London Real Estate Rises Above Economic Malaise

London's prime real estate appears to have emerged strongly from the gloom that still envelops other property markets.

The city's prime residential property prices have returned to their pre-recession peak, according to a survey, while demand for prime retail and office space continues to grow, driving up prices.

Those trends are likely to continue as London next year hosts the Olympic Games and the queen's diamond jubilee celebrations, events that will require the completion of several major public construction projects and will attract millions of visitors to the city.

Conditions in London's prime residential market remain strong, according to property consultancy Knight Frank LLP, even though the broader market remains volatile and online estate agent Rightmove PLC (RMV.LN) last month said that U.K. homeowners looking to sell their properties in July reduced their asking prices by an average 1.6%.

Despite a recent rise in supply in London, prime residential prices climbed 8.3% year-on-year to June and were expected to continue to grow in the second half of 2011, albeit at a slower pace, said Knight Frank, which defines prime as the top 5% of the mainstream housing market.

"The fact is that prime residential markets have acted as safe-havens for investors over the past two years--with growing demand for property in London, New York and other key global cities as economic and geo-political concerns have pushed investors to look for stable locations for their wealth," said Knight Frank head of residential research Liam Bailey.

In retail property, the picture is equally bright. U.K. real-estate investment trusts British Land Co. PLC (BLND.LN) and Shaftesbury PLC (SHB.LN) Thursday reported growth in rental income and low vacancy rates despite the uncertain environment for consumer spending as wages lag inflation and the economy remains fragile.

Shaftesbury, whose portfolio is concentrated in the trendy West End district of the city, said its vacant commercial space was exceptionally low.

"The buoyant West End economy, in contrast with subdued trading elsewhere in the U.K., reflects London's reputation as the world's best tourist city and the western world's most popular business location," Shaftesbury said.

The market for office space is just as tight. British Land Chief Executive Chris Grigg told reporters that in London there was "a shortage of space of right quality and right caliber," a trend he expected to continue next year.

British Land has benefited from that demand, with office rental prices climbing 6.9% year-on-year to the end of June, outstripping the rate of inflation, which stands at 4.2%. It is investing GBP1.1 billion in an office development program in Central London that will deliver 2.2 million square feet of space by 2014 as it looks to exploit the burgeoning demand.

-By Jonathan Buck, Dow Jones Newswires; [phone]; [e-mail]