Property prices in the worlds financial capital is rapidly returning to, and in some cases exceeding peak prices, as the shortage of property and strong demand from foreign buyers lead to bidding wars.
 
There are further signs that London’s housing market is returning to pre-credit-crunch boom-times with central London house prices rising 3.2% in February - the strongest growth in almost three years. Prices have now soared by almost a fifth in the last 10 months, and are now only 10% below the market peak in March 2008, the latest Knight Frank Prime Central London Residential Index shows.

The average asking price in London has now reached a new high twice in the space of five months, as new sellers coming to market attempts to cash in on the lack of available stock. February’s sellers asked an average of 5% more than the month before – an increase of over £20,000 and a new highest ever average asking price in London of £427,987 according to the property portal Rightmove.   
 
And it would seem that it’s foreign buyers who are leading the stampede to snap up central London property, with 45% of £2 million-plus purchases going to non-UK buyers over the past 12 months.

Here at Smuts & Taylor we have also seen clear signs of this. Since around June last year there has been a definite feeling among our clients that the price falls in 2008 along with low interest rates and the strong ZAR had created good value in London.

In my opinion the sharp price rises we have seen lately is down to a dramatic shortage of homes on the market – around 22% fewer than this time last year. We have talked before about developers downing tools during the recession or going out of business completely, and the effect this had on new property coming to the market is now starting to show.

These growth figures at the top end of the London market may entice you to look for your own luxury apartment in the posh streets of Mayfair and Chelsea but beware. While it’s true that top end property is usually the first segment of the market to experience significant growth, it’s also the first to see large slumps when the market turns as we’ve seen in a 24% drop in prices over the last downturn. It’s important that as a South African investor you focus on the rental income generated by your offshore investment rather than the possibility of large capital appreciation in the future. To achieve this South African investors are far better off focusing on one and two bedroom units between £185k and £400k.

Despite a recent resurgence in housing starts there is still a significant shortage of good quality London property in this price` bracket and completions of new homes are forecast to sink to about 108,000 units in 2011. Demand is set to increase significantly, leading to a shortfall of as many as 95,000 in 2011.

While entry into the housing market remains difficult for those without the cash for a large deposit, growth in the private rented sector will continue. And given the relatively low returns on cash and investors disillusion with the stock market, it seems likely that competition from equity rich investors for London property will continue. 


Wishing you health, wealth and happiness,

Mike Smuts
Property investor and MD of Smuts & Taylor.