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An international centre of business and culture at the confluence of the world’s time zones, London is arguably the most global of the cities we monitor. The city enjoys a stable, transparent real estate market. Its residential market has seen price growth of 44% (for the SEU) since 2008, when its contemporaries in our ‘old world’ index increased by just 19%.

In a post-credit crunch environment, both domestic and overseas buyers have been attracted by this established, ‘safe haven’ market. Always an international market, international buyers now account for 39% of the prime London residential market. Most of them (85%) live and work there.

Overseas equity, combined with domestic wealth generated by London’s global economy has fuelled price growth in its prime residential sector, up 58% since 2008. We estimate that approximately £37 billion has flowed into London property from overseas buyers since 2006. Recently implemented tax changes, most notably an increase in stamp duty on properties over £2 million, have had only modest, and probably temporary, impact on growth.

Such sustained capital growth is diminishing yields in the prime sector where rental growth has failed to keep pace. This is weakening prime London residential as an investment proposition although prospects for secondary locations still look very strong. Yields for resale properties outside the core are generally high and in mainstream markets rents are up 9.3% over the past two years (while prime rents have increased by only 0.8%). Rents have been driven by strong demand from households shut out of the sales market by high deposit requirements and mortgage restrictions.

In the prime markets, weak corporate demand and increased levels of stock have constrained rental growth, as prime gross rental yields now stand at just 3.7%. By contrast, mainstream property is looking an increasingly investible proposition with average yields at 5.1%.

Taken from
Insights: World Cities Review - H2 2013

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