Are the Russians returning to London’s prime property market?

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Are the Russians back in the UK?Prior to the collapse of the worldwide economy, Russian property investors were very dominant in the London prime property market however there are signs that after apparently walking away from the London prime property market last year, they now appear to be returning. While it would be wrong to say there was a stampede from Russian property investors towards the UK market in general there are signs of greater interest in the £10 million plus London property market.

The UK property market

It is no secret that the UK property market has collapsed over the last 18 months and with mortgage funding still not available for the vast majority of the UK population it appears as though the sector is set for further downward pressure in the short to medium term. While the top end of the London market has performed better than many had expected there has been significant selling and a lack of buying interest in the midmarket sector around about £10 million plus.

The prime property sector in London has fallen by over 20% from the 2008 peak to the current level and while there are signs of interest, this is by no means a concerted recovery in the sector. Viewing figures for February are up 28% year-on-year and while the £10 million plus property sector was dead in the final two months of 2008 we have seen some properties change hands in the first two months of 2009.

Overseas investors

For some time, following the substantial collapse of sterling, many people have been targeting overseas property investors as the potential saviours of the UK property market. When you consider that sterling has fallen from around $2 to the pound down to around $1.47 to the pound this is a serious increase in spending power for those dealing in dollars. When you add together the increased spending power and the substantial fall in UK property prices this adds up to a significant reduction from the property price highs of 2008 after currency adjustments.

The influx of wealthy Russian property investors has been a characteristic of the UK market for some time now with many Russian business people relocating to the capital. However, it seems as though with the Russian economy in freefall, many Russian property investors believe their funds will be safer in the longer term within the UK property market and in particular London. There appears to be substantial interest in the more luxurious end of the market where underground parking, swimming pools and extreme privacy are guaranteed.

There has also been significant interest from those investors who hold their investment funds in euros, which is another currency that has performed very well against sterling. The ongoing volatility of the Russian ruble had apparently resulted in more and more Russian investors holding their assets in dollars and euros, something which has been of significant benefit to them over the last few months.

Supply and demand in London

While properties with a value in excess of £10 million are not necessarily advertised in the everyday press there would appear to be a number of such properties up for sale at this moment in time. Since the turn of the year, after no £10 million plus sales in London during November and December 2008, estate agents have been reporting on average one substantial sale a week. While in no way does this signal the end of the decline in London prime property prices it may be a sign that the currency situation is starting to kick in and investors see long term potential in the market.

On the domestic front, even the wealthy of the UK public are struggling to make ends meet and we have seen a significant number of business people lose literally tens of millions of pounds over the past 12 months. This has led to a number of high-value properties coming onto the market via discreet estate agents and there have been suggestions of significant price reductions even against the original relatively low asking prices.

The UK economy

While it is interesting to see an increase in interest from overseas property investors the UK economy is still under serious pressure even after a series of interest rate reductions. The government is literally in the last chance saloon now having instigated a form of quantitative easing which will see the Bank of England acquiring financial assets and government bonds to reintroduce liquidity into the UK economy. If this fails there is a serious risk that the UK economy could be engulfed by a depression which could last for many years.

Whether overseas investors have jumped aboard the UK property market to soon remains to be seen, but they do have a significant comfort zone when you bear in mind the substantial reduction in the strength of sterling. While many people believe that sterling will in due course bounce back to former levels this is by no means guaranteed and the situation could be complicated even more if the government decide to join the euro.

Prospects for the UK property market

As we touched on above, the lack of mortgage funding in the UK has held back those who are even considering property purchasers in these very difficult times. The government has instigated a number of substantial taxpayer backed rescue packages and financial stimulus programs which have yet to kick in. Quantitative easing is literally the last throw of the dice and while many believe it will revive the UK economy in due course, historically, in places such as Japan, quantitative easing has taken some time to be absorbed into the economy and improve funding flows.

Conclusion

It is interesting to see that some Russian investors now see the UK as a “safe haven” compared to their own country although the fact those dealing in dollars and euros have benefited from currency exchange rate movements has played a major part in the apparent increase in interest. The next few months are vital for the UK property market and it will be interesting to see if there is any follow-through with regards to the London prime property market and overseas investors.

Those looking longer term may possibly have spotted a number of potential bargains in the UK property market but there are still risks associated with short, medium and long-term investments in the UK.

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