World class winning streak will widen the gap
10 November 2011
The UK’s prime residential real estate markets have historically been driven by equity not borrowing, but the international equity now driving prime central London is creating a market increasingly detached from the UK’s other prime markets, says international real estate adviser, Savills, which today published its five year forecasts for the UK residentialmarkets.
The headline numbers:
Prime central London residential values are now 15.6% over their peak level, with price growth expected to top 13% this year and rise by 22.7% over the next five years, according to Savills residential research.
In the short term, further (though slower) growth is expected in 2012, with a short-lived downward blip in the final quarter that will leave values just 3% up in the year. Growth is expected to resume after 2013, supported by London’s strong global city fundamentals and an improving domestic economy.
By contrast, the UK’s prime regional markets have not benefited from a ripple of equity from the capital and are on average 16.6% below peak and falling. These markets, which remain dependent on domestic wealth generation and relocation from London (which has been weak during the recent recovery), are expected to show falls of around 3% in 2012. Growth is expected to resume in 2013 with a particular bounceback in the South East and total five year UK growth to average 15.1% by the end of 2016.
Prime London is itself dividing, with the more domestic markets of southwest London and locations such as Islington starting to see softening demand due to a weakening outlook for city-generated wealth, with little prospect of a fillip in the form of bonus cash in the near term. These markets are currently 6.7% and 6.9% above peak respectively, and as the outlook for London’s economy weakens so growth is slowing and they are expected to perform more in line with the prime South East than prime central London over the next year to 18 months.
Prime central London – Does such growth make sense?
“The price growth seen this year in prime central London does not make sense in the context of the UK economy, but must be viewed in a global context,” says Yolande Barnes, Director of Savills Residential Research. “Central London’s residential real estate is increasingly behaving as an asset class, more closely linked to global wealth generation than any domestic indicators.
“It is clear that international buyers are buying a safe haven store for their wealth, some are also making a currency play on cheap sterling. In the past 18 months we estimate that net inward investment by international buyers has totalled around £6 billion.
“The question is how long this can continue. Further growth is dependent on prime central London continuing to defy – or even benefit from – the pressures on the global economy. On balance, we believe the influx of global wealth in uncertain times still has some time to run and it may even be boosted by the international attention focused on the Olympics.
“The fundamentals of this market, particularly its finite supply side, remain in place for as long as London retains its global city status.”
London as an investment class
“Prime real estate has proved itself a stable safe deposit in uncertain times and in an investment world searching for yield and security the five year outlook for prime property is compelling,” says Barnes. Over the next five years prime central London residential real estate is expected to outperform many commodities markets and perform in line with West End offices and UK gilts, with additional rental growth (forecast at +27.6% from 2012-2016) on top.
Prime regional – in the slow lane
Prime regional values across the UK as a whole have been slipping. Values are currently averaging 16.6% below peak, behaving more in line with domestic markets. This makes them look particularly good value in relation to prime London and Savills believes that this will contribute to a catch up over the mid term. Five year growth is forecast to total 15.1%, significantly lagging London and the South East, but outperforming the UK mainstream (forecast at +6%).
Despite the widening price gap between London and the country, Londoners seem increasingly reluctant to move out and there has been a 24% drop in such relocation activity, meaning that values in the South East are still 12.5% below peak and will only turn upwards as the economy begins to recover. At this point, Savills forecasts a London and South East centric recovery resulting in 5 year growth of 21.3% in the South East.
The markets that are completely divorced from London have so far been the slowest to recover and will continue to underperform showing falls in 2012 (Midlands and North at -6%, Scotland -4%) and lower five year growth (7.3% and 7% respectively). The prime South West markets, particularly Devon and Cornwall which benefited from high levels of discretionary wealth in the boom years also remain well below peak and will require further discounting before growth can resume.
The Savills central forecast assumes negligible short term growth in the domestic and Eurozone economies, but does not attempt to anticipate the impact of a major financial event, for example the collapse of the Eurozone.
Barnes again: “Such events are impossible to forecast, but it is clear that all short term forecasts - not only for real estate – would be rewritten in such an event. The wise investors will be those taking a mid- term, five year view and not those banking on the short term.”
Savills Berkeley Square
Savills Berkeley Square
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Savills Berkeley Square
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