London real estate coming off steroids

By George Hay

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

London real estate has been on steroids since 2009. But it’s no longer a racing certainty that the capital’s property will deliver an Olympic performance this year.

Properties in London’s fanciest districts like Chelsea and Notting Hill entered 2012 at record levels – about 10 percent above the last peak, says high-end real estate agent Savills. The recovery in London’s financial sector is one factor, with over 20 percent of Londoners’ overall income generated in finance. Meanwhile, international buyers continued to see London as an attractive place to live and a safe financial asset at a time of market volatility. Sterling’s weakness against the euro, relative to pre-crisis levels, only helps.

But one leg supporting the market is starting to tire. The capital’s financial sector is in decline. About 9 percent of the workforce was shed in 2011, says the Centre for Economics and Business Research. Bonuses have slumped.

Rents in London’s top areas are now coming off the boil, falling 0.2 percent in January to sit 0.6 percent below their peak in September, according to Knight Frank, another top-end agent. Corporate lettings budgets for relocating bankers to London have been slashed by up to 15 percent, it says.

The cull in the City isn’t over. And bloodletting has historically been accompanied by London price falls: in the early 1990s and 2008 crashes, prices dived 20 percent, says consultancy Capital Economics.

There are already signs of a slowdown in the sales market. Rightmove, a property website, says vendors in Kensington and Chelsea dropped asking prices by 1.7 percent in January, after a 0.4 percent snip in December. Asking prices in Islington, a nest for financial workers, were cut by some 4 percent in December, and 0.7 percent last month.

This all puts more pressure on international buyers if prices are to hold up or go higher. Their buying power has reduced somewhat as the euro has weakened against sterling since last summer. Moreover, as the sense of extreme crisis passes and equity markets recover, the appetite for safe havens may abate. But international buyers are an unpredictable force; demand from wealthy Russians remains keen.

Savills predicts a 3 percent rise in prime London real estate in 2012. But property tends to be momentum-driven. If prime rents and Kensington asking prices are leading indicators, the momentum will be down not up.

Source: http://blogs.reuters.com/breakingviews/2012/02/14/london-real-estate-coming-off-steroids/