Following our mid-2021 UK Property Outlook, here is our mid 2021 London Property Outlook.
A key contributor of the UK economy, London has held the pole position of #1 City in the World’s Best Cities 2021 rankings for 5 consecutive years based on a number of criteria including human capital, infrastructure and culture, experience and prosperity. It has also held on to its title as the overall European City of the Future in the Financial Times’ fDI rankings for 2020/21. London is the best city in the world for property investment, second only to Los Angeles in the Global Cities 30 Index rankings.
How will London negotiate the challenges of COVID-19 and the uncharted terrain of a post-Brexit world? Will the UK’s main city, continue to be known as the “capital of capitals”?
In Ernst & Young’s (EY) latest UK Attractiveness Survey published in 2020, London emerged as the main driver of the UK’s strong performance, especially in the digital tech sector. In 2019, the city secured 538 digital tech projects, representing almost 50% of the national total.
Nonetheless, London—just like all the other UK cities—has been forced to reckon with Covid-19. The impact of the end of the furlough scheme is expected to cause a contraction in employment as employees that were protected from redundancy by the furlough scheme fall out of the labour market.
Still, London is a key contributor to the UK economy and the commercial heartbeat of the country and, unsurprisingly, the most densely populated city in the UK. Data confirms that London has the greatest proportion (67.4%) of working-age people in the UK, and home to 4 of the country’s top 20 fastest-growing local authority areas.
Its population density is 24 times higher than that of southwest England; 1/3 of its population is foreign-born. Based on the most recent census projections, London’s population is projected to hit 9.2 million in 2021.
While London has excelled in creating jobs and opportunities for decades, it has failed to build adequate housing for its citizens. Housing undersupply is acute in the capital city where many are renters, resulting in a vacancy rate that is one of the tightest in the country at 2%—meaning, only 1 out of 50 homes are available for rent. Worse, houses are being built at a slower rate in London than any other region despite the capital having the most acute homes shortage.
Covid-19 is bound to exacerbate the problem further, with new housing starts falling to an average of 12,500 p.a. over the next 5 year— a glaring shortage against a need for 52,000 homes p.a.
Housing undersupply has been the cause of London’s stratospheric house prices and rental rates. The last 3-4 years, however, saw price points hit a ceiling and begin to lag, no thanks to (i) stamp duty increases for second homes and non-residents, (ii) uncertainty in the country’s leadership, and (iii) Brexit. Today, with more certainty on Brexit and the Conservatives firmly in control, London property prices are expected to rise again.
3 Key Criteria for Investing in London
#1 Understanding Housing Affordability
The average house price (all property types) in London in Jan 2021 stood at £660,754, a rise of 4.10% in 12 months according to Zoopla estimates. In terms of property types, apartments in London sold for an average of £532,056 and terraced houses for £711,659.
Investors typically invest in London for its incredible capital gains over time and the more prime/ central its location, the better the price growth. However, investing for rental income and better cash flow and yields requires an understanding of housing affordability.
Often, investors make the mistake of focusing solely on how close a property should be to the London city core. But is a Zone 1 or Zone 2 location necessarily a good thing for an investment property if you’re looking at rental yields?
Can you find a tenant that is able to pay rents at a price that will cover your mortgage and expenses, and ensure that you are not in a negative cash flow position?
Fact: all the average tenant needs is a decent home to live in with good connectivity. Rental properties located close to transportation links have better value and are well sought-after in London.
#2 Addressing Negative Cash Flow
Although London remains one of the Top 10 cities for buy-to-let investments, the average rental yields in London, at best, are currently lower than cities like Manchester or Birmingham. Rental returns at London Zones 1 – 2 are at about 2% – 3%.
Even with an average rental yield of 4% in the outer Zones, and general mortgage rates of 4%, the returns will result in negative cash flow after other expenses are paid.
A way of improving your cash flow is through interest-only loans, which have lower monthly payments and which can be covered by the rental income that you receive. Over time, the appreciation in the value of your property and increase in rents will enable you to fully repay your principal.
#3 Bonus: Regeneration / Crossrail
Regeneration can improve an area and quality of life for its residents, consequently increasing the value of properties within its boundaries.
A recent study on the effect of regeneration on local property markets in London found that house prices within a 750-metre radius of a regeneration zone grew faster than the wider market by up to 3.6% per annum on average.
One of London’s biggest regenerations, besides Stratford (Olympics Park), the Royal Docks and others, is the Crossrail.
The Crossrail is scheduled to partially open in 2021 (full service in 2022), after a delay of more than 2 years, and is billed as the capital’s biggest and most important transport upgrade since the expansion of the Tube network over 100 years ago.
Properties on the Crossrail route have already doubled in price despite delays. In Nov 2019, the average house on the route stood at £665,103, compared to £330,770 in 2008, in the midst of the financial crash when the new railway route was given the green light! Market observers expect house prices surrounding the majority of Crossrail stations to continue to outperform the wider London market.
End Word: 2021 London Property Outlook
Although London’s average yields may not be the highest, investors can make significant gains through capital appreciation. Statistics show that London chalked the highest cumulative price growth over a 25-year period compared to stocks, gold and property in other cities, second only to the S&P 500 (Figure 7).
The key is the right property choice in the right location. Prime Central London prices, specifically, are still some 20% below their 2014 peak hence there is room for growth in value. London continues to remain #1 in the World’s Best Cities Rankings for 6 years running, Top 3 in Schroders Global Cities 30 Index and the UK’s Top 3 destinations for buy-to-let.
Wherever in the world that you choose to invest in, find out how your desired investment property stacks up by using our G.O.L.D.M.I.N.E. Strategy © and S.A.F.E.T.Y. 1st © Criteria to ensure you have considered everything necessary for exponential growth. No idea what that is? Attend our free webinar to learn more. Register here: https://webinar.csiprop.com/
Read our Mid-2021 Outlook on the Australian Property Market here.
By Vivienne Pal
All data is accurate and up to date at time of writing. © 2021