London’s safe-haven stock will run dry

25 June 2012 | By Naomi Heaton, chief executive officer at London Central Portfolio

This follows hot on the heels of the Middle Eastern investors seeking refuge from the Arab Spring.

But with the number of prime central London properties on the open market plummeting, for how long will there be enough property for them all to buy? The number of prime properties changing hands in central London, as of the first quarter of this year, was down to just 5,409 over the year. On average, that is just 100 properties a week and almost 60% less than reported in Q1, 2000.

With so little prospective building space, developers struggle to bring new residential units to market

Based on the averagedrop in sales each year since 2000, it would take only 15 years for the stock to run dry.

The impact on prices goes without saying. One reason behind the falling availability is the tiny size of the two exclusive boroughs that contain the stock, located in just six square miles centred around Hyde Park. There are little more than 95,000 households in the Royal Borough of Kensington & Chelsea and 120,000 in the City of Westminster.

With so little building space, developers are struggling to bring new homes to market. Just 780 housing completions are projected over the next four years in Kensington & Chelsea, while in Westminster only 614 residential units are under construction.
This means stock levels can never significantly increase.

The reduction in sales of prime central London stock shows investors’ retrenchment into blue chip tangible assets, such as gold, and a reluctance to divest of one of their best performing assets when global equity markets show ongoing volatility.

This was also the case during the credit crisis, when central London property owners sat tight and the number of transactions fell by nearly half from their high point in 2006.

With the continuing eurozone crisis likely to throw global equity markets into further chaos, residential transactions seem likely to fall even further.

Declining sales, however, have no correlation to a lack of appetite to buy prime central London property.

This stock has always been a go-to destination for work, play and for buy-to-let investors from all over the world. In the borough of Kensington & Chelsea, 29,000 properties are privately rented, amounting to more than 30% of the available stock.

In Westminster, the number is about 40,000 or 33%, compared with just 16% privately rented in Greater London as a whole. With stock levels falling and the demand for buy-to-let properties continuing to increase, we are seeing stiff competition for available units.
It is rare to view a property where there is not more than one bidder. Last week, a small, one-bedroom flat in Pimlico received five offers within a matter of 48 hours, then went to sealed bids.

The chosen purchaser was mortgage-free in a market where cash is king, and the property achieved significantly more than the asking price. This is increasingly the rule, rather than the exception.

One of the most significant reasons for the pressure on prime central London stock, however, is the huge level of wealth that continues to increase globally, despite the economic crises.

In 2010, the population of high net worth individuals reached a total of 10.9 million people.

Not only is the number of globally wealthy individuals increasing but their financial wealth is growing too, reaching $42.7 trillion and surpassing the 2007 pre-crisis peak.

With only 5,000 or so prime London properties available to buy each year, this is a ratio of 2,000 possible investors to every property.

Cash buyers account for nearly 60% of the overall purchases in this sector, so high net worth clients are a driving force in the market.

We believe the eurozone crisis is one of many events that have been drawing investors to central London stock and for most, investment in this category is a one-way street.

Economic crises may come and go, and so might new money, but investors are here to stay.

This all suggests that there may only be 15 years left for those wishing to capitalise on this exclusive safe haven asset class.

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