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London property has long been seen as a desirable investment for property. With its economic importance, national and cultural significance, London is top-of-mind for many expatriate investors and is the largest property market in Europe.

As a stable market which is seen as a safe haven for capital, property there is safe and attracts the eye of those seeking safe places to park significant amounts of wealth.

Some banks in Asia have even developed special mortgage products for expatriate investors, allowing them to finance mortgage properties in GBP – for property in Zones 1 and 2.

However, despite London’s reputation in the minds of most people as an excellent investment market, it’s not the hot investment it once was, and here’s why:

High prices

The high price of property in London presents a significant barrier to entry for many investors. For many of our expatriate clients, the ability to manage deposit payments is crucial to entering the market. With the focus on acquiring a number of properties – and allowing the rent to pay down the debt quickly – the high price of a London deposit can be difficult to reach.

For example, in the mortgage product above from DBS Singapore, a 25% deposit is the minimum expected by the bank – which is a high barrier to entry for expat investors who are looking at properties as secondary buy-to-lets and not primary residences to live in.

Rental Yield compression in London

For any property prospect, the metric we advise all buy-to-let property investors to look out for is rental yield. Rental yield is a key indicator of the performance of your investment.

By looking at the amount of rent that your property will produce as a percentage of the total market value of your property, you reach a percentage figure.

This we calculate as follows:

Gross Rental Yield: Annual rental income (Weekly rental value x 52) divided by Property value, multiplied by 100.

According to Gareth Lewis of PwC,“money tends to plough into [London] during the harder times, as people are looking for a safe bet, somewhere to keep their money.”

“As prices go up, and yields compress, people looking for better rewards will look to secondary cities.”

In other words, as prices go up – but rents do not keep pace with the rise of house prices – these properties become less attractive in terms of their rental yield.

And with rental yields in London hovering around 4-5%, this is markedly lower than some other secondary cities in the UK in which we are currently seeing rental yield around the 6-7% mark.

A difference like this means thousands of pounds of difference over the course of the years.

London is no longer in the top 10 of European cities for property investment

According to the Emerging Trends in Real Estate 2016 report by PwC and the Urban Land Institute, London has slipped out of the top 10 best cities for investment prospects for the first time since 2012, down to 15th place.

Berlin and Hamburg are the top two cities and Birmingham is the top British city – at sixth place – and London comes in below Istanbul and Budapest.

The list of European cities with the best investment prospects:

  1. Berlin
  2. Hamburg
  3. Dublin
  4. Madrid
  5. Copenhagen
  6. Birmingham
  7. Lisbon
  8. Milan
  9. Amsterdam
  10. Munich
  11. Stockholm
  12. Barcelona
  13. Budapest
  14. Istanbul
  15. London

Birmingham leads the UK for investment prospects

Birmingham is experiencing a Renaissance, with many businesses starting to move there, such as Google, HSBC and the BBC, and the HS2 train link to London bringing the city closer to the capital.

Interesting property developments in Birmingham include Castle Court, Dudley and [Other Developments?] which benefit from a higher rental yield and a lower purchase price.

As always, for our clients the focus is on building a diversified portfolio of revenue through accessible investment opportunities.

 

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