Global Investing: London realty falling down?

Do the math: London's real estate development pipeline is 14 million square feet. Sixty new projects launched since last October, twice credit bubble highs. Banking and finance is 40 per cent of office lease demand in London and the City is going to shed 100,000 jobs even before Brexit.

Every social event, dinner, business meeting and strategy bull session I have attended since June 23 in Dubai has focused on sterling and London (and local) real estate. Investors in the UAE are shocked and unnerved by the trauma of Brexit, confused about its impact on sterling and London property, missold as a "safe haven" by so many brokers in town. A Pakistani friend told me he had bought two Nine Elms million-pound apartments as a "safe haven". I did not have the heart to confess my conviction that Battersea projects are offplan leprosy that could well lose 80-90 per cent of their value. From pied-à-terre in Edgeware Road to office leasing funds managed by Bahraini/DIFC/onshore Shariah-compliant banks, the Gulf has untold billions invested in London property. So what now? What next?
London home prices, hideously expensive by any criteria since Samuel Pepys and Richard Sheridau raged against West End developers centuries ago, were a proxy for the tsunami of offshore global wealth creation that has now evaporated. Yet by any rational criteria of value, London is awfully overpriced relative to the rest of Britain and relative to UK income growth. There is no demand in Britian for 54,000 new multi-million pound flats sold as pieces of paper in hotel lobbies from Abu Dhabi to Hong Kong. Brexit is the catalyst for a property crash that has now begun. Crossrail has ignited a binge in overvalued suburban developments that will haemorrhage cash.
Do not believe broker hype that there is a "shortage" of supply. Go check out planning applications for new builds, if not empty buildings. If the lights are turned off (other than in ritzy buildings like One Hyde Park, an aerial safe deposit box!), this speculative death spiral will unravel. Theresa May has sacked Chancellor Osborne of Bullingdon but she will keep painfully high stamp duties and "mansion tax" intact. The "nasty party", supposed to be a friend of Gulf investors, will impose ever nastier taxes on Gulf home buyers, both buy to let and second homes.
I am also acutely sensitive to the fact that the global oil/commodity cycle and Chinese capital flight will no longer boost London and the "cheap" sterling will get a whole lot cheaper, despite the post-Bank of England MPC dead cat bounce. The luxury market has begun to sag. The Russians, the Gulf Arabs, the Hong Kongers, the Malaysian Chinese, the (Benami) Indian oligarchs, the Pakistani (PMLN - dubbed the Panama Money Laundering Network by the media in my country!) money-mians are all gone. The party is over. Get set for "distress selling" of Mayfair and Belgravia penthouses by cash strapped oligarchs. One of history's great luxury home bubbles will unwind with Brexit - and ain't no sunshine when the posh boys is gone and the white orangotang haunts the Foreign Office.
I expect a 25-30 per cent fall in London office tower values. Do the math; the development pipeline is 14 million square feet. Sixty new projects launched since last October, twice credit bubble highs. Banking and finance is 40 per cent of office lease demand in London and the City is going to shed 100,000 jobs even before Brexit. I was horrified by the RICS sentiment and price expectations data in July, by the shock to UK business and consumer confidence. One of my earliest, most traumatic memories in banking was watch my mates in Chase's London dealing room get wiped out by the crash in London property just after the Kuwait war in 1991. If the plunge in sterling creates inflation, Threadneedle Street could even be forced to tighten monetary policy amid a recession. The macro tea leaves do not spell correction to me. They spell a full-blown office property crash, the reason it makes strategic sense to short Great Portland Estates, British Land and any cement supplier exposed to London construction (Cemex?).
The London property crash is going to create some superlative values, not just in lovely Georgian- or Victorian-era cottages in Norfolk and Sumerset. I see Kings Cross as I saw the Docklands in the early-1990s. The next big thing, not just a place for the tatty after hours clubs of my youth. What do the high speed commuter train timetable auguries portend? The garden of England, the county Colin Cowdrey and Asif Iqbal captained, the kingdom of Lear Beckett, Chaucer and Wimbledon's royal duke. Kent!
Matein Khalid is a global equities strategist and fund manager.