London still safe as houses

London central property market is an intelligent, investment arena which has a low correlation with other asset classes and the national domestic market. It represents world class, blue chip housing stock which can provide significant performance and diversification benefits in a balanced portfolio.

Since 1969, residential property prices have risen over 40 times, doubling in value six times over this period. Taking net rental income into account, the sum invested could have increased by almost 60 times. This is greater than the total return delivered by commercial property, which is the traditionally better known asset class.

Despite the ‘annis horribilis’ since the turn of the millennium, residential returns in London central have been significantly higher than those that come from the conventional balanced portfolio designed for capital growth and income.

Investment returns in a balanced portfolio designed for capital growth and income significantly lag behind London central. It shows all the signs of a sustainable market with strong potential for market growth. Prices in London have also shown far less volatile performance than other markets. This is most clearly represented when compared with the FTSE 100, which shows the stock market crash resulting in a rebalancing of values.

While London central residential property has delivered consistent long and short-term results – often outperforming most other asset classes – private client advisers and wealth managers have tended to overlook the role it can play in a balanced portfolio.

This may be due to unfamiliarity with the market place, or that the many aspects required to realise added value are too disparate for easy management.

Nevertheless, the genuine utility and inherent illiquidity of bricks and mortar, with its relative immunity to macro-economic and political factors, has made London central residential property popular in recent years.

The professional, strategically focused approach to the market place offered by specialist property investment houses ensures that wealth managers and investors are able to outsource the whole investment process with confidence.

Key players have been approaching the London central market place as an alternative asset class for as long as 15 years. Their service is handled in-house and involves identifying and analysing the best market opportunities, organising the purchase, undertaking the refurbishment and furnishing and providing a full letting and rental management service. From the point of view of a wealth manager, this provides a number of clear benefits.

Firstly, it provides accessibility to a complex market place. This enables them to consider adding residential property into a client’s portfolio, when previously this option might have been rejected. “It is important that every aspect of the investment process is precisely coordinated and that the investor’s interest will be looked after for the lifetime of their investment,” says Richard Denton, director of MeesPiersonReads Private Bank in the Channel Islands.

David Purdy, senior manager, business development at HSBC Private Bank in Guernsey adds: “By appointing a dedicated property manager, the wealth manager can outsource the whole investment process. You have the reassurance of knowing who will be looking after a valued client for the duration of their investment. There will be no third parties involved that the wealth manager does not know and whose credentials he has not checked out.”

‘At an average growth level of 8.5 per cent, property values in London central will double in just over eight years’ Naomi Heaton, LCP

Being empowered to add residential property to a client’s investment portfolio also provides other product benefits.

A dedicated property asset manager will always discuss with clients, the potential benefits of ‘gearing up’. Rental income can be set against a variety of tax allowances, thereby reducing tax liability. The most significant of these is loan interest and, by using bank finance to purchase the property, their clients have the possibility of structuring a “tax neutral” investment. This will also enhance the return on their equity contribution.

At an average growth level of 8.5 per cent, property values in London central will double in just over eight years. The return on equity, assuming a 70 per cent gearing on the purchase price, could be well over 300 per cent.

While every case differs and specialist tax advice should be sought, LCP can frequently be mortgage facilitators. With cash rich clients, funds derived on the back of a property purchase, will also need to be reinvested, thus further diversifying the client’s portfolio. Remember, too, that when a non-resident investor divests their property portfolio, they should not be subject to UK capital gains tax. The capital uplift will therefore be tax free.

With the limited land development potential in prime London central and the pattern of long-term ownership by investors and second home owners, residential property is a scarce and diminishing resource. London central accommodates some of the most prestigious and desirable addresses in the world and property there is highly sought after.

The success of the Olympic bid and the ‘halo’ effect it has had on property values in other host cities, is likely to further stimulate prices. Add to this mix, the inclusion of residential property as an eligible asset for pension funds in the UK from 6 April 2006. Now may be the time for wealth managers to consider the inclusion of London central into their clients’ asset mix.

Naomi Heaton is CEO of London Central Portfolio Limited (LCP) For further information contact: ceo@lononcentralportfolio.com

Demand for property in affluent areas of London seldom flags