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An apartment in Eaton Square, London, listed at £7-million ($11-million). For that, you get a 16-year lease.Best Gapp

The sixth Duke of Westminster, Gerald Cavendish Grosvenor, might have the sweetest real estate deal on the planet.

Through Grosvenor Ltd., the family real estate company, he has perpetual and exclusive ownership of most of Mayfair and Belgravia, the ultra-posh London neighbourhoods where a BMW is considered a lowly grocery getter. Buying a house or apartment in either place is exceedingly difficult. That's because the properties, which came into the family in 1677 and cover about 300 acres, are almost always occupied on leases that can range from a few years to a century. When the lease is up, the duke (or his heirs) takes back the keys.

And thanks to the extraordinary rebound of the London property market in the past year or so, the property values and lease prices attached to them are rising, pumping up Grosvenor's profits. John D. Wood & Co., a London property agent and manager, tracks values and found that large houses (more than 3,500 square feet) in the prime parts of central London fell about 40 per cent between 2008 and mid-2009. Since then, they have recouped almost all their losses, marking one of the sharpest and quickest comebacks in recent decades.

By North American, even Manhattan, standards, the cost of accommodation in West London is outrageous. Example: The asking price on one three-bedroom, 3,000-square-foot apartment on Belgravia's Eaton Square is £7-million ($11-million). For that, you get 16 years. The lease price works out to $58,000 a month.

No wonder the Duke of Westminster is ranked by The Sunday Times Rich List as the wealthiest Briton (if not resident), with an estimated 2010 worth of £6.75-billion. If the London market keeps rising, the next tally will no doubt pump up the figure. Last year. Grosvenor Ltd.'s pretax profit was £394.8-million, against a loss in 2009 of £235.8-million, and its net asset value rose 9 per cent to £2.78-billion.

Mark Preston, Grosvenor's chief executive officer, says the bounce back in both the residential and commercial market, notably the latter, has been remarkably strong.

That's quite a change since 2009, when there were endless predictions that all things real estate faced a long and brutal downturn as British unemployment soared, the national budget deficit exceeded Greek levels and the government resorted to nationalizations to save the banking system. On top of that, a few of the rare healthy banks, such as HSBC, threatened to skip town in retaliation against the threat of higher taxes and tougher financial services regulation.

Mr. Preston credits supply constraints as one of the prime drivers of both the residential and commercial property revival. During the recession, construction all but collapsed, "so there is very, very small supply now," he said. With two- to three-year lag times between the start of a project and occupancy, he thinks values could keep going up.

He also thinks London achieved a greater degree of safe-haven status in the past year or so. Political turmoil, such as the Arab uprisings, convinced wealthy foreign investors - from billionaires to sovereign wealth funds - to diversify. "In times of crisis or uncertainty, investors flood to gold and London property," he said. "One of the great attractions of the London market is liquidity. The market is transparent and investors can get their money out if they want to."

Henry Overman, the director of the Spatial Economics Research Centre at the London School of Economics, thinks the bank bailouts contributed to London's bounce back. The nationalizations and other support measures saved the weak banks from almost certain destruction and helped the stronger ones muddle through the downturn.

Most of the banks are based in London and most of their jobs were preserved. Employment in financial services has actually been rising in London, if not in other parts of the country.

Commercial space is, once again, in short supply. Peter Damesick, chief economist for Europe, the Middle East and Africa for CB Richard Ellis, the world's biggest property adviser, said 15 million square feet of commercial space was leased in London in 2010, the highest level since 2000. The long-term average is 12 million square feet a year. "The drivers of the London economy are geared to the global markets and that allowed the property market to bounce back quickly," he said.

The residential market has also regained some strength, making even modest homes costly. The average London home price is now almost £337,000, which might buy a cramped, two bedroom flat in need of renovation well away from the city centre.

London's property revival is all the more impressive when you consider what's happening elsewhere. Outside London, the housing market is still firmly in recession. The latest figures from the U.K. Land Registry office show that of the 11 regions measured in England and Wales, London was the only one in positive territory in the year to the end of March, with a 0.8-per-cent average house price increase. The worst-hit areas were the North East (down 9.3 per cent), Wales (down 7.2 per cent) and Yorkshire and the Humber (down 5.3 per cent).

It's hard to imagine that London is actually part of the same economy. London home prices are well more than three times the value in the North East and twice the value in the South West. The slow economic recovery beyond London helps to explain the extreme price gaps.

Jobs are still being shredded in Britain's secondary cities, in good part because of the brutal public-sector spending cutbacks as the national and local governments try to balance their budgets. This comes as a blow to cities such as Cardiff, Swansea and Liverpool, which had had some success in replacing lost industrial jobs with government jobs, only to see austerity programs take them away at an alarming rate. Relatively speaking, London has fewer public sector jobs than most parts of the country.

Will London's good fortune last? Mr. Preston, Mr. Overman and Mr. Damesick all agree that severe supply constraints of both residential and commercial property could keep the party going for a while. Mr. Overman said Britain had 120,000 housing completions in 2010, the lowest level since the 1920s. By his estimation, that's half the level required to meet demand.

The shortage is particularly acute in London, which is ringed with a greenbelt, has many protected heritage neighbourhoods and whose mayor, Boris Johnson, dislikes high rises.

Mr. Damesick thinks the banks are the biggest single potential threat to London's enduring recovery. If the euro zone debt crisis takes a turn for the worse, all of Europe's banks could face monster losses and job reduction. Higher taxes on corporations and the wealthy could trigger an exodus from London. Taxes have indeed been rising, but few businesses, aside from a few hedge funds, have left town.

In the meantime, London is pretending the recession and property downturn never happened. The property listings say it all. Another residence on Eaton Square, this one a large house with an elevator and a courtyard garden, is yours for a mere £28-million.

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