8 June 2011

Over the last 2 years, our clients have enjoyed some of their highest returns from their investment properties in London.

Over the last 2 years, our clients have enjoyed some of their highest returns from their investment properties in London. This is why it has remained one of our key investment markets over the last 2 years. Extreme under supply and high rental yields are just some of the reasons why we favour this market.

First and foremost the London property market has continued to perform well over the last 12 months with property prices forecasted to grow 29.1% in the next 4 years. Secondly, the exchange rate continues to favour foreign investors with the pound currently undervalued making it relatively cheap for foreign investors to purchase London real estate. Thirdly, rental values are at high levels and have increased by 16% over the past 12 months. It is likely that interest rates will increase in 2011, which will have an impact on rental yields, however we are still seeing a very strong uptake of rents with an average of 5 tenants competing for every property in the UK. This demand-supply disequilibrium in the market means you will be able to demand higher rents to offset the higher interest rates. The final confidence factor on the London market is how attractive it is compared to the rest of the other real estate investment opportunities around the globe. Real estate in Singapore, Hong Kong and China is inflated and over regulated which makes purchasing in these markets difficult and very expensive. London has shown consistent capital value growth and good levels of leverage which has not always been present in Singapore, Hong Kong and China.

Leveraging your property investment especially in London can really push up your returns. Take this example: over the last 11 years property prices in London have increased 109%. If you were to leverage your investment at 70% in 2000 i.e. took an average loan of 70% of the property value, then you would have made a 376% return on your investment compared to the price growth of 109%. This indicates the importance of leveraging assets to optimise the returns on your investment. Leverage is always sensible for a point of using your capital wisely and generating better returns but also for reducing any tax liability. For instance your monthly rental is offset against mortgage costs, if you have GBP 1,000 rent and GBP 800 mortgage you only pay tax on net income of GBP 200 and of course that is not taxable because of this low band of income.

With so many London products in the market, one can be forgiven to be somewhat overwhelmed or confused as to where or what to invest in. Keep it simple: focus on super-prime. Over the past few years super prime London property has performed better than the general London market and there are a few boroughs which outperform the rest. The likes of Kensington, Chelsea and Westminster are examples of super prime London. Even during the recession, if you were to have leveraged your investment property in Kensington and Chelsea in 2006, you would have seen a return of 189% compared with 55% unleveraged. This shows you the kind of return in super prime London and how leveraging your property can more than double your ROI.

Super prime London is a perceived as a store of wealth with investors turning to these markets as a safe haven in the midst of ongoing global political and economic uncertainty. If its investors in the Middle East trying to get political security or Asian investors wanting to buy in Europe or investors from Russia looking for top quality product in an under supplied market, Super prime London ticks all these boxes with a forecasted growth of between 5 and 10% for this year.

London is a tried and tested market year in and year out. Although the market is cyclical, like most real estate markets, over time even with natural peaks and troughs, London will give you very strong and generous returns without significant risk. This is why we have invested over GBP100 million in London on behalf of our clients.

Kind Regards

Tim Murphy

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2.8 billion in international real estate investments in over 30 markets worldwide.

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