By Victor Balogun
Whether to rent or buy is a commonly asked question and one which may have a different answer depending on individual circumstances. Renting offers greater flexibility, as it is easier and usually quicker to move between rented accommodation than it is to buy and sell. However, from a longer term financial perspective, buying is usually the better option. Provided the property is held for a reasonable amount of time – at least 5 years to allow for cyclical upswings and downswingsâ€“ there is every likelihood of accruing a capital gain.
Ian Plumley is Senior Vice-President at luxury house builder Berkeley Group, a FTSE 100 company. He comments: â€œLondon property is historically a resilient investment in the long term and the reasons for this are highly unlikely to change in the foreseeable future. The attractions of this market go far beyond short term economic performance and political debate.â€ Moreover, while many investors purchase property purely for capital growth or to generate a rental yield, Berkeley Group has found that many of its overseas buyers are either occupying their properties themselves or are putting their children in them while they study in the UK. This gives parents the added security that their children will be in safe accommodation whilst also providing somewhere for them to stay when they visit London.
London has seen 10 year average price growth of 61.5%, with prime locations such as Westminster and Kensington & Chelsea, where Berkeley Group is currently marketing its Kensington Row residential scheme, recording growth in excess of 70% over the period. Slightly away from central London, Islington, where Berkeley Group has launched its 250 City Road development, has also seen robust capital growth of 55% over the past decade. The current market offers some good buying opportunities as the growth cycle has slowed but this is likely to be relatively short-lived as across the capital as a whole, demand outstrips supply.
If the property is acquired utilising mortgage debt, there are still plenty of good fixed rate deals for 5 year terms or even longer. Mortgage repayments will go towards securing outright ownership of your property, unlike rent which just goes into your landlordâ€™s pocket. Debt will also enhance returns if you decide to rent the property out rather than occupy it yourself.
For example, a Â£1m flat in Islington will currently command an average rent of Â£2,393 pcm according to Zoopla. In comparison, a 75% LTV on a 25 year repayment mortgage with a 2-year fixed rate of 2% would equate to a monthly mortgage payment of Â£1,060 â€“ representing a monthly saving of Â£1,333. The saving on the same flat in Kensington & Chelsea rises to Â£2,826 a month.
The UK, and in particular London, is a popular location for international buyers. The UK enjoys a long standing safe haven status â€“ both financially and from a personal security perspective â€“ and is renowned for its tolerance of ethnic, political and religious groupings. Public services are among the best in the world, with the health and education systems especially renowned and the retail offer is arguably without equal in Europe.
The UK is also the second most popular destination in the world for overseas students and they have risen in numbers over the past decade from 14.8% of all UK Higher Education (HE) students in 2007/08 to 19.1% in 2016/17. In the academic year 2016/17, the latest for which statistics are available, HE students from Nigeria were the sixth largest group of foreign students by nationality. The May 2018 Times Higher Education Top 200 International Universities ranking contained 10 UK HE colleges in the global top 20. The London School of Economics & Political Science was ranked first in the UK and second in the world with foreign students accounting for 70.5% of its total students, while three other establishments had ratios of more than 50%. Seven of the top 10 in the UK were located in London.
London is additionally one of the worldâ€™s most cosmopolitan capitals, offering a wealth of cultural and leisure experiences. A further important factor and one which is sometimes overlooked is language: English is the lingua franca of international business and is widely spoken as a second language on a social level which helps greatly to make London more accessible to foreigners. The UK additionally benefits from overlapping with the Asian and north American time zones.
London is an equally attractive proposition from a real estate perspective, offering a large stock of high quality properties and a long and proven track record of strong growth performance and market transparency. Moreover, the legal system is straightforward and offers clear title with regard to property. There is also a large and growing private rental market, which has expanded from 19% of all London households to 26% over the past decade, and offers owners not in year-round occupation plenty of opportunity to rent out their properties.
Outside London, there are plenty of opportunities for buyers in the larger regional centres. For example, Reading, where Berkeley Group is currently marketing its Green Park Village scheme, has seen capital values rise by 43% over the past decade. Crossrail services (the so-called Elizabeth Line) are due to operate from Reading train station towards the end of this year and will transport passengers straight into central London without the need to transfer onto the underground system. Reading University also has a high proportion of overseas students (32.5%).
Looking ahead, whilst there is uncertainty regarding a post-Brexit Britain, the longer term prospects for the residential property market look healthy. For many decades there has been a structural imbalance between housing supply and demand which is unlikely to be resolved any time soon. In London, the situation is particularly acute. The GLA has a 10 year housebuilding target of 66,000 new homes every year whereas completions over the past decade have only averaged 20,000 per annum. It is therefore questionable as to whether the target rate can be met. This suggests that prices will inevitably come upwards pressure over time.
The rich economic, social and cultural history of the UK, together with its strong laws and resilient property market, will provide a reason to invest here for a long time to come. Brexit aside, London and the South East corner of the UK remains a secure environment for property investment.
â€“Balogun is a real estate consultant