Money pours into London market as the rental sector booms

Private capital is pouring into the central London property market as confidence makes yet another return. The private rental sector is booming, with gross returns outpacing many other investments.

Demand is highest for small, one and two-bedroom apartments in new developments. Modern properties are the most desirable because repair costs are low and they offer high-class accommodation for tenants.

Much of this investment is coming from abroad, particularly from Hong Kong, Singapore and Malaysia. The Singaporean government's measures to halt property speculation have led to money flowing into the UK, which Asian investors consider safe, both politically and economically. Compared to the major Far East cities, London property is cheap.

In Singapore a well-located two-bedroom flat can easily cost pounds 1m. And gross yields from renting are between 3 and 4 per cent, compared with 8 to 8.5 per cent in London.

The majority of Hong Kong and Singaporean investors buy solely to let, and plan to trade up after three or four years. Malaysians buy to let or for their own use, more particularly to house children undertaking tertiary studies in London.

Hamptons International, which specialises in property for investment, says the market has been dominated for the past three years by investors from Hong Kong and Singapore.

Lately there has been an increase in British investors, both companies and individuals, buying developments for letting.

"Most recently we have seen an influx of investors from Dublin," says Robin Patterson, a Hamptons spokesman. "The Dublin property market has increased by over 100 per cent and investors are moving funds to London to cash in on the boom."

The demand for high-quality, conveniently located apartments meant prices for newly available units in London rocketed last year by up to 50 per cent, with many developments sold wholly to the Far East before construction started. Properties are often marketed overseas before they become available to UK buyers, with weekly property exhibitions held in Hong Kong and Singapore.

Regalian is one company that specialises in attracting South-East Asian investors, who have proved willing to buy in this way. There is evidence that British buyers are prepared to do the same, possibly due to the strength of the market. David Goldstone, the chairman of Regalian, believes many development firms which specialise in Far East sales are rushing through promotions before the 30 June handover of Hong Kong.

But Sarah Eve of Savills says exhibiting abroad is extremely expensive. "With the UK market at present as strong as it is, many developers are now making a conscious decision not to market overseas," she says.

Maiden Square, a new development by Artesian in Covent Garden, will be marketed purely in the UK. The shortage of private residential property in the area means the firm expects an enormous response. A previous development at Seven Dials went almost entirely to local owner-occupiers. Maiden Square is a development of one and two-bedroom apartments with a few penthouses, and prices will range from pounds 200,000 to pounds 750,000 for 125-year lease.

Manhattan Loft Company is offering 20 lofts at Bankside, opposite St Paul's Cathedral. Prices range from pounds 120,000 to pounds 650,000 for 999-year leases. Lofts close to the city tend to be bought by Londoners, who then mine a rich vein renting to Americans. Manhattan Loft Company describes its Summer's Street Lofts in Clerkenwell as "the nearest thing London has to Manhattan's SoHo".

Most Far East buyers want something slightly more traditional, in Knightsbridge or the West End. More than 70 per cent of new developments in Kensington, Chelsea and Westminster have been sold to overseas investors. Regent's Park and St John's Wood are also favourites, being attractive locations and close to international schools and colleges.

There are still far more potential buyers than properties available, and rental demand has increased significantly. Senior executives doing a two to three-year stint in London will now rent rather than buy.

The number of British landlords continues to grow, aided by the Buy-to- Let scheme launched last year by the Association of Residential Letting Agents. The panel of lenders - Halifax, Mortgage Express, Home Loans Direct and Mortgage Trust - offers packages for investors wanting to buy properties purely for rental. The private rental market has always been hampered by high interest rates on mortgages for such properties, up to 4 per cent above standard owner-occupier rates. Under the scheme, borrowers are charged the standard variable rate of interest plus 0.5 to 1 per cent.

Some lenders are encouraging people to build up portfolios of properties in much the same way as any other savings portfolio. Property is still the stock favourite investment in this country, and many will buy as a form of pension.

Purpose-built ex-council flats are a sound long-term investment. They are often conveniently located and their very design and use of space makes them ideal for letting. In the short term they are unlikely to increase in value as much as other properties, but obviously they are cheaper to buy in the first place.

Buyers, once again, are motivated by capital gain as much as by living needs. London Residential Research says a residential property owner with a 75 per cent mortgage on a pounds 200,000 home will achieve a 40 per cent return on equity if its value goes up 10 per cent in a year.

The popularity of certain developments, for example Marathon House on the Marylebone Road and Albany Court on the busy Vauxhall Bridge Road, indicate that convenience is as important as location.

Hamptons lumps all the areas of central London which command high rents for one and two-bedroom apartments in with the City and the West End. A high-quality flat can bring as much as pounds 275 to pounds 800 a week.

One district where purchase prices are still relatively low is the Hatton Garden area, close to the West End and the City. Dubbed "Little Italy" after two obsolete offices were converted into Da Vinci House and the Sienna Building, the area has an urban village feel. London Residential Research considers it attractive for both investors and residents.

But Dockland properties are providing the highest rental yields of between 10 and 11 per cent. A standard one-bedroom riverside apartment will fetch pounds 275 to pounds 300 a week, for an initial investment of pounds 130,000. Regalian's flats in Premier Place, close to Canary Wharf, start at pounds 85,000 and command similar rents due to their proximity to the City and local workplaces.

"Docklands has seen a Rennaisance, and with more major companies moving headquarters to the area, demand for living space will increase dramatically," says Regalian's Jonathan Holman. Half the properties in Premier Place have been sold to Far East investors, but interest is increasing from within the UK.