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Gimme shelter

4 September 2012 By Peter Thal Larsen

Urban real estate may prove a deceptive safe haven. Investors seeking refuge from economic turmoil in the euro zone and mainland China are snapping up prime houses and apartments in the likes of London and Hong Kong. That risks crowding out locals. If the onslaught continues, cities may start to raise defences.

In the London and Hong Kong real estate markets, it’s as if the financial crisis never happened. The price of prime property in the centre of the British capital is up 49 percent since the spring of 2009, according to Knight Frank. In the former British colony, residential property is up 12 percent this year, and 89 percent since the end of 2008, according to data from Centaline. An apartment sold for a record $55 million last month.

Ultra-low interest rates offer a partial explanation: for those able to borrow, debt servicing costs remain relatively low. But residential property is also increasingly seen as a shelter from the risk of a euro zone collapse, or an economic hard landing in China. Just as investors are willing to accept negative yields on “safe” government bonds, buyers are more concerned about preserving their capital than earning a return.

The flight to safety is causing strains. Local buyers are squeezed out. If homes are left empty – as seems to be the case in some of London’s more desirable areas – the stock of available housing is also reduced.

High property prices can be a signal of a city’s success, when they are a by-product of attracting high-earning workers, whose income taxes and local spending then provide a welcome economic boost. But passive and possibly absent landlords bring few such benefits.

Hong Kong’s new chief executive has promised to restrict some flats to local buyers, though it is not clear how this would work. In the UK, the government’s only response has been to close a loophole that allowed foreign buyers to avoid tax when buying property. It’s possible that soaring prices will eventually persuade inhabitants of London and Hong Kong to become less obsessed with owning property. But in the absence of such a shift – or a market correction – investors in search of real estate safe havens should prepare for a frostier reception.


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