London's property market risky investment for now
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THE London and UK residential property boom is well and truly over. In the past few months prices have begun to slip in what has become a buyer's market. The slide has been especially evident in north England and the Midlands as a sizeable increase in new apartments on the market have failed to attract new buyers and tenants. In cities such as Manchester and Leeds, estate agents and residents have reported that a sizeable proportion of new buildings, with one and two-bedroom apartments, is empty. Aspirant landlords who were hoping to let the flats have been trying to sell the apartments as the mortgages on some of these properties are in many cases 90 to 100 per cent of the value. Hometrack, a property information group, has reported that house prices in England and Wales fell for a fifth month in a row in February. Other surveys also report a fall. The only difference in opinion is the extent of decline. The London property market has also begun to sag in tandem with the stock market slide, the pricking of the private equity and hedge fund bubble and an end of the mergers and acquisitions boom. Adding to the problem, changes in non-domicile taxation for wealthy foreigners and international employees in London have led to a decline in demand for prime property in popular areas such as Chelsea, Kensington and St Johns Wood. Previously 'non-doms' were not taxed on income and capital gains on assets held outside the UK. Now the latest Budget rules that if a taxpayer wishes to remain 'non-dom' they must pay an annual levy of £30,000 (S$82,750). The levy has also created uncertainty that non-dom levies and taxation may increase in the future. Thus, some of these foreigners have begun to sell houses and apartments. 'The global credit crisis and consequent financial market volatility have taken their toll on prime central London property,' notes estate agent Savills in a report. 'Compared with the third quarter of 2007, values in the final three months of 2007 fell by 2 per cent. This was the first fall in three years.' Savills estimates that gross average rental yields are only 4 per cent, about 1.5 to 2 per cent below the level of current mortgage rates. Now that capital values are either stagnating or declining, landlords are losing money. If the trend continues as several economists predict, owners of these so-called 'buy to let' properties will be forced to sell, adding to the supply and pressure on prices. Prospects for the city sector and the wider global economy are currently uncertain, notes Savills. This uncertainty is likely to deplete rental demand from corporate tenants and suppress rental levels going forward. In 2007, half of London's tenants worked in the finance sector and as many as 70 per cent in central London. With the extreme volatility in financial markets, weak investment bank results and possible redundancies, it seems likely that corporate tenant demand will be reduced, adds Savills. On the other hand, rental demand could increase as families delay buying houses and apartments. Overall rental increases are expected to be subdued in 2008. |
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