London property market still offers great investment prospects

Despite the fragile state of the economy and the sluggish nature of the UK housing market, the residential property market in London continues to look highly attractive from an investment perspective.

Property prices and rental values have soared in recent years and despite tentative signs that the market may slow in the short term, prices look set to soar in the longer term.

The capital's population growth is the fastest in the country and there are simply nowhere near enough new homes being developed to cater for rising demand from homebuyers and renters.

The government forecasts a rise in household numbers in London of between 34,000 and 38,000 annually up to 2028, however, based on development levels over the last ten years, an optimistic estimate of the number of homes which will actually be delivered each year is 21,000.

Based on the economic model of supply and demand, investing in London's property market is a no brainer.

Price growth in the prime central London market continued through October with the Knight Frank Prime Central London Sales Index confirming a further 0.8% rise compared to the previous month. Prices have been climbing now on a monthly basis since November 2010 and stand 52% above the post-financial crisis low of March 2009.

Knight Frank's analysis of market activity shows that average prices have climbed 10.1% over the past year, with flats (11.1%) outperforming houses (8.4%) in terms of growth.

A separate report published by Cluttons today also suggests that London rents are expected to increase sharply over the next ten years as the supply of housing in the capital fails to meet the needs of people working in the city.

Currently almost two thirds of households rent in inner London and 40% in outer areas, roughly equally divided between private and social housing. While some tenants are attracted by the flexibility of the private rented sector, many are often unable to buy due to high house prices and tight mortgage lending criteria.

Unless there is a sharp rise in the volume of new homes developed in London each year, future property price growth looks almost inevitable, with existing homeowners and those buying property in London now standing to prosper from future capital growth and higher rental returns.

By Marc Da Silva