Is a 2.75% yield on prime London properties feasible going forward?

The London prime property market has been central to the worldwide property market for some time now. For many people London is seen as something of a “safe haven” in times of trouble with its own micro-economy and micro markets. However, worrying signs are starting to emerge amongst some of London’s prime properties with yields of 2.75% reported on Bond Street assets.

While there is no doubt that London has always been one of the major property markets of the world, are yields of 2.75% really feasible going forward?

Could prime property in London be on the verge of collapse?

While there is no doubt that Bond Street properties have some of the more financially secure and largest retail operations in the UK, it would be difficult to push through significant rent rises in the current financial climate. Some experts believe that property yields on Bond Street could fall as low as 2.25% by the end of the year and potentially challenge the world record low of 1.75% in the short to medium term. When you bear in mind the lower levels expected by some in the marketplace you would be able to obtain higher yields on UK government bonds which are significantly more secure than property assets.

Quote from PropertyForum.com : “Property prices in and around the Olympic Park in London have continued to rise since the end of the Games almost a year ago, new research shows and have outperformed national markets.”

We have seen literally billions upon billions of dollars ploughed into the UK prime property market and at this moment in time this demand is not falling. The reality is that the current level of investment demand cannot continue forever and a day and at some point concern will begin to build. It may well take further economic problems within Europe, it may be issues within the UK we may even see economic problems emerging in the Far East. It would not take an awful lot to rock the short-term confidence in the London prime property market.

Are we back in the property casino?

While property yields of around 2.75% are well below the 10 year average of 3.7% for prime property in London, interest rates are significantly lower than at any the time in living history. You could argue that current yields are unsustainable in the longer term and indeed London prime property may well be overvalued in the current economic climate. There are concerns that we are moving back towards the “property casino” of the 1980s and indeed just prior to the US mortgage debt crisis of 2008. Whether we are actually in such a similar situation is open to debate although it has to be said that any sustainable economic recovery still appears to be some way off in the UK, Europe, North America and other parts of the world.

All eyes will be on the London prime property market in the short to medium term and indeed any signs of overheating could prompt a very difficult decision for the UK government. In a perfect world interest rates would be the go-to option to take steam out of the property market but this is not something which is open to the UK government at this moment in time due to the precarious economic situation.

Conclusion

At first sight it is not surprising to see that some people are growing more concerned about the “property bubble” surrounding prime property in London. While yields of 2.75% are already on the relatively low side there are expectations that yields could fall to around 2.25% by the end of the year. This is significantly below the 10 year average of 3.7% although we are in a very different economic situation to any seen before in living history. It will be interesting to see whether overseas demand continues to build and indeed whether prime London property prices continue to rise. They seem to be defying gravity at this moment in time and we can only hope for a soft landing rather than a total collapse when reality eventually hits home.