London's property is losing its attraction for investors as they start to venture out of 'safe havens' and worry that the city's prices look high, given a slowing British economy.
A reputation as a safe place to park money during global market turmoil helped drive central London office prices up 52 percent between mid-2009 and the end of 2012. Prices in the smaller luxury residential market grew at a similar pace.
As investors feel calmer about the world in general, they are looking more closely at London property holdings.
"I cannot help but conclude that London is in bubble territory," said Ben Habib, Chief Executive of First Property Group, which owns British and Polish real estate. "The returns available are very low and capital values vulnerable to a shock."
Commercial property deals reached nearly 21 billion pounds (US$33 billion) last year, according to research group Real Capital Analytics. That was double the amount for Paris and four times Berlin.
Over 64 percent of money coming into the market was from abroad - up from 61 percent in 2011 and 55 percent in 2010.
But fears of a euro zone breakup, a slew of U.S. tax rises and spending cuts or sharply slowing Chinese growth have diminished - removing factors that had driven the flow of money.
Meanwhile, concerns over Britain itself have grown.
The economy shrank in the last quarter of 2012, Britain's AAA credit rating looks in danger and the is at a 6-month low against the dollar - in part because of outflows from government bonds that had themselves been seen as a safe haven.
A weakening pound "may start the unwinding of the great wall of money," said Jefferies real estate analyst Mike Prew. "A prime London asset denominated in a secondary currency loses much of its investment appeal."
Yields Under Scrutiny
Not all agree that London property has run out of steam, citing strong lettings in buildings outside top locations.
"If this is a recession, then not only is London doing rather well but imagine the impact of any economic and financial recovery," said Investec property analyst Alan Carter.
When the investor focus turns to yield rather than preserving capital, skeptics say it is harder to make the case for London property.
Yields for some Mayfair properties are under four percent. They are below three percent for the Rolex store under the One Hyde Park luxury flat scheme in Knightsbridge. That compares to a longer term trend of about five percent in the wider West End district.
"We don't believe there is good value in prime central London and are selling to reinvest elsewhere," said Richard Gwilliam, head of property research at PRUPIM, a real estate investment arm of British insurer Prudential that has about 15 billion pounds (US$24 billion) under management.
With signs of some half-full or vacant buildings starting to drop rents, that could also hurt values. A succession of job cuts announced by banks have added to concerns over demand.
The luxury residential market is already in something of a hiatus after rises in sales tax for the priciest homes.
"You have a Sword of Damocles hanging over the market," said Andrew Langton, founder of high-end estate agent Aylesford International. Deals at the top end of the residential sector had fallen by two-thirds over the last year, he said.
Those who parked money in London property as a safe haven may now find it doesn't stack up as well against alternatives.
Benchmark Spanish and Italian ten-year bond yields are trading above five and four percent, but without the same perceived risk of euro zone breakup that sent them soaring last year.
Property has the disadvantages of being a much less liquid market with things like higher transaction fees, building maintenance costs and gaps in rental to worry about.
Escape to the Country
For specialist property investors, London is also looking pricey compared to the rest of Britain.
Outside London and the Southeast, office values have dropped 14 percent since June 2009, according to property consultant CBRE.
The gap in yield between West End London offices and so-called secondary British offices is about 10 percent versus one to two percent before the crash of 2007.
Property company share prices show London's premium too.
London specialists Derwent London, Great Portland and Shaftesbury trade at premiums to net asset value forecasts of about 14 percent, eight percent and 11 percent respectively, according to Investec figures.
By contrast, the two largest property firms with real estate outside London - Land Securities and British Land - trade at about a six percent discount and a five percent discount to their last stated net asset value.
In a sign of the interest outside London, billionaire investor George Soros last month built a stake of over five percent in Development Securities.
Axa is raising one billion pounds (US $1.55billion) to buy property across Britain on long leases, Aviva Investors is also looking in British regions and JPMorgan cites better opportunities away from London's most popular districts.
Beyond Britain, there is also growing interest in some of the very regions from which money flowed into London in search of safety. In cities such as Milan and Madrid, the best shopping centers can command yields of as much as 6.75 percent.
"As euro zone break-up risks subside we may look at southern peripheral countries," PRUPIM's Gwilliam said.