Home or Away?The effect of foreign purchasers on the London residential market

October 2013Shares

The latest Cluttons Private Capital Survey based on research from their offices in nine countries abroad, has confirmed that London remains a prime property investment hotspot for high net worth individuals from around the world.

The London property market has been significantly bolstered through foreign investment in residential and to a lesser extent commercial, property. To high net worth individuals, London is a safe haven, benefitting from high value capital growth and favourable exchange rates, thanks particularly to a weak Sterling in South Asian markets.

But it’s not only the financial lure that attracts investment. London is a brand that offers an unequivocal lifestyle perhaps only rivalled by New York, and unsurpassed education, whilst also being home to the quintessential luxury brands – making it an ideal second home. The trend seems unlikely to stop and the focus of developers attracting foreign investment will continue into 2014 and beyond.
Foreign investment into the London property market has got many a project off the ground, stimulated the economy and at least for the time being, safeguarded the future of London. But what impact has foreign investment and ownership had on what’s available and affordable to domestic buyers and occupiers?

Does increasing demand for London property by foreign investors result in an exaggerated property price cycle? Whereby the influx of demand from the worldwide market pushes prices up and makes London property unaffordable for domestic buyers, resulting in a ripple effect of moving people further out into cheaper areas – causing a negative impact on the local area fabric, in terms of community and businesses.
But should the real debate be about property use rather than property ownership? There’s a big difference between a high net worth individual buying up property in Belgravia or Mayfair and only using it for a few weeks in a year, and an Asian investor buying one or more new build apartments to rent out on a continual basis. The former leads to empty housing, akin to the occupancy (or lack of) of a scheme like One Hyde Park; the latter ensures that there is more stock available to rent than might have otherwise been the case.

And whilst empty foreign-owned trophy assets may only benefit the owner’s tax position, more properties bought by overseas investors which are rented out undoubtedly ease the under supply of housing. In this latter case, there may be some tension between a developer’s desire to maximise sellable space and raise the overall GDV of a scheme, and to create aspects of a scheme allowing greater inclusion with the local community, a greater sense of place for residents and neighbours and indeed a more enjoyable living experience for residents. In parallel foreign investors will be looking at the best price per sq. ft. in order to decide where to invest, but they will also want good quality tenants and good rental yield. Schemes with features which promote a better quality of life to residents within the neighbouring community, will prove more popular a place to live and in turn of course attract higher rental income. The focus as ever should be on creating a unique sense of place, which can be enjoyed by all.

Author: Ru Kotecha

Update: On Sunday 3rd November, The Sunday Times article entitled “Need a London flat? Go to Asia” by Oliver Shah, highlights some of the very issues we’ve discussed above.
Savills suggests that international sales have to bring forward 3,000 homes through planning deals known as section 106 agreements. Yolande Barnes, director of residential research, said: “There’s undoubtedly a shortage of housing for ordinary people but the political argument is misplaced. The only affordable housing actually being delivered in London at the moment is as a result of private housebuilding. If you do something to threaten that supply, you’re really cutting off your nose to spite your face.”
This notion has been backed up by a report by the London School of Economics, that showed only 6.5% of sales by value in the capital went to overseas purchasers last year and suggesting a correlation between the flow of foreign cash and the construction of affordable homes.  Rob Perrins, Managing Director of Berkeley further defended the use of overseas exhibitions to forward fund schemes. “This fear about too many foreigners or non-residents buying property is good politics but bad economics. International, or any investment to encourage supply is a force for good and we should be encouraging more of it, not trying to hinder it.”