While only larger properties in the leafier parts of the capital have come close to the price growth in the rest of the UK, the recovery in prime central London values is underway, and activity levels have picked up significantly over recent months. Though renewed Covid-19 uncertainty will likely push the expected bounce in values further into 2022, it remains a question of when and not if prices rebound.
Frances Clacy
1. Larger houses continue to fuel growth
The average value of prime property across London increased by 3.2% in 2021, more than double the 1.2% seen during 2020, bolstered by a strong final quarter of the year when prices rose by 0.9%. There has, however, been considerable variation in the performance of different property types and locations, reflecting the different drivers of demand across the London markets.
The strongest performing markets during the past 18 months have been larger homes in prime west and south west London. Against average price growth of 3.7% across all of outer prime London (i.e. excluding central London), the price of a six or more bedroom house in west London rose by 10.4% during the past year and by 15.1% since March 2020. And in south west London, the same house added 9.1% and 12.1% respectively to its value.
And, in a clear sign that the pandemic-fuelled desire for more space is yet to come to an end, these submarkets continued to see the highest levels of growth during the final three months of 2021. The availability of this type of property remains scarce and high demand levels have led to competitive bidding and increased prices.
As such, the south west London neighbourhoods of Richmond, East Sheen, Wandsworth and Wimbledon were the four strongest performing locations for annual price growth in 2021.
Since last summer we have seen more buyers looking to return to the capital, particularly wealthy professionals and those in search of a pied-à-terre. As such, London flats have also begun their recovery with values up, modestly, by 1.1% in prime central London and 1.0% in outer prime London during 2021.
In central London appropriately priced, best-in-class flats have been selling well, while across outer prime London, the perceived value on offer has triggered a rise in demand from affluent first time buyers and young professionals. In particular, flats in north and east London are the only submarket where values remain below (-0.5%) their level a year ago. Here, ease of access to The City and Canary Wharf is a strong draw for this type of buyer.
Central London’s recovery also continued throughout the final three months of 2021. A quarterly rise of 0.7% left annual growth at 2.0%; not dramatic but still the highest since September 2014 before the introduction of new, higher stamp duty rates.
A more robust recovery in values is still reliant on a sustained recovery in international travel. While December 2021 saw an average of 3,335 daily flights to the UK – more than double the 1,488 seen in December 2020 – they still remain two-thirds of their December 2019 level of 5,017.
Although more than half of our central London agents reported seeing an increase in international demand during Q4, this was likely tempered in December by the risk of Omicron and the reintroduction of some travel restrictions.
4. Top end transactions remain robust
Although a recovery in values has remained relatively subdued, transactions at the top end of London’s market have been anything but. Last year saw 522 £5m-plus sales take place across the capital, the highest number for any year since 2013. The total value of these transactions was £5.54 billion, 48.1% higher than in 2020, highlighting that confidence in the most prominent parts of London remains strong.
Because of fewer international arrivals into the UK, for much of 2021 the top end of London’s market has been reliant on domestic buyers and international buyers who are already resident in London. But in a sign that this could be changing, the last three months of the year saw the highest quarterly spend for any quarter on record (since 2006) with almost £2 billion spent on £5m-plus property.
5. Central London ready for its revival
Recovery in prime central London values appears to be underway, and, as detailed above, activity levels have picked up significantly. But renewed Covid-19 uncertainty seems likely to push the expected bounce in values further into 2022. Still, we believe it’s a question of when and not if prices rebound, particularly as more pent-up demand builds.
The prospects for global wealth generation – fuelled in particular by growth in the technology and life sciences sectors – also gives us confidence for prime central London’s medium and long-term outlook.
However, we expect the recovery to be less dramatic than historically because of the underlying tax environment and London’s maturity as a world city. Our forecast for growth of 24% in the five years to 2026 means that by the end of the period, values will return to their previous 2014 peak level for the first time.
6. A squeeze on spending power in outer prime London
Since the start of the pandemic, the more domestic markets beyond central London have primarily been driven by demand from those looking to upsize into large family homes.
But we have now begun to see a pick-up in the rate of price growth for smaller houses and flats, particularly in areas with good transport links to London’s business districts as connectivity is once again at the forefront of buyers minds. These property types have more capacity for growth in the short term, having lagged behind over the past 18 months.
There continues to be unmet demand from those looking to upsize but a lack of suitable stock on the market will support prices, whilst the supply-demand imbalance remains.
Looking further ahead, rising interest rates and the possibility of tax increases for wealthier households will put some pressure on buyers’ spending power and we are therefore forecasting slightly lower levels of growth from 2023 onwards.
PRIME PRICE FORECASTS
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Source: Savills Research
Note These forecasts apply to average prices in the second-hand market. New build values may not move at the same rate.
< View our latest Q4 2021 updates here
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