime’ property — the top 5 per cent of the market — is now priced around 20 per cent higher than it was at its pre-crunch peak, and prices in other prime areas, such as Fulham, Islington and Battersea, have held up very well, the fast-growth numbers Londoners quote are led by a few small areas. That said, even the worst areas of London are better than the best elsewhere, In the north of England around 12 per cent of homes are in negative equity. In London that number is 3 per cent.

So why has prime property done so well?
It’s all about foreign buyers and about the pound. Over the past 15 years, Russian money has been pouring into London. Five to six years ago it was joined by Chinese money. And since the financial crisis rich Europeans looking for a safe haven have been pouring in too: all estate agents report fast rising sales to the French, the Greeks and the Italians. They are now expecting the French to arrive in even greater numbers thanks to François Hollande and his 75 per cent income tax plans. Foreign buyers have been encouraged partly by the safe haven status of the UK — we offer legal security alongside very low taxes. But the weak pound has helped too: between 2007 and mid-2011 it lost about 20 per cent of its value. That effectively offered overseas buyers a 20 per cent price cut. In 2007 around 75 per cent of super prime properties in London were bought by foreign buyers. By last year that number was 85 per cent.

What next?
Global instability — the thing that really brings the foreigners in — doesn’t look like it is going to abate any time soon. But there are a few things that should make buyers more cautious than usual. The first is stamp duty. The attempts to deal with tax evasion and to make the rich pay more by pushing the duty payable inside companies up to 15 per cent and the ordinary duty for houses costing over £2 million to 7 per cent is bound to affect prices at the top end. Then there is the pound. It has now started to rise again (as I write, it is at a 20-month high against a basket of currencies). That has started to put up prices for foreigners. A  £2 million house would have cost €2.27 million a year ago. Now it would be €2.45 million. Add on the rise in stamp duty and you’re talking real money. Remember also that rental values do matter — investors like to get a reasonable yield when they buy — and rents in London are finally cooling. According to Savills, super-prime rents have slipped by 0.5 per cent so far this year. Finally, it is worth noting that, while foreigners are important, research from Capital Economics also shows that those areas in London with the highest rises in house prices also have the lowest levels of unemployment. As our recession drags on that might change — and prices might stall as a result.

Where should I buy?
Assuming you aren’t a Chinese money-launderer with £10 million to spend, the answer is probably nowhere specific. If you really want to be in the London market — and you understand that to buy is to make a bet on currencies, global friction and financial industry employment — your best bet is probably to diversify via a fund. If I were looking for one, which right now I am not, I’d consider LCP (londoncentralportfolio.com). The firm is launching its third London residential fund with an eye to buying properties below the £2 million mark and renting them out to blue-chip executive clients.


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