Jan 21, 2019 in Analysis

1.0 Introduction

London is among the most cosmopolitan countries in the world. It offers great leisure and cultural experience, with a stable environment and a society that embarrasses political and ethnic diversity (Society of Property Researchers 1992). Furthermore, London is a major destination for students searching for higher education mainly due to English language which is used as an international language. The fact that English language is applied at the social level makes London more desirable for foreigners.  Nonetheless, London is among the best region in UK from the perspective of real estates since it offers high growth performance, large quality properties and market transparency.  Physical accessibility is a major factor for property owners (McCarvill 2012). In London there are regular international flights and underground networks that link commercial areas with major entertainment areas, shopping and business areas. Moreover, there are infrastructures improvements such as the cross rail that will help enhance travel in the capital. 

The legal system related to property in London is very straight forward with assurance of a clear tittle and transaction costs are low as compared to other countries in the United Kingdom. London has also embraced internationalization of trade that has resulted to increased commercial property investments and capital inflows (Financial Times 2012).  Additionally, London has a multinational diversity and property buyers originate from different countries. The major financial and economic drivers for the overseas investment is liberalization of control of capital specifically currency fluctuation, capital export and geopolitical disruption whilst the major international property buyers include Indians, Chinese and Russians.  

Another issue that affects international buyers in the real estate market is the exchange rate volatility. A depreciation of the sterling pound implies a discount on the purchase of properties in London and this attracts more buyers.  

2.0 Overview of London Real Estate

Real estate investment has been one of the best investments in London market since it brings a lot of income for the citizens and London as a whole. This has led to a strong influx of the foreign investors investing in London commercial real estate market. Nonetheless, real estate market in London comprises of several distinct categories. First, some real estate investments are for commercial occupiers which are the largest real estate divisions in London (Society of Property Researchers 1992). Secondly, real estate investments can be built for industrial purposes such as distribution centers, factories or plants. In other situations, real estates in London are built for hospitality and leisure activities such as restaurants, hotels and bars and at other times for commercial purposes. Further, the buy-to-let real estate markets mainly focus on traditional prestigious regions such as Mayfair, Knightsbridge, St. James and Chelsea. Moreover, the average prices for the real estates in London have shown an increasing trend over the past few years with 57 per cent increase recorded since 2009. Further, London’s real estate prices growth compares constructively with the other leading global cities like Singapore and New York, which have shown 45 per cent and -26 per cent price growth in their real estate over the last four years since 2009. 

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3.0 Commercial Property Market in London

The demand for property is high such that the prices are maintained at high level. The rates in London are higher by 2.1 times in other cities in Wales and England. The situation is intensified by the limited commercial real estate stock particularly in the prime segment.  Increase in property prices in London has constantly been higher than other countries in the UK.  In 2012, the average price for a house increased by 4.2% while in wales and England price decreased by 0.6% and 0.4% respectively (McCarvill 2012). This price growth is expected to remain due to the financial and economic drivers in the market. Moreover, London is cited among countries which have a large number of millionaires whose major concentration is education and property wealth accumulation. 

The lettings market has grown steadily after recession period experienced in London. The proportion of businesses operated in rented house increased from 10% to 15.6% for the period 2000 to 2009 (Knight Frank 2012). The private renting rates in central London are twice the rates in the outer regions.  

Majority of the entrepreneurs in London are forced by the fact that they cannot afford to buy commercial property while others rent by choice either due to lifestyle or fixed leasehold contract.  The availability of foreign renters in the major towns implies the sales sector with shared companies. The market is also characterized by a contract renewal that is beneficial to renters considering income inconsistency and void periods. The average price for private sector in December 2011 reached £1,023, which is higher by 44% compared to other cities ins England and wales. Lack of enough rentals especially for small apartments which are highly demanded is the major cause of rents pressure. 

Further, as a core location, the demand for real estate properties in London is robust resulting to very high prices to acquire a house, around 2.1 times higher than average prices for Wales and England. The situation is exacerbated by the shortage of the commercial buildings that are within the prime segment (McCarvill 2012). Moreover, as a result of shortage in such infrastructure in London, price growth has consistently outperformed of United Kingdom over time. For instance, in 2012, the average house buy rates in London increased by around 4.2 per cent as compared to a decline of around 0.6 per cent for Wales and England as a whole. Additionally, the average price of houses in Westminster and Chelsea Kensington rose by around 12.3 per cent and 9.4 per cent during the end of 2012. 

Figure 1: Typical cost of Houses in London compare to United Kingdom

Source: McCarvill (2012).

Nonetheless, resilience of prime locations in London is usually demonstrated by its performance in real estate since its recent recession. Besides, the five main London boroughs containing mainstream of the primary central London commercial have seen prices recovered in order to surpass their pre-recession peak stages where the average prices were just over 16.5 per cent and 14.4 per cent above peak in Westminster and Kensington & Chelsea (Financial Times 2012). However, though price inflation in London real estate slowed down in second half of 2012, the prospects for the continued growth are still bright.  

4.0 Prime Central London Market

Mayfair is among the unique neighborhoods in London since it is bordered by regent to the east, Green Park to the south, Hyde Park to the west and Oxford street to the north (McCarvill 2012). The area has Selfridges department store, shopping district, bond street, Savile row and luxury hotels such a Connaught. The area also benefits from the central location in the west end. It was developed in mid-17th century as a fashionable commercial and the elegant buildings with public Garden Square still beatify the area. Currently, the sales for properties around Mayfair have been dominated by foreigners particularly from Russia, Middle East, china and India. Other buyers are from European majority of them being Greeks.  Close to 75% of the sales in the prime segment account for foreign purchasers. Moreover, the average price for land in this area ranges from £1,500 / square feet to £3,500 / square feet. 

5.0 Types of Property Ownership

There exist three types of ownership of property in London. First, there is the freehold ownership which offers the buyer an absolute ownership of land together with the buildings on it for an unlimited time period. Freehold owners have the right to do anything they wish with their property and due to this; freehold ownership is desirable for most buyers (Financial Times 2012).  The second type of ownership is the leasehold ownership which allows the buyer to own property in a piece of land owned by a different party through a lease.  This type of ownership applies commonly to apartment’s owners and apartment lessee. The period for lease is determined by the two parties and can range from 99 years to 999 years.  The leaser is expected to pay a yearly ground rent to the land owner.  The amount of rent can vary from some thousand pounds subject on the size of the whole building. 

The third type is the common hold ownership which provides for ownership of commercial units within an estate or a building. Ownership is through a lease and therefore not limited by time (Knight Frank 2012).  The other part of the estate or the building is managed and owned jointly by a unit holder through common hold association. The owner also provides for conditions that the lessees must fulfill before they are given the houses.

6.0 House Prices in London

The average commercial real estate prices in London have shown a tremendous increase over the past few years as compared to prices in other cities in Wales and England. For instance, in April 2012, average house price in Wales and England was around £160,417, which represented a 1 per cent decline as compared to prices in 2011 (McCarvill 2012). This was in contrast to average house prices in London which averaged to £360721 representing 5.2 per cent increases every year (Knight Frank 2012). Therefore, London house prices are expected to remain far higher as compared to those of the rest part of United Kingdom and the world at large. Further, while houses prices are falling or stagnating nationally, the house prices in London continue to keep on rising over the years. This leads to widening of the gap between London and rest of United Kingdom. 

Table 1: Mean house prices in London

2007 and 2010

London is mainly subjected to a wide range of geographical variability in terms of house prices (Society of Property Researchers 1992). Besides, it can be noted that more rated inner London had almost doubled the house degree price escalation to that one of the exterior parts of London. In addition, it is significant that house prices of Kensington and Chelsea which had the highest house price record in London experienced an increase of more than 20 per cent whilst Barking and Dagenham suffered a price decrease of around 7.3 per cent over the same period. This information can lead to some controversial debate regarding the performance of London real estate market. Firstly, one could wonder how house prices increased in London despite the reported decline in real incomes. Secondly, one could wonder why the most expensive areas were being subjected to greater than the average price rise. All these phenomena pointed out to something particular occurring in the London commercial real estate market which is not happening anywhere else (Cocco 2005). 

6.1 Supply Constraints in London

For the past few decades, there has been some structural imbalance between growth of new commercial buildings and their demand across London. For instance, since the year 2000, construction of new commercial building as well as their demand has faced stiff competition which ranging to around 18500 units per year.  This figure compares with the official projections and estimates for 2006 in which about 34000 new industrial buildings were being built every year (Baum 2009). Moreover, assuming that completions of commercial real estate building were to reach the peak, pre-recession levels of around 24,000 per year for remnants of 2031, it is believed to translate to an annual deficit of around 10000 constructions that equates to possible shortfall of around 200000 commercial buildings over this time (Knight Frank 2012). This means that by excluding this major calamity, prices would unavoidably increase in the long term. In the recognition of commercial real estate construction shortage, London government came up with some consultation proposal in 2011 which were aimed at relaxing the planning rules to facilitate alteration of use from the domestic to commercial space.

Figure 2: House Supply in London  

Source: Self.

In London, the new supply has contributed to lag in commercial building projections. This leads to suggestions that the industrial building numbers in London will grow at average rate of around 36000 units per year. Besides, the new housing supply in London amounted to around 20040 industrial buildings in the year 2011/2012 and it has averaged to around 20458 units per year in the last five years.  This information suggest that despite the fact that London real estate supply market is persistently wanting, the condition here is not considerably worse that in the nationwide picture.  Indeed, the percentage shortfall of houses in England and Wales over the last three or so years is higher than in London real estate market.  Moreover, in terms of the most affordable house provision, London is believed to be doing better than other cities in England and Wales with year 2011/2012 London recording around 44 per cent all new houses compared to 25 per cent new  industrial houses built in England. Further, in England some 51 per cent of the new constructions were grouped as affordable as compared to around 71 per cent found in London (Chandler & Disney 2014). 

7.0 Affordability of Commercial Real Estate in London

Given the escalating prices of leasehold within the real estate market in London and as the best alternative for the entrepreneurs occupations in London for increasing proportion of the Londoners and as the conduit for investment, analysis for real estate affordability in London is appropriate. Besides, in both London and England as a whole, house renting business is poised to be the second largest tenure from real owners (Baum 2009). Nonetheless, in London, renting houses is around 23 per cent of the total commercial units in the region. 

It is also clear that for a huge number of the entrepreneurs in London, house renting should not be viewed as the stepping stone to buying a house (Knight Frank 2012). Indeed, in many scenarios, house rent costs in London are above the cost of purchasing similar property for the first-time buyers, since the deposit is usually 20 per cent of value of house. 

8.0 Real estate Investment market in London rising up

Real estate investment is an acknowledged assortment balancer that offers diversification of the risk as well as enhanced returns. Besides, in London over three and ten year’s periods, real estate has outperformed some commercial properties, gilts and equities pertaining to the total returns in the nominal terms and it has also contentedly outdone inflation (Financial Times 2012). Further, the real estate investment in London has been far less instable than the equities. 

8.1 Favorable Conditions in London Commercial Property

There are numerous factors that make commercial property market in London more attractive for investors. These include; exchange rates, post-recession. With continued low interest rates as well as other economic aspects this means that there is potential of taking advantage of the advantageous exchange rates. In addition, with new coalition conservative Democrat Government, there have been sweeping changes in the real estate market made to corporation tax which are due to the take effect over the following years. Besides, London government has been able to put the international investors close with the independent financial advisors who are in a position to provide some advices to them on appropriate structures over which they can purchase the real estate with the most tax effective way (McCarvill 2012). Finally, there has been some market down turn in United Kingdom real estate market prices leading to a window of opportunity for several investors to buy while the real estate market is still at low point. 

8.2 Legal Overview of Business Premises in London

Generally, In London, the legal system related to purchase of business premises is transparent and well established providing buyers with clear tittle through the land registry that is accessible to the members of the public. The process of purchasing property (also referred to as conveying) is open and is handled by a solicitor who is commonly appointed by the buyer. The first stage of purchasing a commercial property involves examining the tittle deed to ratify ownership and ensure there are no complications that would arise later regarding the documents. The second stage involves affirming that the purchaser will obtain a clear tittle. The third stage involves investigating if there were any planned issues that may affect purchase of the property (Knight Frank 2012). The fourth stage is analyzing the local developments that can affect the value of the property in future.  The fifth stage includes ensuring the necessary certificates and paperwork in case of improvements and alteration to the property, are valid and available. In the sixth stage, the purchaser and the seller can negotiate the conditions and terms of sale. In the final stage, the recording of the changes in the tittle in case of mortgage is done by the land registry.  At this stage, the buyer is supposed to make a 10% deposit for the agreed price. Both parties will decide on a day to execute the transaction. If the buyer opts to withdraw the purchase, s/he will lose the deposit. 

9.0 Conclusion

London market continues to be amongst the most resilient real estate market in United Kingdom and in Europe general for investment. Thus, investors especially those based in the international market, continue to see London as one of the most regions having unwavering real estate market, and subsequently as an exciting time or period in investing in London real estate market. 

10.0 Recommendation

To be able to operate London commercial real estate market successfully as well as to avoid the inflation in this market, it is advisable for London real estate to have authorized real estate investment agents who could act on behalf of the London government. The agents will have detailed knowledge of local real estate markets as well as will be able to supply the resident with best products and services at best prices. In addition, the real estate investment agent will also play a role of sourcing the properties, analyzing the investments, managing real estate transactions in London, providing strategic advice for real estate owners in London as well as undertaking the initial diligence regarding all real estate transactions in London real estate market. 

 

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