The war is on to get hold of the best property assets in London and for many investors that means moving up the risk curve and taking on more development projects than before, according to research by PwC and the Urban Land Institute. The survey of 500 property professionals revealed that 71 per cent of respondents believe that development is an attractive way to buy prime property as opposed to buying an already overpriced ready-made building, with London at the top of list for development prospects in Europe, up five places from last year.
However, while the prospect of more development in the capital is good news, London’s popularity with sovereign wealth funds and other big spenders has inflated prices in the capital, leading to concerns there’s a bubble in the making. PwC and ULI said interviewees talked about “£8 of equity for every £1 of available property" in London, sounding the warning bell for a potential price bubble in the making. “The West End of London is scary, and there is still an expectation that prices will continue to increase. City of London prices will stabilise but at a price that is too high,” one property expert said. This is not just occurring in London. Some 59 per cent of respondents said they believe prime property in Europe’s core markets has now become over-priced. The good news is that is prompting institutions to look outside of London and at quality secondary property the regions, which they can turn into core investments. Simon Hardwick, real estate partner at PwC Legal calls 2014 “the battle of the assets”:
This is also leading investors to look beyond the major cities, with the recovering markets of Spain and Ireland tipped to be the ones to watch this year. Joe Montgomery, chief executive of ULI Europe explains:
Intense competition for the limited supply of suitable property will inevitably continue to have an impact on prices – particularly in global gateway cities, including London. This will result in investors having to look at other opportunities and to accept more risk. This is reflected in the renewed interest in development, as well as the fast improving outlook for “non-prime” locations and properties.
Investor appetite in Dublin has been growing over the past 12 months with significant volumes of international capital chasing the best assets. Investor interest is now moving to Spain, where there are signs that opportunistic investors, who entered the market when Sareb opened for business last year, are now being followed by mainstream institutions.