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Long-term trends in London Residential Property

Thu 15 Nov 2007

It is notoriously difficult to understand the significance of what is happening around us at the time it is actually taking place; only with the perspective of hindsight can the meaning of events become really clear to us.

This is especially true in times of transition and the present is certainly a time of transition for global property markets.

Any attempt to explain recent and current events in these markets must at this stage, be necessarily, tentative and impressionistic.

What is clear is that the global binge of cheap credit is over and there is a supply crunch arising in terms of global oil markets.

The Financial Times recently reported that the Royal Institution of Chartered Surveyors were indicating that new buyers “have been withering for almost a year”.  The article went further to quote humorously from an estate agent in east London that “all poor news on the eastern front, poor enquiries, poor stocks, poor prospects”.

My experience of the current market in terms of central and west London, is markedly different. In recent months, I have been struck by the robust nature of this market in the context of the sub-prime crisis. In trying to understand this, I have come to realise that recent history has shown us that quite often New York’s disadvantage, has proven to be  London’s advantage.

The very strong market in 2005 and 2006 in London was, in my view, not due to the binge of cheap global credit rather, it was a reaction to a flight of money into London which emerged as, not just the cosmopolitan capital of the world, but also the financial capital.

In becoming the world’s financial capital, it could be said that it did so at New York’s expense as the financial markets reacted to a post-Enron culture of increasing regulation that impacted on the US business community. 

London’s ascent in real estate terms into this pivotal global position could be seen as a renaissance. Undoubtedly, we have been bequeathed a wonderful city with magnificent streetscapes and dazzling architecture which combines with a cultural richness that pervades even a passing acquaintance with the city. While London was very much alive in the 1960’s, I think it is fair to say that for much of the 1970’s, 1980’s and 1990’s, it fell behind in the natural order of things.

In hindsight, London’s property prices suffered from this sentiment as well as from the negative equity squeeze of the late 1980’s and early 1990’s. Moreover, Britain during this period, was internally politically polarised which affected how we were viewed by the outside world.

In retrospect the proud but rather protectionist Thatcherite view towards Europe, coupled with a Labour party still coming to terms with era of Arthur Scargill, meant that many large European corporations voted with their feet against Britain when it came to locating their European Headquarters. Our near neighbour in Ireland, and in particular Dublin, was, in my view, the beneficiary of this U.S. reaction as evidenced by the fact that Microsoft, Dell, Intel, Google and Apple, all now have their European Headquarters in Dublin and the rest of Ireland.

In fairness to Tony Blair, Gordon Brown, and David Cameron, we are now regarded as a much more outward looking nation and, therefore, London, in particular, was able to benefit from the post-Enron reaction to increasing regulation in the U.S. This consequential internationalisation of London, has had a significant impact on the strength of the central and west London residential markets.

The media has tended to put the strong residential market performance down to being “bonus” related. While undoubtedly this is, in part, true the underlying reason that the market has done so well is that London is attracting an increasing number of foreigners who are coming, either to live, or to establish bases here. The Conservative Party’s recent proposal to have a domicile tax is, not only, tangible evidence of the scale of the internationalisation of Britain but, more particularly, of London.

When the hullabaloo of the sub-prime crisis passes, as it will, the internationalisation of London will, in my view, continue. Many people look towards the Olympics in 2012 as offering substance to this view. While I don’t disagree that the Olympics will have an impact.  I think, ironically, the supply crunch in oil is going to be much more important to London property in the long-term.

What history has taught us, in property terms, is that if the oil producing nations can gain more of an upside in the price of a barrel of oil, then ultimately some of this money (and it doesn’t have to be a big percentage of it) will wind its way back into the western world, by way of investment in central London housing. We sometimes need to remind ourselves the world, after all, is round!

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