After experiencing years of instability that reduced the river of foreign money that previously poured into the metropolis, the London real estate market is preparing for a key 2023.
According to MSCI statistics, foreign investment in London real estate reached £12.4 billion ($15 billion) in 2022. Foreign investment dropped significantly from £30.5 billion in 2015, before the twin shocks of Brexit and the COVID-19 outbreak.
Uncertainty about property prices as interest rates increase and after political upheaval precipitated by September’s mini-budget threatens London’s longstanding ability to attract vast tracts of foreign investment.
MSCI figures reveal that in 2022, foreign investors made for 57% of London’s real estate investment, down from 66% in 2015.
“Market liquidity is now badly hampered by a significant range between buyer and seller price due to uncertainty about how the increase in interest rates may compress property values,” says Sue Munden, a senior analyst at Bloomberg Intelligence. Until inflation and interest rates are under control, “transaction volumes may be poor.”
Following the Brexit vote in 2016, some capital was temporarily redirected to Paris. However, by 2021, the focus had returned to London. According to Munden, Russia’s invasion of Ukraine in February 2022 rapidly stopped that mini-boom. Foreign investment could remain healthy in 2023 thanks to London’s allure as a hub for international finance and a lower pound.
Because of the low value of the pound, Munden predicts that “while this plays out, the proportion of overseas purchasers may remain above the 50% level.” London is still favored as a market for foreign investments because of investors’ long-term faith in the city’s status as a global hub.
Sharp decline
China’s once-iron hold on the London real estate market is slipping faster than any other country due to stringent financial controls and chilling ties with the UK.
MSCI figures reveal that in 2022, Chinese investors contributed less than 1.5%, or roughly £185 million, to the total foreign investment in London real estate. This was in sharp contrast to 2013, when Chinese investors poured cash into the capital city, and Prime Minister David Cameron and Mayor Boris Johnson actively courted their investment, when the country’s stake was 11%, totaling roughly £2.2 billion.
A shift in public opinion towards China could be a discouraging business. Plans for a new Chinese embassy to be constructed around the Tower of London were shot down earlier this month. Planning clearance was denied by the Tower Hamlets Council on a unanimous vote because of fears for the safety of locals in light of fears that the area will become a terrorist target and a surveillance hotspot.
Prime Minister Rishi Sunak, in his first primary foreign policy address, said that the “golden era” of UK-China ties was ended, an indication of how bad things had become between the two countries.
Despite Sunak’s retreat from a threat label, the tone is strikingly different from that of Cameron’s administration. As part of his attempts to improve ties between the two nations, he visited the United Kingdom in 2015 and drank with Chinese President Xi Jinping.
Yet the Chinese government’s domestic policies have had the most significant effect. It’s hardly surprising that dealmaking dried up when Xi imposed stricter capital restrictions in 2016.
Rasheed Hassan, head of global cross-border investment at broker Savills, claims that “capital limitations in China are almost exclusively driving” the decline in investment. That is the leading cause for the shift in volumes, for sure.
US investors used the dollar’s strength to funnel almost $4 billion into London’s real estate market in 2022, accounting for over a quarter of the total $12.4 billion in capital flows from abroad.
According to research published by Knight Frank, in the first half of 2022, American purchasers accounted for 14.5% of all international premium London residential property transactions. That’s the highest percentage recorded in statistics stretching back to the beginning of 2018, and it’s up from the previous six months by 6.2%.
He claims that five of the six houses sold by London real estate agent Charles McDowell between July and November went to American purchasers at prices ranging from £25 million to roughly £50 million.
McDowell notes that this year’s market is “driven to a significant degree by dollar-denominated purchasers,” with an increase in interest from the Middle East and the Far East, especially Hong Kong. That trend is anticipated to persist until 2023.
