Arab investors to pounce on prime London real estate

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Local knowledge key for equity rich Arabs as market dynamics boost office prices and capital gains says Asteco in fourth quarter report on UK property market
 
London’s real estate market may have suffered a rollercoaster year in 2009, but it has been a year of two markets. Rents which are struggling to recover from the recessionary pressures in the first half of the year and investment markets which has seen a boom in demand from both domestic and international investors, according to major regional and international real estate services firm Asteco.
 
“There has been a dramatic turnaround in the market, with huge demand for London office investments coming up against relatively few willing or unwilling sellers,” says the Asteco report using data supplied by London-based Savills Research.
 
The effect of this has resulted in prime City and West End yields falling by around 100 basis points especially in the second half of 2009 as prices steadily rise. Indeed prime office rents will witness a noticeable recovery from the middle of 2010. This scenario will likely play out over the next three years as rising demand will be faced with a development pipeline that is virtually non-existent at the moment.
 
Commenting on the report, Dubai-based Richard Angel, Head of International Investment at Asteco, said, “A recovery in values has now commenced, we therefore expect Middle East and North African (MENA) investors to play a greater role in UK investment in 2010 because of market confidence and a still reasonably strong dollar. However, there is a clear demand/supply imbalance which is assisting in the increase of values and any investors will need to be well advised to ensure they are purchasing at or below market rates.
 
On the other side of the coin, the leasing market in London was seriously depressed throughout the first half of 2009. Although there were signs of recovery in the second half of the year, as savvy tenants looked to take advantage of low rents and anxious landlords. In general the story was one of low levels of demand, rising vacancies and falling rents.
 
“This has led the second half of 2009 - particularly in the City of London - seeing much higher volumes of take-up than in the first six months of the year. Indeed, it looks likely that the total take-up in the City of London will exceed four million square feet this year – only marginally below the long-term average,” says the report.
 
However The West End office market, which is more exposed to the UK domestic economy than the City, as a result, has not benefited from the recovery in confidence in global financial markets. As such leasing activity in 2009 will total approximately 2.2 million square feet, as opposed to its long-term average of 3.4 million square feet per annum.
 
As far as supply is concerned, the big story in the second half of 2009 has been the stabilisation of the vacancy rate, and the fact that it has begun to fall over the last few months. In the City of London the vacancy rate peaked at 15.3% and now stands at 14.5%. In the West End the peak was 6.7% and this has fallen to 6.5% over the last three months.
 
On the residential front, in terms of forecasts, after a sustained growth period which started in March 2009, the mainstream housing market has now caught up with levels last seen in September 2008.
 
“We anticipate that residential prices will soften into 2010 and this could be a very good time for MENA investors to take advantage of lower prices without robust competition, although supply will increase from 2009 levels it may remain weak comparative to the market highs and thus prove challenging to find the right property without local knowledge and local know how,” added Angel. 
 
South-west London led the way with third quarter growth comparable to that recorded during the market peak in the second quarter of 2007. During the third quarter of 2009, prime property prices in areas such as Fulham, Clapham, Wandsworth and Richmond, rose by an average of 8.4% following growth of 6.4% during the previous quarter.  
 
“The prime London suburbs and prime townhouse markets outside of the capital have shown the strongest growth. High levels of demand for family housing have driven up values in these equity-rich prime – rather than ultra-prime – markets,” says the report.
 
Over the next five years, three potential scenarios for the UK residential market are analysed in the report, taking into consideration certain influences such as mortgage affordability, supply and demand, the economic outlook, weak sterling and market sentiment. 
 
With the highest probability rating of 50%, the report forecasts that equity rich buyers could be eroded from now on and through well into 2010, as supply increases, sentiment wanes, economic growth weakens and prices soften.
 
“Prices during this period are expected to fall no lower than previous recent lows cushioned by current levels of affordability in a low interest environment. A gradual return to house price growth is expected as economic growth is restored, causing unemployment to fall from 2011 and mortgage markets ease meaning that base rate increases are mitigated by falls in borrowers margins,” the report concludes.  
 
For more details, please visit www.asteco.com

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