London prime residential property: a prime source of money transfers to the UK

| Monday, October 20th, 2014

One of the core reasons why people transfer money overseas is for buying property abroad. In this research piece, we focus on the London property market, one of the most important markets worldwide for overseas buyers. Growth in the London prime residential market softened in the third quarter of 2014 according to reports by the major property agencies and consultants, with values rising by only 0.5% compared to the previous quarter. Reasons are varied, but the weakening of the pound against the dollar over the past six months, and the relative stability of sterling against currencies of other major sources of international investment – notably the euro, Singapore dollar and Japanese yen – should forestall too great a slowing of international interest in the sector and thus demand for international money transfers. This may not, however, fully compensate for the slowdown in demand and thus currency transfers from Russia – a growing source of inward property investment in recent years – in light of recent economic sanctions.

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Despite increasing uncertainty in the market – analysts are now talking of London residential property in terms of “stagnation” or being “fully priced” – London will remain one of the preeminent destinations for international residential investment. Indeed, the macroeconomic fundamentals remain encouraging given the UK’s improving growth outlook – particularly relative to mainland Europe which is the source of some 30% of foreign purchases – the unlikelihood of interest-rate tightening before late 2015 and London’s dominant place as a global business centre. Some 50% of prime London residential property is bought by overseas buyers.

The consensus for prospects in the UK residential market as a whole are that growth will slow in 2015, but remain positive. The prospect of a mansion tax being introduced on properties upwards of £2m in the event of a change of government in 2015 is a key concern for London, where some 80% of such properties are found. This is more likely to affect domestic demand for high-value properties than international as foreign buyers tend to be more cash rich, but the uncertainty alone will keep the prime sector subdued. But even within prime London there will likely be variances: Another property agency, Knight Frank, sees prime outer London prices growing faster than prime central London as both domestic and overseas buyers seek better value in less well-known and high-profile areas.

London prime will nevertheless remain attractive for overseas buyers, especially as economic and employment prospects improve relative to Europe. But the biggest factor likely to affect foreign currency transactions will be the exchange rate. Any major strengthening of the pound, even if interest rate rises are not expected for several months at the earliest, would dent London’s appeal to overseas investors given current prices (although it is possible for those transferring money overseas to hedge and fix exchange rates). That said, Knight Frank envisages a scenario in which overseas buyers of residential investment property may simply shift their attention out of London, in turn supporting overall international demand.

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