London Property Boom

London Property Boom - Property has been a money spinner for investors in the last decade or so.

Listed property companies naturally have also done very well. The good times are continuing. Rugby Estates (LSE: RES) , which released its results yesterday, saw pre-tax profits rise by 79% and increased the dividend by 100%.

In particular, the company saw strong demand for office rental in its main central London market. Both rents and property values have been pushed up, allowing the company to realise some of these gains by selling some of its investments.

Such profits from property have encouraged ever more investors to seek part of the action.

"Private buyers, from both the UK and overseas, have continued to compete with institutional investors, who are increasing their target weightings for property", said David Tye, the chairman, in his annual review. There is a "continued surge of both equity and debt capital seeking a home in property as an alternative to other forms of investment".

This surge has pushed up property prices and as a consequence yields have dropped. It has also meant that the 'yield differentials' between primary and secondary property has narrowed. In some cases it is 'too narrow', according to Rugby. In other words, some property in secondary locations is over-valued.

Rugby notes that there has been a marked increase in development both for property which has been let before being built, and speculative property that is built first with the hope that it can be let later.

That's interesting because it's sometimes said by investors that the building of such speculative property is a sign of a bubble. However, if you believe Rugby, the development boom looks set to continue.

"A plentiful supply of debt continues to fuel a seemingly insatiable appetite for property investment and development opportunities in all sectors throughout the UK and particularly in London and the South East," said finance director Stephen Jones in his report.

Rugby has been able to take advantage of investor demand and has raised £27.6 million through a placing. This is is being invested in a number of projects and, in particular, into an investment vehicle, 0 Twelve Estates, which will develop sites in East London for the Olympic Games. Rugby is managing this development.

The investor demand, which, in my opinion, may be partly fuelled by the introduction of Real Estate Investment Trusts (REITs) in January this year, could mean that the boom in the property market has quite a lot further to go.

Rugby's outlook statement is vaguely positive saying that their aspirations for this year are similar to those of last.

Barring some systemic shock I think they probably will meet the aspirations. The question is whether in this heady market, cautious investors should be investing.