Return on investment in London property market

Return on investment in London property market

Investing in the London property market remains a reliable and profitable area for capital investment. London, like the UK in general, has one of the most stable real estate markets. Property prices have been growing steadily here over the past 20 years. Even if prices drop, as it was during the 2008-2009 crisis, such a drop is of a short-term nature and the market quickly recovers. London is a developed, well-structured, fully integrated real estate market that offers many opportunities for investors. This is a very dynamic market: enough to say that the average English family is ready to move, improving their living conditions, once every three years. Rental housing, unlike most other European capitals, in London is considered a temporary solution, and everyone is trying to take the first step in acquiring property.

The strength of this market is also evidenced by the fact that it withstood the crisis and the recession that followed. London and the prosperous South-East did not almost seem to notice that. There was no wave of defaults on mortgage loans in UK, as it happened in the US. What sets apart the UK market are: a simplified system of capital input and output, as well as a higher level of profitability compared to other European countries. The country is actively investing in its own infrastructure, including such large transport projects as Crossrail and HS2.

Considering that the pound sterling is one of the most stable currencies in the world, the benefits of investing in UK market are pretty obvious.

Recently, the percentage of foreign buyers in London`s new developments has grown to 40-60% – depending on the area. London property market is the most attractive for East Asian investors. Since 2011, the capital of England regularly ranks 1-2 in terms of investment in housing (more than 5 billion pounds per year). The steadily rising prices for houses and apartments, fueled by demand, are key to a win-win investment in UK real estate.

London is not just a city and UK`s capital, but a real global brand with an incomparable status. Return on investment in the London real estate market varies from 3% to 15% or even more, depending on the type of investment. Conventionally, there are several types of investment in the London real estate market: 1) investment in student hostels and nursing homes; 2) purchase of apartments and private houses; 3) purchase of apartments under construction; 4) purchase of commercial real estate; 5) investments in development projects.

Let’s take a look at each of the types of London property investment ideas.

When investing in student dormitories and nursing homes, the rental flow is the main source of return. As a rule, the rate is about 6% per year. The value of the property itself is not growing as fast as traditional residential real estate. Price increase rate for student hostels and nursing homes is about 4-5% per year. Demand for this type of property is always stable, although it is affected by seasonal adjustments when it comes to student hostels. In general, demand in this segment has only been growing over the past 10 years. Globally recognized quality of British education constantly attracts an increasing number of international students. Increase in British life expectancy contribute to this as well. Average cost of investing in these types of objects is 260 thousand GBP including associated costs.

Buying apartments or houses in London for renting them out is the most popular investment strategy, both among British landlords and foreign investors. Profit comes from the rental cash flow and the annual rise in the cost of the property itself. This class of real estate has a peculiarity: the amount of profit is not proportional to the cost of the investment. That is, buying expensive real estate does not guarantee high rents. All other things being equal, it will be more difficult to find a tenant for an expensive property. In 2019, almost half of the London real estate market (47.5%) were two categories of apartments and houses: up to 500 thousand GBP (19.3%) and from 500 to 750 thousand GBP (28.2%). These two segments are the most promising in terms of investment. Let us consider the return on investment in this segment using the example of an average apartment. For July 2020 the average cost of an apartment in the London market was 544 thousand GBP. Within the city limits, you can find cheaper flats, but from the rental potential point of view, they will be less attractive. Together with related costs (taxes, legal services, transaction support services), the transaction value will be about 575 thousand GBP. This is the average price excluding the mortgage and when applying for a foreign buyer. If the apartment is purchased by a British resident, the costs will be 16 thousand GBP less, due to the absence of additional tax. Renting out the apartment in question will bring about 2.2 thousand GBP of rental income per month, which gives us 17.5 thousand GBP income (or 3-4% yield) after paying all taxes and fees. As for the profitability from the annual increase in property value, Knight Frank`s forecast says that in 2020-2021 London`s residential real estate will add 3 to 6%. Which gives us a yield of about 40% within 5 years or 7-9% per annum.

London`s commercial property market is, like in any large, developed city, represented by offices, shops, commercial apartment buildings, hotels, warehouses and industrial facilities, as well as nursing homes and student residences. Due to the higher profitability compared to other types of property investment there is an increased interest of investors in the commercial real estate segment. The average cumulative return on this type of real estate is 12.7%.

Fig. 1 Aggregate return on different types of investment objects

Among different types of commercial properties, offices have the highest aggregate profitability: since 2013, they have risen in price the most and have demonstrated the most significant increase in rental rates. Industrial and warehouse facilities were second.

Property type Rental rate change, % Capital gain, % Return rate, % Total return
(Capital gain +
Return rate), %
Offices 7,25 16,55 5,74 22,29
Retail property 1,37 7,42 5,64 13,06
Industrial and warehouse facilities 0,40 13,31 6,72 20,03

Fig. 2 Return on investment in London commercial property market

Return on investment in London`s development projects can sometimes reach up to 30% or more per annum. The attractiveness depends on a set of parameters: the project, its location, developer, the availability of a full or partial package of permits. In addition to the new facilities construction in the London market, projects for the reconstruction with a subsequent increase in area and buildings technical characteristics improvement are very popular. However, investors should be extremely careful about the possibility of obtaining approvals and restrictions imposed on properties by the municipality.

Coobrick team is always ready to provide help with regard to investing in London property market.

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