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Saturday, July 4, 2009

Lure of British properties

For the past several months, Malaysians have been toying with the idea of having a bit of England, predominantly London, to call their own. Be it aspirational or otherwise, they have cited several compelling reasons for that interest.

The first is the drop in property prices in Britain. The second is the devaluation of the British pound. A third is their children, who are studying there.

Added to the above is Britain’s base lending rate, which has fallen to 0.5%, the lowest “in decades”. Although unemployment is expected to climb to 3 million from the current 2.5 million (unemployment rate: 7.1%) and the economy looks bleak for the next few years, there is a strong interest internationally because of the currency advantage.

Buyers are from the Middle East, Europe, Ireland, Russia, Asia and Africa.

Jones Lang LaSalle director and head of residential James Thomas says that because the majority of London’s seven million population are from outside London, there is always a demand for housing.

Between now and 2026, about 33,000 extra households are expected to be added annually to the current 3.8 million there today, he says.

On the interest shown by Asians, Thomas says there was a time before the 1997 Hong Kong handover when London was considered a safe haven. That was when the Hong Kong and Singapore buyers featured very strongly. Today, Malaysians do not want to be left out.

“When property prices began to escalate in 1998, many felt the city was getting too expensive. They changed course and bought in Asia. Now, there is a resurgence of interest from Asia.

“Singaporeans and Malaysians generally buy within London and they prefer new properties rather than second hand where maintenance will be higher. New properties means modern facilities, car parking area, concierge, a lift, double glaze and comfortable cooking facilities. The older properties don’t have the facilities and lack security.”

Thomas says the interest is typically for houses worth £400,000 to £1mil with one to three bedrooms. Asians tend to like places which have nearby amenities, access to the underground and near universities. Some of them look at areas around Chinatown, he says.

Interest from Malaysians emerged when the pound dropped 28% in the last quarter of 2008. The pound dropped from about RM7 to £1 before the fall of Lehman Brothers to an all-time low of RM5 to £1. Although it has clawed its way up today to RM5.80 to £1 (a drop of 17%), the thought of having a bit of London continues to be enticing.

They have called real estate agents, attended exhibitions which have made their way to Kuala Lumpur and some have gone over to check out the sites. On the supply side, British developers are making their way to India, Hong Kong, Singapore and some to Kuala Lumpur.

The questions buyers ask are where and what to buy? Holding these two questions together is the all-paramount teaser – is it time to buy?

Before going further, London property prices are not representative of Britain, anymore than Kuala Lumpur is of Malaysia. Even in London itself, there is the prime central London and the Greater London location.

Since March this year, Russians, Middle Easterns, South Africans and Europeans, especially the Italians have invested billions in prime and greater London area, says Savills, one of Britain’s largest property agencies.

This does seem rather exciting from a property consultant’s perspective, especially when the number of transactions have halved over the last year.

Says its director Edward Lewis: “A lot of the activities are driven by equities.

People are hesitant but they are beginning to see the opportunities; the locals don’t have it quite as exciting because they do not have the currency advantage.”

There are today three schools of thought whether it is time to buy. The first is that there may be room for prices to fall further. A second view is that the sector is picking up. The third is that, London is still London, and now is as good a time as any.

Thomas says the trend in price falls has eased considerably this year and may even be turning to positive growth although this is too early to say.

“The number of sales and the number of enquiries continue to improve,” he says.

While an earlier housing market recovery is most welcome, there are reasons to question the sustainability of these latest trends, he says.

A Jones Lang LaSalle report UK Residential Market Forecasts says actual first quarter 2009 price falls were in line with their forecasts. Secondly, Britain and the global economies are still dire. Third, it is unlikely that the full impact of declining employment has yet to hit the housing market.

It is also possible that the current fillip is due to the sharp fall in interest rates, improved affordability and spring/summer market.

“These suggest that the current housing market recovery is sentiment-driven, and is hence, both fragile and prone to relapse.”

Savills’ Lewis says transactions today are back to March 2008 levels and they are not getting that much stock coming on the markets.

“There is a possibility that you may be able to buy 40% to 50% lower because of the combined weaknesses but that door is fast closing because the pound is strengthening. There is now more interest which culminates in actual transactions. How long it will last remains to be seen,” he says.

It is important to note that when property agents say that properties have fallen by X%, they are using the peak of 2007 as a yardstick when London properties were at an all-time high.

Britain’s properties have been trending upwards at a phenomenal rate for several years beginning from 1998 to 2007 after a lacklustre 8.5 years from 1989 to 1998.

To give an idea of how much housing cost has escalated, the average cost of a house in the mainstream market, non-prime area, in England and Wales has more than doubled to £160,000 today, compared with £67,000 between 1989 and 1998 when housing cost reached a plateau.

International buyers are mainly interested on prime central London and Greater London area, essentially zone 1 and 2.

Prime central London includes areas like Belgravia, Knightsbridge, Chelsea, South Kensington and Mayfair, areas bordered by the inner rectangle of London’s underground, its main public transport system.

Between the first quarter of 2008 and 2009, the prime central London prices were down by 22%, a markedly steeper decline than anywhere in Britain, which prompted much interest from international buyers, the report says.

Despite the recent pick-up seen in May and June figures, the real estate consultancy continues to expect further significant price falls in prime central London and Greater London this year and does not expect the current resurgence in confidence to force prices higher.

“Prime central London prices may fall in the region of 14% to 18% this year, representing a slight improvement compared to our previous forecasts. Prices in Greater London is expected to fall between 15% and 17%.

Thomas, of James Lang LaSalle, says the 2010 economy outlook is uncertain although prospects have certainly brightened.

“We have not boosted our 2010 forecasts as a result of the more positive economic survey. Rising unemployment remains an issue.

“The fact that house prices will be 28% below their 2007 peak will encourage new demand.

“We believe the first half will continue to see prices fall and subdued activity followed by increased activity and a diminishing, if not curtailed, price falls in the second half of next year.

“We expect the bottom of the market to come in the second quarter of 2010 and prices to begin rising again as early as the third quarter in Greater London and prime central London. By the end of next year, we expect central London prices to have risen up to 2% while Greater London is expected to be stable.”

The base lending rate is also expected to increase steadily from 0.5% at the end of 2010 to about 3.5% by the end of 2013 before returning to equilibrium levels of 4.5% to 5% post 2013.

Thomas says he does not expect the average British house price to recover their third quarter 2007 peak levels until the third quarter of 2015.

But because the city will be leading the economic recovery and will be boosted by the Olympic and Paralympic Games in 2012, it will see higher price growth compared to overall Britain.

By The Star (by Thean Lee Cheng)

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