LONDON Feb 13 London's property is losing its
attraction for investors as they start to venture out of 'safe
havens' and worry that the city's prices look high given a
slowing British economy.
A reputation as a safe place to park money during global
market turmoil helped drive central London office prices up 52
percent between mid-2009 and the end of 2012. Prices in the
smaller luxury residential market grew at a similar pace.
As investors feel calmer about the world in general, they
are looking more closely at London property holdings.
"I cannot help but conclude that London is in bubble
territory," said Ben Habib, Chief Executive of First Property
Group, which owns British and Polish real estate.
"The returns available are very low and capital values
vulnerable to a shock."
Commercial property deals reached nearly 21 billion pounds
($33 billion) last year, according to research group Real
Capital Analytics. That was double the amount for Paris and four
Over 64 percent of money coming into the market was from
abroad - up from 61 percent in 2011 and 55 percent in 2010.
But fears of a euro zone breakup, a slew of U.S. tax rises
and spending cuts or sharply slowing Chinese growth have
diminished - removing factors that had driven the flow of money.
Meanwhile, concerns over Britain itself have grown.
The economy shrank in the last quarter of 2012, Britain's
AAA credit rating looks in danger and the pound is at a 6-month
low against the dollar - in part because of outflows from
government bonds that had themselves been seen as a safe haven.
A weakening pound "may start the unwinding of the great wall
of money," said Jefferies real estate analyst Mike Prew. "A
prime London asset denominated in a secondary currency loses
much of its investment appeal."
YIELDS UNDER SCRUTINY
Not all agree that London property has run out of steam,
citing strong lettings in buildings outside top locations.
"If this is a recession, then not only is London doing
rather well but imagine the impact of any economic and financial
recovery," said Investec property analyst Alan Carter.
When the investor focus turns to yield rather than
preserving capital, sceptics say it is harder to make the case
for London property.
Yields for some Mayfair properties are under 4 percent. They
are below 3 percent for the Rolex store under the One Hyde Park
luxury flat scheme in Knightsbridge. That compares to a longer
term trend of about 5 percent in the wider West End district.
"We don't believe there is good value in prime central
London and are selling to reinvest elsewhere," said Richard
Gwilliam, head of property research at PRUPIM, a real estate
investment arm of British insurer Prudential that has
about 15 billion pounds ($24 billion) under management.
With signs of some half-full or vacant buildings starting to
drop rents, that could also hurt values. A succession of job
cuts announced by banks have added to concerns over demand.
The luxury residential market is already in something of a
hiatus after rises in sales tax for the priciest homes.
"You have a Sword of Damocles hanging over the market," said
Andrew Langton, founder of high-end estate agent Aylesford
International. Deals at the top end of the residential sector
had fallen by two-thirds over the last year, he said.
Those who parked money in London property as a safe haven
may now find it doesn't stack up as well against alternatives.
Benchmark Spanish and Italian 10-year bond yields are
trading above 5 and 4 percent, but without the same perceived
risk of euro zone breakup that sent them soaring last year.
Property has the disadvantages of being a much less liquid
market with things like higher transaction fees, building
maintenance costs and gaps in rental to worry about.
ESCAPE TO THE COUNTRY
For specialist property investors, London is also looking
pricy compared to the rest of Britain.
Outside London and the Southeast, office values have dropped
14 percent since June 2009 , according to property consultant
The gap in yield between West End London offices and
so-called secondary British offices is about 10 percent versus 1
to 2 percent before the crash of 2007.
Property company share prices show London's premium too.
London specialists Derwent London, Great Portland
and Shaftesbury trade at premiums to net asset
value forecasts of about 14 percent, 8 percent and 11 percent
respectively, according to Investec figures.
By contrast, the two largest property firms with real estate
outside London - Land Securities and British Land
- trade at about a 6 percent discount and a 5 percent
discount to their last stated net asset value.
In a sign of the interest outside London, billionaire
investor George Soros last month built a stake of over 5 percent
in Development Securities.
Axa is raising 1 billion pounds to buy property
across Britain on long leases, Aviva Investors is also
looking in British regions and JP Morgan cites better
opportunities away from London's most popular districts.
Beyond Britain, there is also growing interest in some of
the very regions from which money flowed into London in search
of safety. In cities such as Milan and Madrid, the best shopping
centres can command yields of as much as 6.75 percent.
"As euro zone break-up risks subside we may look at southern
peripheral countries," PRUPIM's Gwilliam said.