Through 2008 and 2009 demand became heavily dependant on a relatively small pool of domestic owner-occupiers as investors and overseas buyers retreated from the market. This occurred at a time when employment and earnings in the financial and business services sector were under pressure.
In 2010 investors began to return to the prime East of City markets, feeding into price growth and progressively increased transaction levels. The first quarter of 2012 was particularly strong with investor demand accounting for one in four of such purchasers (see Graph 3).
Overseas demand, particularly Asian, has been increasingly important, given the continued uncertainty surrounding the financial and business services sector upon which the market is heavily dependent. In 2006 and 2007, overseas buyers accounted for one third of demand for second hand product. In 2011 and the first part of 2012 it has been half of all demand.
Such buyers are attracted by the area's investment credentials. The prime East of City markets offer higher gross income yields than prime central London (4.9% v 3.8%). Added to this at the end of May, rents were some 3.7% above their level at the peak of the market
in 2007.
Nonetheless, the market continues to be reliant upon buyers employed within the financial and business services sector who account for around six in every ten buyers.
Accordingly, the extent to which we see an improvement in core owner-occupier demand is likely to be closely linked to the economic performance of the financial sector in London and its impact on the Canary Wharf employment markets.
Finance is the dominant business in the Canary Wharf commercial market, accounting for 76% of the office space leased over the last five years.
Across London as a whole, the economic output and employment forecasts for the financial and insurance sector in 2012 are relatively weak (see Graph 4).
Oxford Economics forecasts economic growth in the sector will be just 0.1% this year and that employment will fall by 0.9% compared to 2011. This is likely to act as a constraint on demand and price growth in the short-term.
The return of consistent economic and employment growth from this sector is expected from 2013, increasing into 2014. We expect this to feed through into increased demand for prime housing in the East of City markets from 2014.
Though we expect high deposit requirements and constrained bonuses to continue to be limiting factors, this should lead to
an improvement in transaction levels and price growth from 2014. (See forecast)
This price growth is likely to peak in 2015 and 2016 given the constraints on the development pipeline and the supply of new product into the market before easing back as the pipeline begins
to ease.
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