We’re Forever Blowing Bubbles – Commercial Property in a Global City
Anyone who has picked up a paper in the last year will have some idea of what is currently happening in London's property market. Prices have increased 17% in 2014 alone and buyers are being squeezed out of the market as billions of pounds of foreign investments flood the market. Cash-rich investors are benefitting twofold from the current economic conditions: firstly, their currencies have strengthened in recent years against the pound; and secondly, with the Bank of England still devoted to keeping interest rates at an all time low, the cost of money is still incredibly cheap. London has been seen as a 'haven' for commercial property investors from Asia, the Middle East and mainland Europe in recent years, and this trend shows little signs of waning.
International buyers accounted for around three-quarters of the £20bn commercial property transactions in 2013. While returns from bonds and cash remain flat, real estate yields on commercial property in the City of London and the West End was around 4.5% over the past two years. The market remains incredibly liquid with deals being struck on London's most iconic landmarks. Following the sale of the 'Gherkin' to the Brazilian Safra Group in the past month for £725m, the BBC have imaginatively worked out that the value of London's famous skyline now stands at £7.2bn.
Space in Central London is becoming more and more scarce and thus more expensive. As a result, the city is starting to become a lot taller to accommodate such high demand for such little supply of land. The 'Walkie-Talkie' and 'Cheesegrater' are two new additions to the Square Mile in the last year, and by 2030 many more developments will have been completed; dramatically altering the look of Central London.
These developments are not without risk. Political and economic uncertainty surrounding the UK's position in the EU and possible changes to fiscal policy may very quickly stick a pin London's growing market. An exodus of foreign investors out of London to a new city with higher real estate yields may quickly follow and newly built skyscrapers standing half empty will do nothing but dent the confidence of even the most optimistic of investors. The fear currently is that the departure of investors will pull the rug out from underneath the market and the bubble will quickly pop.
However, I believe we are beginning to see the start of some thing entirely different. I attended a lecture recently at the Chartered Accountants Hall, home of the ICAEW, on the future of digital currencies. The speaker on the night was Dave Birch, an internationally renowned thought leader on digital finance. Being a social anthropologist at heart, he began talking about what economies will look like in a few decades time. His belief, a view I share, is that city-states will begin to replace nation states in the future and more power will be given to the world’s largest cities on global monetary and fiscal policy. This, if you think about it makes a lot of sense. The economy of London mirrors that of New York or Paris a lot more than it does say Huddersfield or Sheffield so it would be beneficial if these economies were treated separately.
The signs are already there that London is becoming more and more detached from the rest of the UK. The city’s growth has been to the cost of other larger cities as more talent and resources have left in the hope of greater job prospects and a more vibrant city life. This is where I believe the bubble exists. The market for property, jobs, commerce, etc. in London is not an economic bubble in the sense that prices do not match the inherent value of assets such as commercial property. Instead, I feel it is a bubble which has become separate from the rest of the UK and is now floating away with other global power cities.
Prices are not being inflated by ‘the greater fool’ as economic theory suggests – whereby investors can keep selling on assets at higher prices without buyers considering the actual inherent price. Rather, the market is reacting to the growth of London’s influence as a global power. Investors are experiencing fantastic yields comparably to stagnant financial markets because of simple supply and demand. Firms want to be at the centre of London’s growth in prominence and companies are migrating to the city and looking for office and retail space.
London’s economy is forecast to increase by 15% in the next 5 years – accounting for over a third of all UK growth of the period. Construction and financial services will be at the heart of the Capital’s prosperity and as a result, investments in commercial and residential property must surely be in line for more fantastic returns.