Unless you’ve been living on a desert island, it will not have escaped you that the UK’s property news has focused on two things. First, flying in the face of ‘forecasts’ made by expert commentators, property prices have risen sharply. And second, that there will be a mass departure from London as working from home becomes the new normal. The question some investors are now asking is “Should I buy in London?”.
For the first time in many years, house prices have risen faster outside of the capital than within it. However, the question most investors need to ask themselves is, is this the start of a new trend of de-urbanisation or simply a buying opportunity? My guess is that it is the latter. Most successful property investors made the bulk of their fortunes buying property at a low point in the cycle when it was un-loved. I think now is simply one of those times.
If you’re buying for investment, our view is that London is probably one of the best places to invest, here’s why.
Supply and Demand Imbalance
No matter what you’re buying, supply and demand is the ultimate driver of price. London has a chronic shortage of housing. Decades of success creating jobs and new opportunities in the capital have simply not been matched by the delivery of new housing to meet this increased demand.
Whilst the supply of new housing in London has increased from delivery lows between 2010 and 2013, there is going to be an increased supply shortage in London as new construction starts have rapidly declined. New construction starts in 2020 were 22,574 just above a 2012 low of 18,180.
The issue is most pronounced in Inner London where new construction starts have declined by 45% from 10,113 in 2015 to just 5,559 in 2020.
London Remains a Global City
London remains one of the most vibrant, popular capital cities in the world. The entertainment, arts, cultural, business and educational facilities continue to place London as a global city.
The Global Financial Centres Index, published by the China Development Institute (CDI) and Z/Yen partners, provides evaluations of future competitiveness and rankings for 114 financial centres worldwide. Their latest report ranks New York first with London second.
It also reports that London is one of just 15 global centres likely to become “more significant” over the next two to three years.
Do young professionals really want to live 60 minutes from London?
Some families living in London have taken the opportunity to move out of London to commuter belts and countryside. But what about the the hundreds of thousands of young professionals working in London? Do they really want to leave the capital?
The draw of the bright lights of the big city for twenty and thirtysomethings will prevail for most. Most wont be able to afford to buy a property, the average age of a first home buyer is now 34. So they will share a rented property with friends – but will three flatmates all work from home around one kitchen table when lockdown has eased? NO.
They’ll be back to the office for the most part, wanting to live in central London in vibrant areas close to the tube and catch up on all they’ve missed. When the lockdown restrictions ease, I very much doubt we will see a shift in the working and living patterns of these young professionals from pre-covid times.
House prices in London are still rising
Despite all the noise surrounding house price growth outside of London, prices in London are still rising, albeit at a slower place. Nationwide reported annual house price growth of 13.4% in June 2021, prices in London rose 7.3% over the same period. So for those waiting for property prices in London to plummet, think again. It’s impossible to know when to catch the bottom of the market, but with slower growth and limited supply, smart investors will be looking at the opportunity that presents itself.
Follow the leaders
If you’re a long-term investor, you will not go wrong if you track and monitor large property developers. Where are they spending their money? Where do they see potential for growth? These development companies have teams of experienced researchers providing in-depth analysis on the market, looking at where to buy land and where the opportunities are. Of the 10 development sites Berkeley Group bought in the last year, 7 are in London.
What does this mean for investors? Should I buy in London?
With the combination of under supply, world leading city status, a large potential tenant pool and house prices rising comparatively slowly, London is the surest place for property investors looking for long term growth. So don’t get blown away by the headlines, look at the investment fundamentals that underpin capital growth and rental yields and make smart investment decisions.
Investors will find the best opportunities present themselves where developers have sites that are about to commence construction. By buying off plan, two or three years in advance of completion, these early investors help to get schemes ‘off the ground’. Their reward for doing this? Keener discounts. Developers recognise the valuable role investors play in the development cycle and ‘reward’ these early investors with lower pricing for their early commitment. The lack of supply, particularly in inner London will mean this is where investors will find opportunities that deliver the best financial performance.
Learn more in our UK Market Review here.