London's prime new build residential real estate export market nets £1.4 billion a year

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The prime London new build residential market is now being driven almost exclusively by international buyers, generating a net £1.4 billion (€1.7 bln) inflow of equity in 2011, according to new analysis from international real estate adviser, Savills.

This means that its dynamics have more in common with Hong Kong and Singapore real estate than with the wider UK property market. Much of this overseas equity has been generated from off-plan sales, prior to completion and helped to forward-fund some of the significant projects that are changing London’s skyline and helping to regenerate significant areas of the capital.

As recently as 2009, UK buyers accounted for three-quarters of the prime London new build residential market but, in 2011, almost two-thirds of buyers (63%) were international. At the top end of the market, international buyers were responsible for 88% of all new build sales in the prime central area worth over £5 million.

NEW VS OLD

A clear line is being drawn between old and new. People from the world’s new economies - primarily Asia Pacific, Russia and the Commonwealth of Independent States (CIS) are a different type of buyer to those from the older economies - the UK, North America and Middle East, whose buyers have been coming to London for decades. Buyers from the new economies are much more likely to buy new build and have concentrated their buying in the new, up and coming areas of London, paying a premium for quality and rarity of product. 

Numerically, overseas buyers in the new build sector, especially in the east of City markets are dominated by Pacific Asians and Chinese. 

This group accounted for 37% of buyers in 2010 and 33% in 2011, compared to just 4 per cent in 2009. This not only reflects concentrated marketing efforts in these regions but also an appetite for investment and willingness to commit to sales “off-plan”, before completion. 

Buyers from Hong Kong, China, Singapore and Malaysia, dominate the apartment market, at lower price points than most other overseas buyers, although buyers from the Chinese mainland are relatively small in number and buy some of the cheapest properties due to the difficulties they have in expropriating their currency. Many are buying apartments for offspring in higher education in the UK. 

Yolande Barnes, head of Savills research says: “Were the Chinese restrictions on property ownership overseas to be lifted and the Renminbi a globally traded currency, the Chinese propensity to spend could be vastly increased. We have estimated in the past that the Chinese billionaire market could move London prices by as much as 15%.”

THE BIG SPENDERS

In contrast to Pacific Asians, buyers from Russia and other Commonwealth of Independent States (CIS), as well as the Middle East and North Africa (MENA) are more likely to buy in the £5 million plus range in prime central areas. At this price point international buyers totally dominate the market, accounting for 88 per cent of sales of new build sales over £5 million (compared to 64% in the second hand market). Almost three quarters of sales are to buyers from Eastern European and CIS countries (47%), the Middle East and Africa (24%). 

At this top end of the market, the kudos of an address combined with proximity to high-end amenities, shopping, parks and international restaurants and bars, has led to a clustering of global wealth, within both the new build and second hand sectors.

In prime London’s second hand markets, UK buyers accounted for 66 per cent of transactions last year, down just 9 percentage points compared to 2009, although over the past five years less than 37 per cent of second hand sales over £5 million went to domestic buyers. This said, buyers from the world’s old economies accounted for a majority share of the top end of the second hand market. Buyers from North America, North Africa, the Middle East and Western Europe accounted for a further third of this market.

INVESTMENT IS LEAD MOTIVATOR

Investors and occupiers drive the new build market in almost equal measure, but different nationality groups have very different motives for buying. Middle Eastern, African and Asia Pacific buyers are primarily investment buyers, while those from the Asian sub continent and North America join domestic buyers in acquiring property for their own use or for use by parents. Without doubt, however, London’s safe haven status underpins all international buying, with wealth preservation at the core of most purchases. 

OUTLOOK

“Our expectations are that the demand from the new world economies into London’s ‘old world’ prime real estate will continue to be strong, with demand from Russia and other Eurasian countries, the Middle East and Africa dominating at the top end of the market,” says Barnes.

“With prolonged social unrest, economic uncertainty and political tension across the globe, London property markets will display some counter-cyclicality. Wealthy individuals are likely to continue investing in overseas assets to safeguard their cash and provide themselves with an alternative living option, and while London retains its status as a leading global financial centre, its residential real estate will continue to be an asset class of choice.

“Chinese and Pacific Asian investment will continue to feature as investment buyers, though probably at a lower level than recently, and strongest markets for this group will be those with good access to the City or Canary Wharf and those underpinned by strong rental demand.

“But everybody will be watching to see what happens if and when mainland Chinese money is freed from current ‘export’ constraints. We stand by our forecasts that if it were to flow into our markets at the rate at which new Chinese billionaires are being created it could boost prime central London values, particularly those within the new build sector, substantially.”

 

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