While the pound might have strengthened against the euro in the wake of last week's Emergency Budget
, with investors viewing the UK economy with increasing confidence given the government's apparent determination to cut the country's deficit and the mounting eurozone debt crisis, underlying weakness against other currencies is continuing to have an impact on the UK property market.
This week saw property developer Minerva announce the sale of 11 further flats at its The Lancasters project, a luxury apartment complex being created out of the old Thistle Hotel overlooking Hyde Park.
With a year still to go until the scheme is completed, half of the 77 flats have been sold at an average of almost GBP 10 million each.
However, the suggestion is that the news does not indicate heightening domestic demand at the high end of the market, but reflects the determination of overseas property investors to capitalise on the strength of their currencies in relation to the pound and snap up luxury accommodation on the cheap.
"UK buyers drop into a distinct minority at this level," Yolande Barnes, director of residential research at estate agent Savills, said in an interview with the Standard.
"It is pretty much a foreign market. The main factor driving up prices is the lack of supply, particularly of new-build, which is what overseas buyers tend to prefer."
Strength of the renminbi
One of the factors to consider here is the decision of China to further loosen its currency's ties with the dollar.
Although the renminbi had not been pegged to the dollar since July 2005, it was still held in a floating exchange rate system which ensured the currency did not fluctuate on a daily basis against the dollar by more than 0.5 per cent.
This caused a fair degree of friction with the US as it ensured the renminbi remained undervalued against the dollar by a considerable margin.
On the other hand, the policy helped China to rapidly grow its export market and brought growth to its economy, although a renewed confidence that a domestic-driven economy can be realised has brought with it a change of outlook.
As a result, in the lead-up to the G20 summit held in Toronto last month, China announced that it will afford its currency greater scope to fluctuate.
Explaining the decision, the People's Bank of China said: "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility."
Even so, the move is unlikely to have an immediate effect, as policymakers are keen to allow their companies as much time as possible to adapt to the potential changes.
A gradualist approach has therefore been signalled, with a one-time revaluation - which would have the knock-on effect of reducing the US' balance of payments deficit - being ruled out.
By the same token, the move is unlikely to produce immediate results in China's quest to reduce its reliance on the export market.
"This move is a vote of confidence in the global recovery and a reaffirmation of Beijing's longstanding commitment to a flexible currency regime," Stephen Roach, chairman of Morgan Stanley Asia, told Bloomberg.
"This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption."
Effect on overseas property investment
If the increased currency flexibility heralded by China has not had an immediate impact on its overarching economic strategy, it has at least prompted Chinese investors to look outside of their own country for investment opportunities
A Reuters report suggests the removal of the renminbi's shackles has led to expectations of gains in the yuan against the dollar, which in turn is prompting Chinese investors to look further afield and to projects such as London's Hyde Park development, as well as Singapore and Hong Kong.
"I think you will start to see more strength in that currency and that will give further impetus to look elsewhere for investments," James Moss, managing director of upmarket UK real estate services company Curzon Investment Property, told the news provider.
"The whole economic situation (in China) is prone to change and so people are looking for a safe haven for their money
With investors from other countries also looking for opportunities across the world rather than in their own locale, it appears that demand will continue to be strong for high-end luxury apartments.
- Tuesday 06 July 2010