London's booming?

Why certain sectors of the London property market are still booming.

The thing about Central London is that all the restaurants are full. Plus you have to book far in advance to get a seat for the latest show or play - such as well into next year for Andrew Lloyd Webber's 'The Lady In White'. You have to queue to get onto the London Eye. It has been difficult all this Summer to get tickets to the Edward Hopper Exhibition at the Tate Modern. In short, the place is buzzing.

Despite the energetic economic climate, many are predicting the end to London's decade - long property boom. With residential prices now among the highest in the world, Central London property might seem expensive to those who don't see the reality on the ground. The fact is that there is a very limited supply of top end London property and an ever expanding number of buyers eager to get the stability, prestige and capital growth that comes with owing a prime property in Central London.

The British Prime Minister for one is not planning to desert the city after his final term in office (whenever that may be). On the contrary, in September, Tony and Cherie Blair decided that their major financial investment will be in central London property, having just completed on their purchase of number 29 Connaught Square in Bayswater, W2 (see Box 'Tony's Pad').

Looking back to 1994/1995, when 29 Connaught Square was purchased by its previous owners, the UK had just come out of recession and property prices were rising again. This was also the beginning of a huge influx of Hong Kong investors - both expats and locals - who were concerned about the effect on their finances of the impending handover of Hong Kong to China in 1997. London property - especially in the prime areas - was perceived as a safe investment, offering secure capital growth and high rental yield. These areas of London were also renowned as attractive and safe places to live, especially if one was living in one's own secure investment.

The level of purchasing during those years before the handover was such that British property companies and estate agents were visiting Hong Kong to sell new properties off-plan.

There were also planeloads of purchasers arriving daily, all anxious to get a piece of the action. Travel-stained buyers would walk into offices as they opened at 9am, having got off a plane that morning, red-eyed and jet-lagged, determined to make their purchase that day. Taking them under their wings, agents would find them a property or properties that suited their needs and their wallet. Then, even more exhausted but with the satisfaction of a job well done, the buyers would catch the night plane back to Hong Kong, leaving matters in the hands of their agent and their solicitor.

Since then, the buying has persisted and the effect was that prices began to rise spectacularly, a trend which continued until well into this new century.

How wise they were, those mid-nineties buyers. The FPD Savill's London Residential Capital Value Index (Prime Central London), which is based on freehold values, shows that the percentage growth rate for the value of apartments from December 1994 until June 2004 has been 131%. Therefore if an investor had purchased a flat for £1 million in 1994, the value today would be £2.3 million.

With houses, the growth rate has been more impressive, at 157%. If a purchaser had bought a freehold family house in 1994 for £800,000 he could expect to achieve a price in the region of £2 million in today's market. Mr. Blair's vendor is an example of one who will achieve this level of capital growth, even after taking into account his enfranchisement and refurbishment costs.

To add to the benefits of making those purchases, there was the added kicker that rental yields were running at around 8% per annum (i.e. gross yield as a percentage of capital value). These levels have softened during the last few years, since the international rental market is quieter than it was in the nineties, largely as a result of the effects of 9/11 on the American expat market.

However, rental yields are still running in the region of 5% per annum gross yield, which, coupled with capital growth, still makes a Central London property an appealing investment. Prime Central London has a jet setting international community with many overseas families posted here on two or three year contracts, working largely in the City in financial institutions. It is this constantly changing community that keeps the corporate rental market buoyant.

For the investor, the gilt on the gingerbread comes when the tenant lives in the property for the duration of the rental period, decides they like the house too much to leave, and then buys it from the landlord at a price including three years' market growth, having paid three years' rent.

One such example is a magnificent Hong Kong-owned house with swimming pool, double garage and staff quarters in Cadogan Place, Knightsbridge, which has recently been sold to its tenants. The property has a gross internal area of 8000 square feet and was let for £10,300 per week - a total of £535,600 per annum for the two-year rental period. It was then sold to the tenants for just under the asking price of £11.5 million.

Although such meteoric rates of capital growth may not be repeated for international buyers, there has not been an annual drop in prices since 1994.

Indices such as the Halifax Building Society's report on British property values, still do not apply in Central London. The Halifax report represents the purely domestic market, which is fuelled by mortgage lending, and which does not apply in the prime Central area. Prime Central London is an international market, appealing to the most affluent worldwide buyers who are not reliant upon local borrowing for property purchases.

Furthermore it is still possible to purchase in the UK via an offshore trust, thus ensuring maximum financial anonymity for the international purchaser/vendor, which further adds value to a London property investment. A European client of this firm, Elizabeth Lord & Associates recently sold a third and fourth floor maisonette overlooking the River Thames for a price of just over £1 million via a Panamanian trust operated through Bermuda. The funds were paid to the trust and did not enter Britain. This particular client intends to retire to live in Portugal but there she will not be able to buy through her trust.

Since the Hong Kong invasion during the nineties, London has subsequently seen many Russian buyers who seek to invest in stucco-fronted mansions in Eaton Square, at prices in excess of £10 million, (to go with the odd football club).

Due to the high oil price, we have also seen the return of buyers from the Middle East over recent years, whose preference is for large apartments in Knightsbridge where the "stone's throw from Harrods" maxim most definitely still applies. In the Summer months, when their weather is unbearably hot, we see many ladies from the Arab states, enjoying the cool of the English Summer and taking advantage of the healing effects of retail therapy.

And of course this area is a haven for world-renowned film and music stars (to say nothing of ex-Prime-Ministers) who can enjoy a level of privacy and security difficult to attain in other major world cities. Sean Connery can often be seen popping down to Sloane Square tube station to buy his morning paper and in true British fashion people only stare a little bit.

Australians and New Zealanders prefer to acquire family houses in the more residential areas of Chelsea and Kensington. Proving that the market is still extremely buoyant, in the Summer of 2004 an Australian family whose children had been brought up and educated through the English system, decided to sell their family home in London and return to Sydney.

The property was a semi-detached house on three floors, in a garden square in Chelsea, with off-street parking, garage and roof garden. The Australians downsized to a spectacular flat in a brand-new development in Kensington, so that they would still have a foothold in the London market.

The Chelsea house, which was leasehold, had a gross internal area of 3,900 square feet. It was sold to an English couple returning to the UK to set up home after many years working in Hong Kong, Japan and Thailand. These purchasers intend to enfranchise the property which, when freehold, should be valued at a price in the region of £4.25 million. (Enfranchising is when the buyers negotiate to purchase the freehold from the landlords, in this case the Cadogan Estate. As leaseholders, they have the legal right to do this once they have owned the property for two years, assuming the lease was for more than 21 years at the granting of the lease. The negotiation between the freeholder and leaseholder will be based on the relative values between the lease and the freehold perceived values.)

Such was the demand for this property, that when it came to the market in May 2004, the selling agents received three offers at the asking price and the house was sold even before the glossy brochure was published or the advertisement appeared, despite the requirement to enfranchise.

It was not necessary to have bought as far back as 1994 to realise satisfactory growth on a Central London investment. Four years ago, a UK family was required by their bank to return to pick up the reins at HQ after many years running the Hong Kong office. They purchased a five storey family house on the South Kensington/Chelsea border at a price of £2 million. The value of that property over the past four years has increased by 24%, so after living there for four years, their house would now probably sell at a price in the region of £2.4 million.

While demand for these high-end properties still outweighs their supply, there is no end to the growth in this stable, if rarefied, market.

Tony's pad

If anyone should know if London house prices are worth paying or not, it would be the British Prime Minister, Tony Blair. He emphatically made his opinion on the subject known in September when he announced that he had purchased 29 Connaught Square in Bayswater W2.

This house, just over 4000 square feet, which had been on the market for some months, was offered at £3.6 million for the freehold interest. The sale was agreed at a price slightly below the asking price. The Blairs financed the purchase with funds of approximately £1 million and raised a mortgage for the remainder of the price.

The house is a grand stucco-fronted five-storey property in a garden square, close to Marble Arch and the shops of Oxford Street. Bayswater is not one of the Grade A locations such as Knightsbridge, Belgravia, Mayfair or Chelsea, though it is a popular, very Central location, more favoured by media and arts buyers than the international mega-rich. There is not quite the same cachet in being a stone's throw from Selfridges as in being a stone's throw from Harrods. But perhaps Blair does not think it appropriate for a Socialist ex-Prime Minister to be seen to be living in the primest of prime areas.

Alternatively his decision could have been due to financial constraints. Baroness Thatcher clearly had no such qualms when she retired after twelve years living in 10 Downing Street to a house in Chester Square, Belgravia, where properties sell at prices ranging from £5 million to £11 million.

But 29 Connaught Square is an impressive house, decorated in opulent and somewhat gothic style more redolent of a stately home than a town house, with no expense having been spared on the joinery and the bathroom and kitchen finishes. The rear study leading from the high-ceilinged first floor drawing room has the same wallpaper as that used in the recent redecoration of House of Commons offices. This should at least lend an air of familiarity for its new owner.

There is a sizeable library on the lower ground floor, which will be a suitable retreat for Blair to write his memoirs. There is a pretty ground floor terrace where Tony and Cherie could share a hard-earned glass of champagne of an evening after a long day funding their mortgage. It appears that until Blair leaves office, the property will be used more as a rental investment than a family home. After all it could be another five years before they take up residence, by which time some of the older children would have left home and three year old son Leo's sticky little fingers will reach higher up the walls. The property already has a tenancy agreed at a figure in the region of £16,000 per month, or £192,000 per annum, which should help to defray the mortgage costs for the immediate future.

Its recent owners purchased the property in 1995 for £900,000. At that time it was a leasehold property but was enfranchised shortly after being purchased. These previous owners who sold to the Blairs also spent a considerable sum of money - far North of £500,000 - in refurbishing the property and bringing it to its present splendour. This is why it has commanded such a high price and why the Blairs have succeeded in finding a tenant so quickly. There are two other properties currently available for sale in Connaught Square - one at a price of £3 million and one at £3.95 million, so the price the Blairs have paid is not excessive for this location. Presumably these other two houses are not in such mint condition as number 29.

Now that Blair has made such a substantial investment in Central London property, is it likely that he would encourage policies that might seriously damage the value of that investment?




Elizabeth Lord is a Property Consultant, for private buyers and sellers. Their offices are based at 30 Cadogan Place, London SW1.
Tel: 44 207 823 1214 / 44 7739 79 3311
Email: [email protected]
Website: www.elizabethlord.com

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