For High End Real Estate, London Rules the Roost

Big Ben
Don Klumpp | Iconica | Getty Images
Big Ben

There have been many winners from London’s rise to Europe’s pre-eminent financial center.

From the restaurants and bars scattered among the alleyways and narrow streets of the City to the luxury car dealerships and clothing boutiques which have sprung up to serve increasingly well-heeled suburbs, the trickle-down from the billions of pounds washing through the UK capital has been transformative.

Even among these beneficiaries, property stands out.

The strength of the London housing market, which has outpaced almost every other asset class during the financial crisis, owes much to financiers’ predilection for owning bricks and mortar within commuting distance of their offices.

Bankers have poured into certain postcodes, supporting prices and creating a ripple effect for the value of housing stock in surrounding areas. Meanwhile, the rest of the UK housing market struggles to bounce back from the price declines experienced in the wake of the financial crisis.

The capital growth on offer in residential property is another reason it has proved such an attractive buy – the strength of demand has not only decoupled London house prices from the rest of the UK, but also from rival financial hubs.

“London prices have risen 45 per cent over the past three years, compared to only 15 per cent in Geneva, 17 per cent in Paris and 10 per cent in New York – so in headline terms London appears ever more expensive relative to its western peers,” says Liam Bailey, head of residential research at Knight Frank, the property services group.

Mr Bailey explains that the relative expense of buying a house in London compared with other financial centers has not been a deterrent, however.

“London still acts as a huge draw for financial sector wealth, the stock of prime properties in London’s golden postcodes is bigger than in any other city, the lifestyle offer and education draw is also more powerful than anywhere else, added to that is the fact that London hosts the largest population of expatriate bankers on earth,” Mr Bailey adds.

One factor which marks London out among other financial centers is the quantity of so-called prime property.

The financial services industry has carved out entire residential enclaves, such as St. John’s Wood, where demand is so strong that prices bear no correlation to the economic logic underpinning the rest of the property market. The buoyancy in these so-called super-prime areas has worried some real-estate industry observers, who have likened the rampant growth to the bubble that engulfed much of the world’s property market in 2007.

In spite of the appetite for owning London housing, there is no shortage of available stock.

As well as large parts of central London, desirable suburbs such as Hampstead and Richmond have received the same surge in demand. The result is that there is enough liquidity in the market to mean buyers are usually not left waiting long.

Ironically, though, it is the constraints on bringing any new stock to the market which have helped keep prices so high.

“Markets such as Paris and Geneva do not have the volumes of the prime London market, and do not have the supply constraints that underpin London values,” says Jonathan Hewlett, head of Savills residential business in London.

“Arguably, as a result, values in Paris are more out of kilter with the broader market. Geneva is very much a business center and often seen as somewhat clinical and Paris, though increasingly cosmopolitan, does not have London’s social and cultural diversity,” he adds

One factor which was expected to have negative consequences for the ascent of London’s housing market was a raft of punitive stamp duty tax measures drafted in during the UK’s recent budget.

George Osborne, the Chancellor, announced an increase to 7 per cent in the amount of duty people would have to pay when buying houses worth more than £2 million and moved to block people using companies to acquire property. Estate agents feared the measures would deter many overseas buyers from investing in the London market.

“We thought the recent budget would have a negative impact on international buyer sentiment but it has not slowed activity – international clients seem pretty phlegmatic about the closing of a few loopholes and the benefits of a very mature London market still outweigh any disadvantages,” Mr. Hewlett explains.