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London & Paris Residential Real Estate still a magnet for investments?

By Marie-Cécile Boulle, Founder of Bulle International
11/05/2011

 
UK property prices have risen by 410% between 1986 and 2006 (source: Housing Statistics Briefing, English Partnerships September 2006). However, London property prices historically have been rising faster than average UK property prices.
 
At the end of the first quarter in 2011, the UK’s housing market was showing a mixed picture with the north/south divide continuing to widen. Prices rose in 8 out of 13 regions and in London average values increased 2.3% over the first quarter compared to a 1% increase in the UK as a whole. (source: Lonres).
 
In light of the recent economic downturn, international political turbulence and property reported price meltdown, it is legitimate to ask ourselves in which direction property prices are heading and whether investing in London bricks & mortar is still wise.

The recent UK budget and public spending cuts, are bringing more ambiguity to the economic recovery and will drive and sustain more household uncertainty.
Surprisingly, in the key hotspot of London central areas, properties are attracting offers above asking price within days of being put on the open market. We also note that more sales are going to sealed bids (36% of agents interviewed by Lonres report an increase in the past three months within central London areas).
 
This is mainly due to a shortage of quality properties coupled with a strong influx of international buyers from India, Russia, Japan and more recently and predictably a wave of investors from the Middle East.
 
The strong demand with the constrained supply means that committed buyers are making stronger offers. As well as pushing up prices, this also means that the level of pricing achieved has increased to an average of 97.6% in Q1 2011 – this is the highest level since the peak of the market in 2007.
 
This trend is in opposition to the national UK trend, and reinforces the resilience of London as prime property location, with house prices expected to rise by at least 2-3% in 2011. In the graph it can also be seen that London’ sought after areas have not been greatly affected in the last 10 years. In fact the trend has been upwards. It is interesting to note that across the London area as whole, average sales prices have already raised by 5.8% since the end of 2010. (Source Lonres)
 
Current ultra luxurious developments at prestigious addresses highlight the undeniable status London has earned as the world’s real estate capital. In 2010 one apartment acquired at One Hyde Park broke the world record and the price achieved was £100,000 million pounds which translates into an astounding 70, 000 Euros per square meter. This fabulous two floors penthouse offers six bedrooms, a high-tech air purification system, bullet proof windows and even a panic room where the occupiers can go and hide in case of an attack. At the front door, security guards trained by the special British forces will be on standby, and for the comfort of the residents a five star room service is also included in the purchase.
 
With the ongoing attractiveness of Sterling, the political and economic uncertainty around the world, London continues therefore to hold its global investment appeal.
 
In the Rental sector, London’s values are increasing. In 2010 there were 20% less rental properties available for letting over the year, compared to 2009 which contributed to a 10% rise in rental values over that year. (Source Lonres). Early indications for 2011 suggest that stock levels have increased slightly compared to the same period in 2010, although they are lower in London’s North and West areas. Nonetheless, supply remains constrained whereas demand remains strong.
 
This trend is sustained by a limited debt market that restrict home buying, home owners holding on rather than selling when purchasing a second home and renewals of current tenancies by tenants who are choosing to settle in London. As a result, properties are letting faster. Early indications show that the average time to let is 1.5 months in early 2011 (even faster than in 2010, where it was 1.6 months – source Lonres). Jean-Pierre Saint-Avit, Head of Search and Letting at Boulle International predicts a 5 to 10% increase in the rental market this summer, when seasonal demand seems set to outstrip supply .
 
On the flip side of the coin, the outlook for buy-to-let property is improving daily as yields rise. Some UK postcodes are reporting returns approaching 8% writes Tanya Powley in the Financial Times.The Findaproperty research showed that 49 postcodes across the UK are achieving returns of more than 6 per cent, 12 of which are in London.

 

What about Paris?

 
The trend couldn’t be more similar. Strong demand for residential property (particularly given the limited alternative investment opportunities) is pushing up values (source, Databiens).
The performance of the residential market in Paris continues to be strong, with average sales values increasing by 23% year on year in Q1 2011.
 
The enclosed graphic of Paris (source Databiens) depicts sales between January and March 2011. The graph also attempts to compare the price trends in the Parisian arrondissements and their London equivalents’.
According to the National Association of Estate Agents (FNAIM), values of Parisian apartments in 2010 till the third quarter grew by 9.7% whilst the National Institute for Statistics and Economic Studies (INSEE) put growth for the period at 13.8%.
 
A prominent member of London’s French community confided in me last week that he was now willing to purchase ‘anything’ in order to catch the current market. He communicated that since he started searching in Paris a year ago the market had radically changed and there was no stock available. He needed to react quickly in order not to miss the boat and be able to plan his return to Paris, confident he would have secured a property in which to settle with his family. In this respect, the Paris property scene mirrors London’s market in most aspects.
 
An interesting idea is being currently entertained by the ‘Mairie de Paris’. In order to help people get on to the property ladder, Jean-Yves Mano, in charge of Housing at the Paris City Hall has put forward a proposal to give a developer permission to erect a block of apartments on a site owned by the city of Paris. A leasehold (bail emphytéothique) of 99 years (the maximum allowed) would be granted to the purchasers. However, contrary to the UK system, the leasehold term would be for the maximum 99 years allowable by law and the ground rent could be set at 2000 Euros per annum. This proposal is generating some controversial debates, as the typical French purchaser cannot envisage the notion of partial ownership on someone else’s land and for a restricted period of time too.
 
It is certainly worthwhile watching how Mr Mano’s proposal, which closely resembles the UK feudal Leasehold sytem of home ownership, will develop. It is commonly said that being copied is the best form of flattery. Could this saying be applied in this case?
In our opinion we believe that London and Paris will remain the two attractive long term investment centers in the world.
 
Marie-Cécile Boulle

Please find a PDF with prices in  €/m2  from our source databiens.com
 
The period is from January 2011 till March 2011 and the graph show the different areas of Paris compared to similar areas in London.

 


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