Rental eases in London market

FOR those who have bought into the London property market and are expecting some yield from their investments, a residental lettings agency urges Malaysian investors to be “realistic about rentals” as the market has shown signs of easing in some locations since the second half of last year.

Benham and Reeves managing director Anita Mehra says “some tenants are willing to downsize or move further away as they cannot afford to pay high rentals.”

Mehra: ‘Some tenants are willing to downsize.’

Mehra was in Kuala Lumpur recently to speak with Malaysians who bought into that market.

She says that although the rental market is healthy, unemployment which is expected rise and a slowing down of the UK economy will affect the rental market going forward.

Her comments are supported by research reports by property consultancies Savills and Jones Lang La Salle, both of which are based in London.

According to Savills, “the previously strong residential rental growth has recently eased in the prime rental market of central London. Prime markets of the south-east have also soften slightly.”

Jones Lang La Salle reports that “rental values have been increasing for two years now (but) the rate of growth has slowed during the second half of last year.”

In its January 2012 report Residential Market Analysis: Prime Central London, Jones Lang says “demand continues to be the highest at the lower end of the market and even more so recently since the increase in rental values has forced some tenants to seek smaller properties or less well-located areas.”

The report goes on to say that “rental value growth has been strongest in studio and one-bedroom apartments. These smaller flats have seen average rental growth of 17.1% during 2011, whereas larger flats have seen a 9.3% rise.”

Although the report focused on Prime Central London, and not the Greater London rental market, it does somewhat give an indication of the Greater London area.

While prices continue to rise in London, prices are on the downtrend in other parts of the country.

Mehra singled out success stories like the riverside development Imperial Wharf in Chelsea where a one-bedroom unit can be rented out for £400 per week compared to Beauford Park in Hendon (£250 a week for a one-bedder).

At the presentation, many investors also enquired about a project in Acton and properties in Ealing.

“Some areas may be further away from the city but the environment is good, like Ealing where it is more family-oriented,” she said.

Reports from Savills said Asian buyers tend to like east of the city in areas like Canary Wharf, at one time known as Docklands which has undergone massive regeneration.

In prime central London, Savills says the Greeks, Italians and Egyptians like Marylebone and Regents Park and tend to go for the large trophy houses and turnkey flats, while other buyers from Europe have taken a liking to Mayfair, Knightsbridge and Chelsea, Kensington and St John's Wood. The Americans go for the well-maintained family houses in West Brompton.

Dynamics changing

The London property market, as a result of the 2007/2008 global financial crisis, is undergoing changes, Mehra says.

One of the most obvious is the foreign capital flight into the market, despite the economic uncertainties in the eurozone.

They call this a “flight to safe haven”, that is foreigners are putting their money into property which they consider as a “preserver of wealth.”

Over in the United States, the reverse is happening. Across the Atlantic, prices of property have gone below the value of their mortgage loans, that is the value of the loans taken out on properties is greater than the market value of the properties.

It is baffling that while the eurozone debt problem languishes, London properties are increasing in value.

Savills' Prime London Residential Markets (January 2012) says global unrest and economic uncertainty is to London's advantage as this has resulted in equity flowing there from other parts of Europe, the Middle East and China.

The prime residential markets of London performed the most strongly over the course of last year as it benefited from strong demand from international buyers who accounted for 55% of sales. These investors introduced £4.5bil of new equity into the market in 2011, one of the highest in recent years. In 2010, foreigners invested £3.7bil into the prime residential market.

Despite the eurozone problems, the European share of the market rose from 13.2% of sales in 2010 to 19.6%, while that of Middle Eastern buyers increased from 7.6% to 8.5%.

However, in the ultra prime market where values typically exceed £15mil, and overseas demand is strongest, annual growth ended the year just short of 19%. Growth was modest in the second half of last year at just 3.75%, the Savills report says.

Buyers who go for this ultra prime real estate are also rather telling they include billionaires from Greece, Italy and Egypt. Both Greece and Italy are among the two worst-hit economies in Europe while the Middle East unrest has also resulted in capital flight to London.

The dynamics of the London property market is undergoing other changes.

Of the £4.5bil that entered the prime central London last year, about a quarter or £1.4bil of new equity (investments) flowed into the newly built prime market alone as opposed to the secondary market. Last year, most of these newly-built properties were sold to Mainland Chinese and other Asians who accounted for a quarter (26%) of foreign purchases in this sector, while UK buyers formed a little over a third. In 2009, UK buyers formed three-quarters of the market for newly build London properties, Savills' The World in London says.

Buyers from Mainland China, Singapore, Hong Kong and Malaysia tend to be more investment oriented. Their objective is to benefit from the weak sterling and possible long term growth. They dominate the apartment market but at the lower price points compared with most other overseas buyers. Good access and communication links were their key requirements.

The report further says that “developers have consequently sought to target the Chinese and Pacific Asians by tailoring products to their preferences in terms of configuration, layout and design features.”

Says Malaysia Properties Inc (MPI) chief executive officer Kumar Tharmalingam: “Those who buy into the London market are taking a risk that the sterling will strengthen and the prices will go up. They are also taking a risk that the Malaysian economy will weaken.

“While London is an international market like Singapore, being an absentee landlord, you will have to pass the management of the property to an agent and there will be a cost to that. The only thing they can hope for is capital and currency appreciation. The laws there protect the displaced, and are anti-wealthy while the laws in Singapore protect the owners and Singapore is just two hours away.”

MPI is a government agency set up to promote Malaysian properties. - The Star