How solid is the prime property market in London?

The appetite for prime properties in London looks set to remain of gargantuan proportions in 2012, despite the grim outlook of the UK economy and the sovereign debt crisis shaking the Eurozone. Indeed, some property professionals believe that the luxury real estate market in the British capital is actually becoming counter-cyclical, much like gold, farmland and other assets that are perceived as safe.

At present, prime properties in London certainly appear to be benefitting from the global turmoil.

“We are seeing funds being moved into prime central London from distressed and potentially distressed Eurozone countries such as Greece, Italy, Spain and even France,”says Giles Hannah of Christie’s International Real Estate. “Cash-rich clients from North and South America are also putting money into London, as are those form the Gulf. Ironically, these challenging times have lead to an increase in interest in prime central London properties.”

Domestic buyers too are choosing to invest in London: recent research by Savills estate agents shows that the gap in value between prime properties in central London and those in the British regions, where prices have fallen by an average 3.3% in 2011, is widening. “We would normally expect to see a flow of equity out of London in the wake of price recovery in the capital, but that is not yet happening,” says Lucian Cook of Savills residential research. “It’s not that domestic owners have stopped trading up, but they are trading up within London and the flow of City money that would normally be the lifeblood of markets such as Guildford is staying put in Parsons Green.”

Will demand for prime properties in London remain high when the economy recovers? Image by Stardusted

As a result, very few asset classes have kept pace with the luxury real estate market in London, let alone outperformed it. Gold is one but, warns Hannah, “growing numbers of people are now cashing in on rising gold prices. They are selling their gold and moving their cash into real estate.”

But if the performance of London’s prime properties is counter cyclical, do they stand to lose appeal when the economy improves? The Wall Street Journal believes that real estate prices in the British capital are too high compared to yields, and in a more confident climate investors may move to riskier but higher rewarding locations.

Hannah, however, disagrees. He expects rental values to increase anyway, but most of all, he says, “prime central London is very much an established market, and people want it as part of their portfolio.”

Short of a dramatic change in tax regime which Hannah believes could be an issue—among others, the mansion tax beloved by British business secretary Vince Cable has once again reared its head—”I’d have every confidence in purchasing a property in Kensington, Holland Park, Mayfair, Knightsbridge and Belgravia. The prospects for a medium to long term investment seem quite strong.”