Why London property isn’t in a bubble

London Terraces

Surges in London property prices have spurred calls the city is a bubble waiting to pop, but investors are still positive on the market.

A key reason for the optimism is the limited supply of new homes in the British capital, according to Tom Eshelby, director of U.K. residential development at Land Securities , the country's largest commercial developer.

"There are areas where there are huge new pipeline and perhaps one might wonder if demand will keep up in the coming two to three years, but in general, London and the U.K. as a whole does struggle to feed the demand for new homes," Eshelby told CNBC.

It's no wonder the London market spurs fears of a bubble: The price climbs have been huge.

House prices in the U.K.'s capital city are rising by 5 pounds ($7.54) every hour on average, according to analysis by property consultants Surrenden Invest , crediting statistics released by the U.K.'s Land Registry at the end of October.

The registry indicated average property prices in London had increased by 9.6 percent annually to 499,997 pounds, the analysis showed. Housing prices in London are more than double the national property average for England and Wales of 186,553 pounds.

In late October, UBS warned that London was the most overvalued property market in Europe and the city most at risk of a bubble.

There are signs demand for the priciest properties is waning, with sales in the most expensive areas of central London down by as much as two-thirds between June and October, based on sales as a proportion of inventory compared the previous quarter, online estate agency eMoov.co.uk said.

But Eshelby doesn't see any signs that foreign buyers, who have been key drivers behind the price increases, are backing off.

"London remains a truly global international buyer base," he said, noting that Southeast Asia in particular has driven quite a bit of demand. But he noted that investors holding property purchased five years ago may be wondering if growth over the next five years will stack up.

Eshelby isn't alone in seeing continued opportunity in London and other U.K. climes.

Alex Bellingham, a director at IP Global, which both acts as a property agent and an investor, said Tuesday he's not worried about London's property market.

"If London corrects, it uncorrects quickly," Bellingham said, meaning it's a solid medium-term bet.

But he noted IP Global is focusing on "greater London," rather than the "zone one" prime area, preferring the zones three to five, where he sees a "less fickle" local demographic for potential renters and buyers.

However, he noted that IP Global is also looking beyond London in its U.K. investments, and it likes the prospects of Manchester, noting it's a beneficiary of the government's proposed "Northern Powerhouse" plan to boost economic growth in the country's slower-growing North.

There's another reason IP Global likes Manchester, Bellingham said: it's got quite a few universities. University of Manchester alone has nearly 40,000 students, while more than 30,000 attend Manchester Metropolitan University; it's estimated the city hosts more than 100,000 university students in total.

Land Securities' Eshelby is also eyeing the U.K.'s student population.

"The whole sector of student accommodation has grown hugely over the last 10 years," Eshelby said. "Investors can see continued growth simply because of the demand."

-Luke Graham and Katy Barnato contributed to this article.

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