When economists are warning of “difficulties ahead”, global investors sit up and listen. Has a decade of UK house price growth and low interest rates taken its toll and will the market come to a shuddering halt?

When economists are warning of “difficulties ahead”, global investors sit up and listen. Has a decade of UK house price growth and low interest rates taken its toll and will the market come to a shuddering halt? We at property asset management specialists, London Central Portfolio view prime London central residential property as an alternative investment class. We’ve seen seventeen years in the residential property industry so we would agree that the current financial climate will have an impact on the buy-to-let market. However, we make a clear distinction between the sub-prime and the elite. LCP focus on two key investment boroughs – City of Westminster and Royal Borough of Kensington & Chelsea– which are relatively uncorrelated to the UK national domestic market, which is affected by borrowing costs, employment levels and the supply of affordable housing. London Central, by contrast, is influenced by global events, the availability of quality stock and international interest in the scarce and diminishing supply of the world’s premier real estate. During the housing “crash” following 1989, it was the sub-prime sector of the market that was hardest hit. Prices on average came-off by under 10 per cent during this period, meaning that investors (who retained their rental income throughout) could weather the storm. On the other hand, those who had borrowed 90 per cent loan to value and above (lured in by the imminent removal of double tax breaks by the Thatcher government) had trouble ahead. In a rising and increasingly unaffordable interest rate environment (the bank base rate doubled to 15 per cent in just over 1 year), panicking banks were recalling their loans the moment negative equity hit. The situation became a personal calamity for many homeowners. Banks will doubtless rein in their aggressive sub-prime lending policies in the wake of the Northern Rock debacle and the US economic difficulties, but lending is a core component of profit for the banks. To assume that they would cut this income stream excessively would be short-sighted. Whilst sourcing and purchasing property in prime central London on behalf of our clients, we have seen considerable but, in our view, sustainable capital growth in London Central recently (13.6 per cent for the four quarters to Q2 2007 compared with the preceding four quarters). Prices double historically every 5-10 years and this last cycle has been no exception. Rental yields have also hardened and investors continue to see their returns. Global interest in London, buoyed by the 2012 Olympics, continues apace. As one of the principal financial centres of the world, London attracts blue-chip corporate tenants and high-quality rental income. Lenders recognise that this is a risk-averse investment. They are happy to lend at relatively low rates (60-70 per cent loan to value) to people who could largely afford to buy the property outright, but instead utilise debt to maximise their return on equity and minimise any tax liability. It’s a simple case of supply and demand. There is almost no land development potential in London central (just 291 new dwellings were created in RBKC in 2004/5) and the majority of purchasers hold real estate in these boroughs as secondary properties – either as pied-a-terres, or as rental investments. This means that turnover and availability is low, putting pressure on the supply and driving prices upwards. Investors tend to move in flocks and due to global events, we saw suppressed growth in London central since 2000, whilst the rest of the country enjoyed above trend appreciation. For the last two years, these positions have been reversed. We would anticipate many markets calming in the coming months as investors review the impact of the credit crunch and would not except this one. However, the genuine utility and desirability of prime residential property should still provide stability in a balanced investment portfolio and this will continue to attract investors. http://www.londoncentralportfolio.com/