Less-familiar neighbourhoods are outperforming traditionally desirable postcodes.
Asked what type of residential assets wealthy overseas buyers are looking for in London’s property market, most people will conjure images of shiny penthouses overlooking Hyde Park or the Thames. What they probably won’t imagine is a two-up, two-down on a typical suburban street in less well-known boroughs.
It is true that overseas buyers tend to concentrate searches in prime central London. But for anyone looking for both capital and rental growth, rather than simply a place to park cash, it seems they are missing a trick.
Knight Frank’s analysis of the data from the last five years shows that traditional residential hotspots – Westminster, Camden, Hammersmith & Fulham, Wandsworth, Kensington & Chelsea and so on – do not feature on the list of the 10 best performing boroughs.
In Waltham Forest in north-east London, house prices have risen by 86% in the last five years
What’s more, this situation is likely to continue for the foreseeable future, with areas less familiar to many overseas investors providing the best return on investment. Tom Bill, an associate in the research team at property consultancy Knight Frank, says that in the years following the 2008 crash, investors were correct in their focus on prime central London. “Prices grew strongly in central London following the global financial crisis as London property became a safe haven asset class of choice,” he says.
However, Bill adds that the situation changed in 2013 for a number of important reasons, not least of which was prime residential property becoming a live political issue. Stories about high-end apartments supposedly bought and left empty as pure capital investments – evidence of which was thin on the ground – led to a series of tax changes that deterred foreign investors.
More positively, the UK economy also began to gather pace around that time, underpinning demand in more domestic-driven markets and boosting in prices in areas more affordable to Londoners. “Wider affordability constraints on buyers in a London property market that remains undersupplied, meant more buyers began to look in boroughs beyond the central areas, including Lewisham and Hackney,” says Bill.
The result is that some areas have enjoyed remarkable capital appreciation. Topping the list is Waltham Forest in north-east London, where house prices have risen by 86% in the last five years. Closer to the centre of the city is Hackney, had the second-largest increase of 73%, followed by Bexley (71%) and Lewisham (71%) in south-east London and Barking & Dagenham (70%) in the east.
“As values in central London have started to reach the limit of affordability, we’ve experienced buyers looking at the market and seeing what’s available in central London and comparing it with what’s available further out,” says Lawrence Bowles, an associate in the residential research department at estate agent Savills. “People have seen that for the same price they can get maybe half the size again and a garden. They’re choosing to move further out and that’s pushing up demand in some of these slightly further-flung commuter locations.”
While capital appreciation is important, most investors want to maximise rental income from properties. The recent history of the rental market neatly mirrors the situation with house prices: less well-known boroughs have performed far better than prime London areas, and this is expected to continue.
“Rental affordability in central London is really constrained, particularly at the top end,” says Bowles. “Not only is the prospect for house-price growth in Hammersmith and Westminster very low, there is also very little scope for the rental growth and the yields you’ll be getting are pretty tight.”
Savills research shows that one-bedroom flats near Barking station benefited from a 5.7% increase in rents since Q4 2015, while properties close to Forest Gate in Newham saw rents increase by 3.1%. Conversely, equivalent properties in Maida Vale and Westminster, saw rents dip by 2.5% over the same period. Meanwhile, the Parsons Green area of Hammersmith & Fulham saw rents for one-bedroom flats dip by 0.2% and two-bedroom units fall by 4.6%.
Looking to the future, another factor to consider when it comes to both pricing and rental increases is Crossrail. The new east-west London and Home Counties rail service, currently the biggest construction project in Europe, is due to open at the end of 2018 and will vastly improve commuting times in large parts of the capital and beyond, including many areas included in the table of boroughs that have seen the highest capital growth in the last five years.
For his part, Bowles is sceptical about claims that the boost in values from Crossrail in areas around new stations has already peaked. He is confident that as the line nears completion it will lead to both increased capital and rental values, as seen in the past with transport infrastructure projects such as the London Overground and London Underground’s Jubilee Line.
“The premium is still on its way,” he says. “A lot of these boroughs where we’ve seen the highest levels of growth more recently, like Barking & Dagenham and Newham, are also boroughs that have Crossrail stations in them. There are opportunities there.”
Of course, certain investors will always flock to London’s prestige postcodes. There is a certain cachet to owning properties in such places. But for those chasing both capital appreciation and rental growth, the best investments currently to be had in the capital are to be found elsewhere.
Adam Branson writes about the UK and international property market, and is the former Contributing Editor of Property Week.