London remains one of the most attractive cities for Chinese property investors, The capital is one of the most cosmopolitan capital cities in the world offering a wealth of cultural and leisure experiences, it is also one of a select group of pre-eminent business cities and the worlds leading financial centre.
Whilst nowhere is immune to geopolitical risk, in times of such unprecedented turbulence, London seems to offer a relatively safe and stable investment environment, as well as a society renowned for its tolerance of ethnic, political and religious groups.
Many Chinese investors have lost faith in the China property market alongside equities and have struggled to find alternative investment opportunities. the attraction of investing in London’s property market for Chinese investors has been increasingly highlighted in recent years.
The Central London residential market attracts a lot of media attention regarding Chinese buyers, however the broader London market has also performed strongly and attracted substantial investment from Chinese investors.
A research house recently issued a powerful graphic demonstrating the performance of London’s residential property relative to other asset classes and according to their analysis (Using UK Land Registry price data for London) £550 invested in a London property in the year of the Queens Coronation (1955) would now be worth £63,679, a 116 fold increase.
In comparison, if it had been invested in stocks & shares over the same period it would be worth a paltry £5,051.
Forecasters expect Chinese investment in London to increase as property investments continue to outperform stocks and shares. One of the leading research houses, Savills forecast that London residential property values will rise 22.7% over the next five years while the outlook for stocks and shares, bonds and other asset classes, remains uncertain.
The pond term structural imbalance between supply and demand which has driven up property values in London remains in place.
A growing population and rising living standards has driven up housing demand across the UK but supply remains tight, primarily because of planning constraints. As the number of households staidly grows, so the shortage of properties needed to hues them is brought sharply into focus. Demand for housing continues to outstrip supply as the Government fails to get enough homes built.
Housing scarcity is most pronounced in London.
There is an acute shortage of development land across the UK but this is especially the case in Central London. Planning consents for residential developments are running at less than 50% of 2006 levels and while the government has set strict targets for house-building, less than half of thees targets are being met each year. The country as a whole is now delivering fewer new homes than any point since the 1920’s. Just over 100,000 homes are being completed annually which is less than half what is required. In London & The South East the situation is most acute with a predicted 550,000 housing shortfall expected by 2016.
Influx of Chinese Buyers & Scarcity leads to pressure on rents and prices.
This continued imbalance has benefited investors by both reducing vacancy risk and in the form of rising rents and prices. Other factors are at play which accentuate an already acute situation. The post Global Financial Crisis) repercussions rumble on and the challenge of access to mortgage finance is a major barrier to first time buyers who are being forced into being reluctant renters.
For the first time, more people will reside in private rented accommodation than in the social housing sector. A recent survey confirmed that long-term renting has become a common choice for many people amid continuing uncertainty on house prices and mortgage lending.
The National home builders federation expected that in 15 years time there will be more people in the UK renting their homes than owning. National home builders federation also suggested that the stigma of renting is disappearing over generations.
What does the London property market mean for the Chinese investor ?
In many respects the current market conditions are taking investors back to basics when it comes to finding sound investment opportunities. The equity market has created its own “on / off” switch which is driven by global liquidity and sentiment. Today, the need to be able to time the market is paramount which for the average investor market it a real challenge. In the old days you could buy and hold a fund or an equity safe in the knowledge that over the longer term you would most likely beat inflation and cash. That simply isn’t the case anymore. In addition, the need for governments to stimulate the global economy has created an era of uber low interest rates which have benefited anyone who had the foresight to buy bonds but at these levels the risk of entry today, into a bond or a fund must be considered big when compared to the potential upside.
That leave alternative investments that are very much back on the investors agenda and real estate is leading the way in terms of where the smart money is being invested.
The key Asian markets of Hong Kong and Singapore are not as attractive as 18 months ago though a combination of fear (a slow down in China) and Government measures to slow the market. New York has benefited from Asian and South American money but has an element of complexity that puts many off the idea.
Europe is in the grips of a crisis of confidence that has resulted in most roads leading to London. Whilst the UK as a whole is still recovering from the Global Financial Crisis, London is a safe harbour for capital. The headlines cover the multi million pound properties being snapped up by international tycoons but real value exits in the one or two bedroom market of Greater London where renter demand is strongest and rental income growth is the greatest.
The ability to generate an income of 2 or 3 times the bank rate of interest is compelling in itself but when we factor in the strong prospect that income to grow is hard to find with other comparable opportunities at this time. Long term capital growth will naturally follow rising rents but many are turning to London property as a core element in their retirement income planning. A portfolio of properties delivering strong and rising income is exactly what you will need when you begin to draw down on capital.
In summary.
The confluence of circumstances stemming from the Global Financial Crisis has created a multi year investment opportunity in the London residential market. Lack of finance, lack of stock and a supply of international capital has made the medium term outlook compelling on a risk-adjusted basis.
No investment however is without risk and real estate is no exception, Location will be the difference between a good investment and a great investment, as will selection of the right property. The temptation to invest in something you may consider for yourself as a home can often result in sub optimal returns. Focus on where rental demand is strong and employ a reputable lettings firm to ensure a low maintenance investment.