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Monday, 6 August 2012

Olympic Games and London Property Prices

South Africa may be scooping gold medals at the Olympic Games, but experts are uncertain of the immediate Olympic boost to London property prices.


South Africa may be scooping gold medals at the Olympic Games, but experts are uncertain of the immediate Olympic boost to London property prices.

According to Mike Smuts, managing director of Smuts & Taylor Ltd, it would seem from the available data that the Olympics have had little effect on East London property prices.

He points out that it’s a little early for judgement, but there is of course always a big debate about whether events such as the Olympics Games actually have a direct effect on property prices in the host city.

Speaking to Property24.com, Smuts explains that some earlier research has shown that the Olympics may aid property values in developing cities, but has little to no effect on developed metropolitan areas like London.

Knight Frank revealed in a report recently that prime central London property prices reached a new high in June with values almost 50 percent higher than they were in March 2009.

Engel & Völkers in Chelsea, London said at the time many landlords and buy-to-let investors were spotting opportunities for short-term rentals during the Olympic Games hence boosting the rental market.

Click here to read the article.

“One thing that is undisputed though is that hosting cities benefit from an upgrade of transport, cultural/leisure facilities and urban infrastructure, which in turn encourages house prices growth.”

He notes that all of this is true for London saying the “Olympic Legacy”, as the government has dubbed it, will lie in these infrastructure upgrades and not in the event itself.

Smuts says some of the infrastructure improvements are already complete, including parts of the £6.5 billion ($10 billion) investment in London’s transport system, as well as private ventures such as the £1.5 billion Stratford City Westfield Shopping Centre.

“Housing projects are still taking shape and until those developments are complete, it’s too soon to look for an Olympic housing boom,” he says.

Smuts says some of the infrastructure improvements are already complete, including parts of the £6.5 billion ($10 billion) investment in London’s transport system, as well as private ventures such as the £1.5 billion Stratford City Westfield Shopping Centre.

Yolande Barnes, director of Savills residential research explains that the real legacy for the housing market in Stratford will start after the Olympics, and any ripple would follow thereafter.

Barnes says transactions in the London Borough of Newham are running among the lowest in the country – at around 40 percent of their former average levels and it is difficult to discern any price rises above and beyond the background rises in London as a whole.

Over the longer term, the infrastructure improvements and general ‘speeding up’ of regeneration and management of place that has happened because of the Olympics will undoubtedly have a positive effect on local house prices, she says.

“Perhaps more importantly it will have a positive effect on the quality of the local environment,” says Barnes.

Furthermore, she says the legacy will effectively be a managed ‘landed estate’ with an eye on long-term quality, which means that some localities will have the potential to rival the more prime areas of west London.

This should attract newcomers who would otherwise not have considered the location previously, she says.

Smuts is of the opinion that the point to get across is that hosting the Olympics or Soccer World Cup doesn’t do much for house prices in itself - but the infrastructure upgrades do.

“House price increases near Gautrain stations in Gauteng South Africa in the wake of the Soccer World Cup is a good example of this,” he points out.

On home prices in East London in light of the Olympics Games, he says the housing market in the area, particularly around Stratford to the east, has under-performed in comparison to the rest of London.

Data from the Land Registry show house prices across London rose 5.1 percent year-on-year to April 2012, but in the east London borough of Newham, home to the Olympic Park, prices moved up just 2 percent.

This is in stark contrast to Kensington and Chelsea where prices have jumped 11.6 percent over the same period as wealthy foreign investors (including many South African buyers) flock to London looking for a safe haven for their wealth, he says.

Smuts says while capital growth has been lower than expected, rental prices have performed far better.

According to a rental index conducted by leasing company HomeLet, London rental prices in April were up 7.1 percent on the prior year, with those in east London (an area which includes and extends beyond Newham) outpacing the rest of the capital, rising 8.6 percent.

Wealthy South Africans are highly prudent with their investments and with the continued uncertainty around the prospects and timing of the global economic recovery, most favour the tangible and straightforward nature of residential property as an investment, according to Smuts.

London letting agents are reporting a surge in the number of advertisements placed on their websites and a record number of enquiries about properties available for short-term lets during the Olympic period, he says.

He notes that Gumtree.com, a UK-run site for classified ads, has seen 2 321 ads posted for Olympic rentals between January and May and almost 10 500 replies to such posts.

HomeAway.co.uk, the UK's number one holiday rentals site, said landlords taking bookings through their site have achieved rents between 70 and 200 percent higher than standard rates.

According to a BBC report, some landlords believe the opportunity to be so lucrative that they have asked existing tenants to leave to free up their properties for the few weeks during the games, he says.

“Still, much like the expected housing boom, I suspect the moneymaking potential of short-term rentals during the Olympics have been overstated by overzealous letting agents - especially because so many properties are coming on to the market,” he says.

Should landlords achieve higher-than-normal rates for their properties during the games, it will merely be a short-term phenomenon and hardly worth turning out existing long-term tenants, he says.

“Interestingly enough it would seem from the lettings data this short-term boost is likely to benefit other areas of London just as much as the Olympic boroughs.”

Rental companies say properties in central and west London have been equally popular as those local to the Olympic sites, with many visitors hunting out home stays closer to the city’s other major attractions, he says.

This week, Savills revealed in a report that a review of record prices achieved for residential real estate in the top 10 ‘world class’ cities reveals that London still holds gold four years after the record of £8 500 per square foot was set in 2008, making the city’s Kensington Palace Gardens the most expensive address.

The top three ‘world class’ cities closely grouped with records set at over £8 000 per square foot, with Hong Kong and New York just behind London with £8 400 and £8 300 respectively, according to the report.

View the record transaction here.

A property that transacted in 2008 in London’s Kensington Palace Gardens tops the list at £8 500 per square foot and Savills says what sets this home address apart from others is the rarity factor.

Its exclusivity, well established residential streets with extremely limited supply.

This week, Savills revealed in a report that a review of record prices achieved for residential real estate in the top 10 ‘world class’ cities reveals that London still holds gold four years after the record of £8 500 per square foot was set in 2008, making the city’s Kensington Palace Gardens the most expensive address.

According to the Knight Frank Prime Global Cities Index Q2 2012 report, the value of prime property in the world’s key cities rose by 1.4 percent and London ranked number five of the 27 global cities surveyed recording an annual price growth of 10.5 percent.

The same report saw two of Africa’s top home locations in the top 10 with Nairobi Kenya at number three (21.8 percent) and Cape Town in South Africa at number 10 (4.1 percent).

Read the article here.

Barnes says in the longer term, it is possible that to see increasing amounts of overseas wealth flowing into the area, not just from investors buying new build properties but also ‘displaced’ west Londoners taking the value of their property east and getting much more for their money.

In the end, much depends on the skills of those creating and managing the new places that are being created but it is difficult to see how such a good start could have been achieved without the Olympics, especially in the current economic climate, she says.

Barnes points out that Westfield has already had a positive impact on the area and the arrival of Crossrail in four years will certainly give a further boost.

Matt Leitch from the Savills Canary Wharf office explains that Newham, Hackney and Tower Hamlets all represent great value in the current market compared to their neighbours.

Tower Hamlets is the city’s cheapest boroughs and are significantly cheaper than, say, Canary Wharf – but have begun to see the benefits of neighbouring City and Islington prices, he points out.

Leitch says property developers are pushing east because they can’t push west due to high density existing development and this, together with huge investment in infrastructure will boost values over time.

“Individual and bulk property investors have been attracted by this potential and the outlook over the mid to long term is extremely positive.”

Connectivity is key to the redevelopment potential - the East London line extension triggered investor activity, and Stratford already has great connections to central London, the City and Canary Wharf, connected via the Jubilee and Central lines and DLR, plus the area will benefit from Crossrail by 2018.

The extended area will benefit from a great deal of residential and commercial investment over the next 20 to 25 years and this would be positive for both investment and owner occupiers, he says.

South Africans buying London homes

Tell us where many South Africans are buying property in London, prices they buy into and what is driving demand for London property from investors?

Asked where in London are South Africans buying homes, Smuts says central and south west London remains firm favourites with High Net Worth Individual (HNWI) South Africans, while the biggest employer of bankers in Europe, Canary Wharf is also fast growing in popularity.

“Most of our clients purchase in the price range of £350 000 to £500 000 for investment purposes and generate a gross yield of 5.5 and 6.5 percent.”

He says they are also seeing a lot of interest from HNW South Africans who are buying with a view to relocate or as a second property to use for when they visit their children or friends residing in London.

According to a rental index conducted by leasing company HomeLet, London rental prices in April were up 7.1 percent on the prior year, with those in east London (an area which includes and extends beyond Newham) outpacing the rest of the capital, rising 8.6 percent.

“For these buyers, trophy properties in the most desirable locations are at the top of their shopping lists and we have had a number of instructions recently for residential properties in excess of £1million.”

Wealthy South Africans are highly prudent with their investments and with the continued uncertainty around the prospects and timing of the global economic recovery, most favour the tangible and straightforward nature of residential property as an investment, he says.

Smuts says this risk aversion and the consequent trend of ‘flight to quality’ have been the main drivers for South African investors as they attempt to avoid economic and political uncertainty at home.

He points out that wealthy South Africans buyers do not seem to base their decision to invest offshore wholly on fear of the Rand’s fall in value or local political instability but rather by solid financial planning that includes diversification of asset classes and markets.

As a result South African buyers also take a very different view on the London market as a whole in that they do not see their property as a short-term investment.

In fact, some don't view it as an investment at all, but rather as a long-term asset that will stay in the family for generations to come, he says.

This is mainly due to the long-standing view that London property offers a safe haven, the enduring attractions of the city's excellent schools and the strong economic and social factors that makes it the investment destination of choice for the worlds wealthy.

London property prices have none the less vastly outperformed expectations.

Smuts notes that London was the last global market to go down in value and the first global market to recover during the global recession.

Prime London house prices are now 47.3 percent higher than the bottom credit crunch in March 2009 and that’s more than 12 percent above previous peak in March 2008.

Rents in Greater London average £1 177 per month –7.9 percent higher than average rents in April 2011, he says.

Smuts adds that while special events such as the Olympics Games and Soccer World Cup may come and go, investors will be well advised to ignore the hype and fanfare that accompany these events and instead, focus on investing fundamentally in income producing properties. –Denise Mhlanga

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