As a result the price of London’s prime residential properties are at historically high levels and rising, says the report commissioned by Development Securities PLC and carried out by Fathom Consulting.
It shows that since 1995, up to 75% of the increase in value relative to the rest of the UK can be attributed to safe haven flows and at a time when the wider UK economy is in the doldrums, prime central London residential prices are currently tracking at a record six times multiple relative to the rest of the country.
Global equity prices, the relative value of Sterling and safe have status are the three key economic drivers behind London’s prime property market.
Of these three drivers, safe haven flows have contributed the most, boosting the price of London property relative to the rest of the UK by just over 30% since 1995, and their influence has intensified in the past four years with growing fears about the demise of the euro following the 2008 crash.
‘Foreign money seeking a refuge from wider economic difficulties has been key to the increase in prime central London property values in recent times, and accounted for 60% of acquisitions by value between 2007 and 2011,’ it says.
The result is that more than half of the resident population of the boroughs of Westminster and Kensington and Chelsea are from overseas.
Looking to the future, and against the backdrop of the euro zone crisis, the report shows that demand for property residences can go down as well as up. Exploring various scenarios that could impact on their pricing, the report indicates that a full break-up of the euro zone is, perhaps counterintuitively, the single greatest risk.
In this worst case scenario, sterling would appreciate against the newly formed currencies, global equity markets would tumble and once the crisis had passed, the safe haven factor linked with prime central London would diminish. Consequently, investment would flow out of London and into cheaper capitals in Europe causing prices to fall by up to 50%.
‘The prime central London residential market has seemingly defied the laws of gravity in the past few years. The safe haven effect has clearly played its role in attracting foreign money into London’s most desirable post codes,’ said Michael Marx, chief executive of Development Securities.
‘However, the property industry knows, perhaps better than most that nothing goes on forever. There are powerful forces at work that may have a considerable impact on prices going forward,’ he added.
According to Danny Gabbay, director of Fathom Consulting, prime central London property has intrinsic value as an investment, with clear fundamental drivers. ‘But in recent years it has also established itself as a safe haven for international capital flows, retaining its attractiveness despite a number of global storms, most recently as fears about the euro’s viability have intensified,’ he pointed out.
‘Its role, now established, means that even after the present crisis resolves itself one way or another, it will again offer investors shelter against future storms,’ he added.
