Complex Made Simple

Will the ‘Olympic effect’ attract Gulf property investors to East London?

With the opening of the London Olympic Games just a few short weeks away, has the much-heralded regeneration of large parts of East London made the area a viable target for property investors in the Middle East?

According to recent research from Lloyds TSB, house prices near the main site of the London 2012 Olympic Games have increased by more than $96,000 on average since July 2005. The UK capital was awarded the Games six years ago and since then nearby house prices have increased by around 30%, with homes in Dalston and Homerton in Hackney enjoying the greatest rises at 55 percent.

So does East London represent a viable opportunity for Middle East investors looking to snap up property in one of the world’s great cities?

“Traditionally overseas investors, whether from the Middle East or elsewhere, have always wanted fairly quick turnaround in capital gains, and historically the data shows that the biggest gains in capital values and uplift in yield, has always been Central London,” says Robert Pearce, Director at IP Global, a Dubai-based real estate investment firm which sells property in London, the US and Asia.

“When presented with the historical evidence, they gravitate towards what the data says,” he continues. “However, although East London isn’t a particularly well-known area to Middle East investors, it represents a long-term opportunity for all property investors as long as they’re willing to see the fundamental drivers.”

Following the Olympic Games, the Olympic Village is set to be converted into the East Village, offering 2,800 flats and houses; over the next 10 years a further 8,000 homes are planned to be built around the Olympic Park. In Stratford, home of the Olympic Park, an extensive redevelopment programme will add 80% to the stock of houses in the area.

According to Pearce, East London represents a greater risk and sits on a longer growth curve than some more central areas of the UK capital, “for example 12-15 years from trough to peak, as opposed to 10-12 years in core London”.

And yet the unrest of the Arab Spring, as well as ongoing violence in Syria and uncertainty in Libya, Egypt and elsewhere, has prompted many regional investors to look to London at a time when they might otherwise have splashed the cash closer to home. Moreover, they are looking to invest in London property without breaking the bank.

“There are many developers in the UK that bring their projects out to the Middle East, touring the region and running roadshows,” says Pearce. “Their push is that their price point is significantly lower than the Central London average. It’s an opportunity for investors who are not heavy on cash to get into the London market, which has safe-haven status for a lot of GCC and Middle Eastern investors.

“It’s a notoriously safe market in terms of its legal framework, the pound is relatively undervalued against the US dollar, and there are definitely price point opportunities,” he continues. “Individual middle eastern investors, those who can’t afford to get into the likes of Islington and Westminster, have definitely been buying stock.

“We’re talking one- or two-bed apartments in developments of maybe 40 or 50, built by developers who have brought brown-field sites,” he adds. “Some of them are conversions of existing buildings, warehouses for example, but the key difference is that the price point is reflective of the area. The further east you go, you don’t get the transport links that you do in central London, and that’s why you pay a little less.”

In the longer term, there is cause for encouragement in this regard, particularly in view of the significant transport system upgrades that have arrived in time for the start of the Games. Stratford is home to a new Eurostar link, opening it to the whole of Europe, and other advancements include the Javelin high-speed rail line, which will whisk passengers from Central London to the Olympic Park in just seven minutes.

“It’s certainly getting easier to take Middle East clients out to view properties in East London,” says one London-based broker with clients from the UAE, Qatar and Saudi Arabia. “Even a few months ago they wouldn’t have been interested in looking anywhere but Central , but now you mention the Olympics and tell them about Stratford International , and they are happy to take a look.

“These are not necessarily the high-net-worth clients we are used to seeing in Knightsbridge or Westminster, but families or smaller investors looking for a second or third residence, or even somewhere to let out,” he continues. “It’s a different part of the market, but an important one nonetheless.”

While super-wealthy Middle East investors are unlikely to have their heads turned by tales of much-improved rail links, buyers from the region looking for considered long-term investments, as opposed to a luxury residence in the leafy environs of Mayfair, are expected to examine the opportunities presented by East London. They would, however, do well to ignore the hype surrounding the Games, and look past the so-called ‘Olympic Effect’.

“The key danger is for investors to be led by the Olympic story, which is ultimately a finite story,” warns Pearce at IP Global. “If you’re buying a property you’re not going to do it just for a couple of weeks to get some yield from the Olympics, you’ve got to make your decision based on the long-term fundamentals of the market, not just what the Olympics will bring.

“When you look at past Olympics, it wasn’t that long ago that the Games were being held in Athens,” he notes. “I’m not saying that the Greek financial crisis is being driven by the Olympics, but the fundamentals of the Athens property market were unsustainable despite the Olympics. From an investment point of view, the area will gentrify in the long-term, but the Olympics should not be the answer to that. There are much more important long-term fundamentals.”