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Skyrocketing London real estate lifts IPO

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With central banks on both sides of the Atlantic continuing to pump money into financial assets, it should be no surprise to anyone that the rich everywhere are continuing to buy prime real estate. Nowhere is this more evident than in London, where an influx of foreign capital has pushed the price of an average home up by almost 10 per cent over the past year. The price surge is causing anguish for young families seeking a roof over their heads and debate in Parliament over the wisdom of government measures to stimulate housebuilding. However, one small constituency is delighted: the owners of Foxtons, a London chain of estate agents, which has just floated on the London Stock Exchange, valuing the firm and its 42 local agencies at $1-billion (U.S.).

Realtors tend to be glass-half-full people, but anyone whose memory stretched back more than a few years will recall that Foxtons was sold by its founder, Jon Hunt, in 2007 to BC Partners, a venture capital firm for £360-million ($594-million). The buyout firm lost control to the banks in the ensuing financial meltdown, but then bravely reacquired a majority share in 2010. Valued in the public offer at £649-million, the shares soared by another fifth on debut trading this week to a valuation that leaves you wondering whether the glass is not half-full but overflowing like a shaken can of beer.

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Foxtons would argue that London is a special market and they are right. Their IPO document is full of narrative, explaining how the capital dominates Britain's property market, accounting for 16 per cent of all transactions and 43 per cent by value. These have now returned to their pre-crash peak and Foxtons boasts that its average deal last year was worth £475,000. The agents charge 2.5 per cent commission which means that each of their offices needs to generate between four and five deals every week worth half a million pounds to generate current levels of turnover.

In the current real estate heat wave, that won't be too hard – a one-bedroom apartment in a glitzy block of flats overlooking Hyde Park was recently put up for sale by a receiver for £5.25-million. However, the London real estate market is always about hot money and flight capital, much of it of Asian origin. If Chinese tycoons are fighting over bricks in a few square miles of a city on a small island off the coast of Europe, is that really a sign of global financial health?

The Federal Reserve, presumably, believes it is not. Hence the decision to continue to flood the U.S. financial markets with new dollars and the frenzied flight of old dollars from emerging markets into London real estate. None of this affects the real world of Liverpool or Newcastle, where shops are still being boarded up and economic recovery is still something that you watch on television.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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