London's Real-Estate Gold Rush

Prime London commercial real estate has emerged as an improbable postcrisis safe haven. Despite the U.K.'s precarious economic situation, international investors poured more than €6 billion ($8.17 billion) into London offices and stores in the 18 months to June 2010, almost as much capital as the next nine most popular cities combined, according to CBRE. Having fallen 50% from its peak, City offices have outstripped every other European market, at 25% higher, compared with a mere 2% gain in Paris, according to Investment Property Databank. But with some West End offices now changing hands at yields as low as 4%, global real-estate investors can find better value elsewhere.

For property investors, London's appeal lies in its perception as a reliable store of value, the real-estate equivalent of gold or the Swiss franc. International investors value its transparency and liquidity. Access to deals is open, unlike parts of Europe and Asia, where foreign investors are often shut out of the bidding or where legal protections are weak—making it hard to deploy capital. Investors are also attracted to its relative stability: Average leases on U.K. offices at 7.5 years are more than two years longer than in Germany. Prime London property is relatively decoupled from the fortunes of the U.K. economy and has been boosted by the pound's weakness.

But asset prices have started to become divorced from the fundamentals. London West End offices yield just 4.25% and City offices, 5.25%—close to the peak of the boom levels. True, 10-year gilt yields have fallen since then to 3.6%, but interest rates are likely to rise next year and rental growth is uncertain. London City office rents fell in real terms by 4.2% over the past decade, a steeper decline than in Frankfurt and Paris, according to IPD. Further, U.K. banks hold billions of pounds of secondary commercial real estate, which they may start unloading in 2011.

So, what should investors do? Within London, the smart money is now focused on new developments, betting that the supply of inward investment will remain strong while the supply of investment opportunities will remain weak. The pipeline of new office developments is running at less than half of the 25-year average. That also means there is likely to be a shortage of new office space available in 2014, when a large volume of long-term City leases start expiring, helping to boost rental growth. Land Securities, which is planning to start development on four London sites this year, is forecasting unleveraged returns of at least 14% on these ventures.

But for real-estate fund investors, other European markets now look more enticing: German shopping centers are benefiting from the strongest consumer outlook since reunification and yield 5.5%-6.5%. Investors also point to Paris offices, where the recovery has been slower. Swedish property, buoyed by an economy that grew 5.5% last year, also looks like a good value, despite the recent yield compression. With London an increasingly crowded trade, expect to see more international capital flow to these markets.

Fewer buyers for £1 million plus properties in the UK, research suggests

Competition for properties worth £1 million in the UK has fallen over the last two years, with just five buyers for each compared with eight previously.

Research by Investec Specialist Private Bank conducted with estate agents, developers and mortgage brokers operating in this market, also reveals that on average it takes between on and two months for sell a property worth £1 million or more.

But the market does vary. A quarter of those questioned or the Investec £Million Plus Property Market Barometer said that it takes less than a month to secure a sale while almost one in ten says that it currently takes more than four months.

High end estate agents, mortgage brokers and developers claim that the top three obstacles facing sales of million pound plus properties are a lack of stock, fear of a 'double dip' recession (and the impact this has on buyer confidence levels) and a lack of finance.

Indeed, almost half of those surveyed, some 45%, claim that the availability of credit to purchase million pounds plus properties is either 'poor' or 'very poor'.

‘Although there remains a lack of stock for sale, particularly at the upper end of the market, our Barometer shows that competition for £1 million plus properties has fallen over the last two years,’ said Jack Jones of Investec Specialist Private Bank.

‘Our findings suggest that one of the main reasons for this is the difficulty in securing credit and the inflexibility of lending criteria among some organisations,’ he added.

Investec recently launched a £Million Plus mortgage targeted at high net worth professionals who are not paid along conventional lines, but rather accrue irregular income such as lump sum bonuses. The new custom-made mortgage offering takes overall income and wealth into account rather than just the value of an individual's property and their regular monthly income.

The £Million Plus mortgage is aimed at the top end of the market, with loans available exclusively to individuals looking to borrow a minimum of £1 million with sustainable earnings in excess of £300,000 a year and an established balance sheet in excess of £3 million. Investec says that these individuals typically purchase properties worth in excess of £1.5 million.

The mortgages may be secured against a variety of assets including property, shares, investment holdings and offshore deposits, and are available in a number of currencies. The offering is not limited to UK nationals and includes the purchase and refinance of UK property residence and investment properties.

Courtesy : propertywire