UK property

Distressed UK property market offers opportunities

The UK's credit crunch and a shortage of new homes are driving up home prices in London and may offer opportunities for investors in Asia, according to property fund manager Cordea Savills.
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London property offers few bargains but stable growth
<div style="text-align: left;"> London property offers few bargains but stable growth </div>

It is hard to turn the page of a newspaper in Hong Kong these days without coming across an advert for property in London, and demand is set to stay strong according to Cordea Savills, an international property fund manager.

Buying property directly is one way to take advantage, but the UK’s credit crunch has also helped to create some more interesting opportunities. The availability of debt in the UK has been shrinking since 2006, with a further 22% decline in the year to November, and the situation is unlikely to improve as long as the eurozone crisis continues.

With credit in short supply, construction firms are facing the prospect of mothballing projects and the resulting shortage in new homes is driving up housing prices.

“Less than half of the prime London units planned to come on stream in the next three years are believed to have funding,” said Cordea Savills at a media briefing last week.

To address the problem, the UK government last week unveiled plans to bankroll property development and real estate companies, which will have to bid for the funds to complete unfinished projects — a sure sign that there will not be enough money to go around.

According to Cordea Savills, this represents an opportunity for investors in Asia to step into that funding gap and earn decent returns. Indeed, the property firm has launched a fund in Asia, the Prime London Residential Development Fund, to do just that. Instead of buying stocks or actual properties, it invests in developers to capture both the long-term growth of the market and rising property prices, said Brian D’Arcy Clark, head of residential acquisition at Cordea Savills

Prime London house prices have trended up since 2001, except during the financial crisis. Although home values dropped during 2008, they recovered to pre-crisis levels within two years and have risen even higher during this year.

The best opportunities are in prime London residential developments, given that properties in this area have outperformed those in other sectors during the past 20 years in terms of capital growth, driven by the global “new rich”. The firm reckons such investments will earn a net internal rate of return of 18% to 20% a year.

Patrick Carr, director of residential investment at Cordea Savills, points out that Asian investors can also take advantage of sterling depreciation and strong local currencies, which have gained between 20% and 50% since the third quarter of 2007.

The supply of new homes is highly constrained, according to Cordea Savills. While there are only 600 new units estimated to be in the pipeline for 2012 to 2015, sales hit 900 units even during the financial crisis (although down significantly from 1,700 units in 2007).

“We think we are investing in development against a backdrop of a sound and predictable growth trend in the market,” said Clark. “If the European debt crisis gets worse, I see London property price strengthening because people will come out of the eurozone with their money and get into a safe haven in London. And the safest haven in London is property.”

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