As London continues its return to normality, central London values have continued to recover over the past three months, after being in the doldrums for much of the pandemic. However, prices in prime central London are still down -17.6% on their 2014 peak, meaning there is still plenty of opportunity for buyers – especially those buying in foreign currencies, given the recent improvement in currency advantage.
Frances McDonald
As the capital returns to normality, prime central London house prices have been rising at a steady pace, after being in the doldrums for much of the pandemic. But a more noteworthy recovery has been delayed by fewer than expected international buyers, with caution because the war on Ukraine is tempering the safe haven effect that we would normally expect.
Values increased by just 0.7% during the second quarter, down from 1.1% in Q1, but annual growth totalled 3.3% - the highest seen since September 2014.
However, prime prices are still down -17.6% on their 2014 peak so there remains plenty of opportunity for buyers – especially those buying in foreign currencies, given the recent improvement in currency advantage.
And in evidence that some buyers are already making the most of this relative value, £5m+ sales across London in the first half of this year was the strongest on record.
Across outer prime London levels of price growth have also slowed, following two years of significant growth caused by pandemic-induced desires to move and upsize. On a quarterly basis, values rose by 0.8% to leave prices 4.4% higher than they were a year ago – only marginally lower than the 4.7% recorded last quarter.
A lack of stock remains the biggest issue facing the prime London market, cited by almost half (45%) of Savills agents in prime central London and 42% in outer London, though this is down from 64% and 68% in Q1.
Across outer prime London, the increased cost of living (31%) was named as being the second biggest influence on the market whilst for central London it was rising interest rates (27%).
Sales at the top end of the market have primarily been driven by domestic buyers since the start of the pandemic and remain the driving force of the market.
Whilst London has retained its status as a leading global city, international travel bans and ongoing lockdowns around the world have led to a lack of international demand. International arrivals into the UK in June totalled 170,077, -15% lower than June 2019 and as a result, growth has been delayed by a slower than expected return to normal travel.
Houses continued to outperform flats on an annual basis but growth is slowing and the gap between the two is narrowing. Houses in outer prime London rose by 1.2% during the second quarter (down from 2.0% in Q1) and by 0.8% in prime central London, down from 1.2%. Flats in both markets grew 0.5% in Q2.
The return of workers back to the capital has been a driving force in the rebalancing of demand between houses and flats. Even with hybrid working becoming more conventional, workers still want to be close to the office and some of those who bought a home in the country during the pandemic are realising the need for a pied-a-terre.
As a result of changing demand, the distribution of quarterly price growth has shifted away from locations which performed best over the pandemic, to areas of London which combine strong first time buyer, family and investor markets – as well as outside space. Notting Hill (2.2%), Clapham (2.1%), St John’s Wood (2.1%) and Pimlico (2.0%) have overtaken the likes of Wimbledon (1.4%), Chiswick (1.0%) and Wandsworth (1.0%).
Recovery in prime central London values is underway and activity levels so far this year have been exceptionally strong. The war in Ukraine has caused a degree of caution and in some cases, buyers and sellers have adopted a wait and see approach.
The catalyst for a more significant recovery is reliant on supply and demand dynamics which will be influenced by the pace of return of international buyers, requirements for greater transparency around property ownership and constraints on stock.
Unless high net worth foreign investors return in their pre-pandemic numbers, we can expect the market to continue to recover at a slow and steady pace, rather than with a sharp uptick.
But longer term, the relative value and the prospects for global wealth generation – fuelled in particular by growth in the technology and life sciences sectors - gives us confidence for prime central London’s medium and long term outlook.
However, requirements to register beneficial ownership of homes held in offshore corporate vehicles could impact on longer term demand levels and temper the desirability of London as a safe haven for super prime property investment.
That being said, historically there have been many reasons to use offshore corporate vehicles to hold UK property. The tax benefits of doing so have largely passed and for many, the anonymity they provided was a convenience rather than a necessity.
Beyond central London there continues to be unmet demand from those looking to upsize and a lack of suitable stock will continue to support prices in the short term. But, rising interest rates and the increased cost of living means buyers are becoming more cautious and they’re less willing to pay over the odds for their next home.
The top end of the market is less reliant on borrowing, reducing its exposure to further rate rises. However, it is not completely immune and the low cost of borrowing in recent years has allowed prime buyers to take out larger mortgages, particularly in the South West and West London family house markets.
As such, we expect to see increasing price sensitivity creep into the market throughout the remainder of the year and realistic pricing will be key for securing a sale.
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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.