The London property search agency thinks the recent cooling off in the market has been long overdue, following a 12-month period of more than 20 per cent growth in the capital and 50 per cent over five years.
Prices could be heading into further pressure next year, the agency says, though those with any reasonable time horizon should welcome this as an opportunity.
“The election, the threat of a mansion tax and plans to levy CGT [capital gains tax] on property investment by overseas investors cast a dark shadow over London residential property, but short-term political concerns must not be allowed to cloud an excellent medium to long-term investment opportunity,” said chief executive Dominic Field.
“We expect the uncertainty to remain only until the end of the second quarter next year when the election will have been decided.”
Field says that the higher rate of stamp duty for expensive purchases “makes sense” though he is less complimentary about the mansion tax.
“Unlike the proposed mansion tax, the Conservative provisions correctly continue to reference stamp duty to a discretionary decision to transact property for the most part, rather than placing a random and indiscriminate burden on only the perceived wealthy,” he said.
“Any criticism of the announced changes is mostly pure electioneering, and they are not based on rational criticism of the tax.”
“It has yet to be seen whether these changes will impact or slow the market at the more expensive end. We believe asking and achieved prices will be adjusted to account for the increased burden, thereby reducing the speed of capital growth in this segment of the market.”
“However, transaction volumes at the lower end of the market are likely to increase once the uncertainty of the election is out of the way.”
Even if there is a negative effect from the reforms, Field says the positives more than outweigh the negatives, highlighting the growth in foreign investment as the biggest driver of prices in the future.
While significant sums of money have poured into London’s residential market from the likes of China and Russia, he says the last five years of growth is merely “the tip of the iceberg”.
International ownership of London property is currently at 6 per cent, but Field thinks this is set to grow significantly.
“London has emerged as the world’s pre-eminent choice as a destination for long-term investment in residential property,” he said.
Performance of index over 5yrs
Source: FE Analytics
“Inflows of foreign capital are strong, and far from seeing a peak in overseas investment, it is likely that we are observing the tip of the iceberg, the last five years representing simply the start of significant international ownership.”
“Restricted supply, allied to enormous demand, will for generations continue to put significant upward pressure on prices. With a yield three to four times that available on similar investments at home, interest in the London residential scene amongst wealthy Hong Kong Chinese is reaching new highs.”
Field adds that the policy commitment to a number of ambitious infrastructure improvements, as well as the highly visible delivery of existing projects, will provide further support to prices.
Crossrail, which is scheduled to carry its first passengers in 2018, will be the first of several transport revolutions, making London – with its highly skilled and international workforce – “increasingly attractive to global business”.
Finally, Field says that long-term demand will be boosted by not only a growing population but also by the reforms to the pension system.
“People will, for the first time, be able to avoid income drawdown and invest some or all of their pension pots to create retirement income, and with the yield on certain properties comparing favourably with that available on other asset classes, and the potential for capital upside strong, additional monies are set to flow into the market,” he said.
Recent research from the Centre for Economics and Business Research forecast that London prices will rise by as much as 54 per cent by 2020 – a view that Field fully supports.
So how do investors cash in on such huge expectations for growth? The most obvious way, of course, is buying property in the capital direct. Field advocates investment on the edge of pockets of expensive new build.
“Here we can achieve excellent value and find affordable properties; we are buying two bedroom flats for clients at £550,000-£600,000, with comparable properties less than 10 minutes’ walk away selling for more than £1,000,000,” he said.
If you want to go down the investment product route, there are a few options. Firms such as Castle Trust offer passive funds that track the price of residential property, including The Growth Housa fund which looks to match the Halifax House Price Index.
Elsewhere, the actively managed TM Hearthstone UK Residential Property fund invests in private rented sector housing across the UK. It is currently overweight London, which has a 38 weighting overall. FE data shows that fund has returned 12.45 per cent since its launch in August 2012.
Ben Willis (pictured), head of research at Whitechurch, says most investors should be wary of investing in London property, in spite of the positive outlook for prices.
“If we go down the property route we tend to look at the bricks and mortar commercial property funds, or those that invest in the shares of property companies,” he said.
“The biggest liability for the vast majority of our clients is residential property, and so we’d be looking to diversify away from that. Even if you don’t own a property, in most cases the overall aim is to buy one, so we’ve historically shied away from it.”
Willis adds that the lack of products that give investors exposure to residential property is another reason why he’s tended to avoid the sector.
