The divergence between London and the regions has been the defining feature of the British property market since the 2008-09 crash - as unexpected in advance as it has come to be seem inevitable in retrospect. Central London shops are now worth 7 per cent more than at their 2007 peak level, reports index provider IPD. Offices in the south west of England have meanwhile fallen by an extraordinary 59 per cent.
But now the balance is changing. The October crane survey of UK cities by Deloitte found that the regional office market was "on the cusp of a new development cycle", with construction started on 11 new buildings over the past year - the largest number since 2008. Even shops, which have had to battle the rise of e-commerce as well as weak consumer spending, rose in value for the second month running in September after almost two years of continuous declines.
I first reported on this sea-change in our March cover feature 'Tired of London?'. The basket of seven regional property stocks I identified - including the likes of McKay, Hansteen and Development Securities - has risen 23 per cent, so the call was a good one. But now it's time to flip the coin. If property investors should be buying in the regions, should they equally be selling in London?
The enthusiasm of stock-pickers towards London property has certainly cooled this year - but it remains warm enough. The FTSE 350 real-estate investment trusts, which are heavily skewed towards the capital, are up 8 per cent since our March cover feature. The wider market has barely budged - up 1 per cent. Tellingly, the big correction in the London property stocks, as in the wider market, came after US Federal Reserve chairman Ben Bernanke's tentative comments about "tapering" (reducing) quantitative easing in May.
Quantitative easing, whereby central banks buy government debt, boosts property because it encourages investors to look for higher-yielding alternatives to bonds. Real estate is an obvious place to start - not least because it is usually bought with debt, which quantitative easing also cheapens. This is just as much the case for the first-time buy-to-let landlord who is getting no interest on his bank savings as it is for the Qatari sovereign wealth fund.
London has benefited more than any other city in the world from this hunt for yield because of its global reputation as a 'safe haven'. It bagged a 13 per cent share of all cross-border property investment flows in the year to June, according to a report by brokerage Cushman & Wakefield. Its nearest rival, Paris, only got 4 per cent. This has as much to do with Britain's stable legal system and accommodating regulatory regime as with the capital's property market. But most global investors looking for bond proxies have been unwilling to take on the greater economic risks associated with markets outside of London. They have accepted rental yields below 4 per cent on trophy assets, on the basis that the rents are at least safe, with some growth potential, and that 4 per cent is better than they'd get on a good government bond.
As government bond yields rise, bond proxies will become less valuable. The sheer inevitability of this trend has underpinned the volatility of the London property stocks since May. Recent noises from the US Federal Reserve - notably the shock decision not to taper in September and the appointment of Janet Yellen as Mr Bernanke's successor - have made clear that the world's most powerful central bank will err on the side of easy money. But that has not stopped aggressive increases in the swap rates used to price mortgages - in the case of UK five-year swaps, from a trough of 0.89 per cent in May to 1.85 per cent now.
I have found most chief executives unwilling to speculate on the impact of tapering; understandably, property types are usually more comfortable with tangible subjects such as occupier demand than the abstractions of quantitative easing. Toby Courtauld of Great Portland Estates is an exception. He says his team has started to factor rising yields - implying falling property prices, all else being equal - into their business plans, albeit not for another year.
Elsewhere, actions have been more telling than words. The big real-estate investment trusts have bought very little central London property since the 2008 crash, preferring to focus on regenerating fringe areas such as Victoria, Kings Cross or Paddington. Where they have bought prime addresses - British Land picked up a big site on Piccadilly last year - it has been mainly for residential redevelopment and sale, which does not require a long-term view. Lucinda Bell, finance director of British Land, is not one for big market calls, but notes "a greater divergence of views than before". This is more pointed than it sounds: until recently, the consensus in favour of keeping shareholders' capital within the capital was almost overwhelming.
It would be a brave man who would call the end of London's property boom now. I tipped Derwent London last month (Buy, 2,287p, 12 Sep 2013) because its strategy of refurbishing space in upcoming office areas such as Shoreditch shows every sign of staying power. Still, faced with an either-or choice, value investors should be more comfortable with the recovering regional office markets than the still-booming London one. Every property cycle eventually comes to an end.
