Research article

Oriental equity, occidental impacts

Global East to West equity flows have boosted the London market. Yet the pattern is reversed when it comes to domestic equity, as more wealth is generated in the West End than the City.

In London, the old drivers of value have, at least temporarily, ceased to be so important. Less wealth is being generated in the City’s economy. It is international economy that is key – and equity is flowing from the cash-rich nations. 

London is operating as a global city – almost completely divorced from the surrounding nation. Not surprisingly, the way that equity is flowing globally is reflected in London, which is acting as a wealth preserver in a sea of global uncertainty. 

Where locally generated wealth is concerned, it is still originating largely in the financial sector but not so much from the big banks in the City and Canary Wharf. City bankers’ bonuses have been curtailed – not just by the performance of the big banks but also by changing methods of remuneration and deferred payment. 

It is the small hedge funds and private offices based in Mayfair and its environs that are generating the most cash to the property market now. In London therefore the global East to West pattern has been reversed, and equity is currently flowing out of West End, not the East.

Bucking the trend 

National newspapers are full of the news that London house prices are continuing to rise while the average UK property continues to be devalued by inflation and mired in low turnover and zero growth. 

Central London has completely bucked the national trend. Our prime London index (covering all prime areas, from Hampstead in the north to Richmond in the south west and Canary Wharf in the east) grew by 8.7% in 2011, adding to the 27.9% gains it had already made since March 2009. It now stands 9.7% higher than its former 2007 peak. 

Top properties in the capital are clearly driven by a different set of factors to the average British three-bed semi. We used to talk about the importance of differences in the London economy, particularly the strength of the financial sector, to explain this. 

In 2006 and 2007, City bonuses were a key factor in the 47% growth in prime London over this boom period. We estimated that, in these two years, around £8 billion flowed into the market from this source. City bonuses are unlikely to reach this level again although other types of equity (share capital, profits and sale proceeds) could easily replace them when the economy prospers. 

Equity migration 

Growth in 2006 and 2007 wasn’t just confined to London. City bonuses also found their way into the prime ‘stockbroker belt’ markets as well as second home markets such as the Cotswolds and parts of Cornwall. Prices in many of these markets grew by more than a third over the same two years. 

The significant amounts of equity that have flowed into central London and prime markets are a ‘missing link’ in the picture of UK house price movements. We estimate that nearly £28 billion entered the housing market by this route between 2006 and 2011 as sellers used their proceeds to buy their next home. 

To put this figure in context, it equates to the value of 137,000 ‘average’ UK houses. It helped to forward fund the gentrification and regeneration of new areas both inside and outside London and helps to explain the growing disparity between average UK house prices and national household incomes. Ours is an equity-fuelled market.

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