THE UK ECONOMIC BACKDROP

Inflation continues to fall with the latest indicators showing the Consumer Price Index at 6.8% in July, an improvement on the 7.9% June figure. Expectations are that the Bank of England may not need to raise base rates as aggressively as previously feared, but as demand-led “core” inflation remaining at 6.9% (in line with June) some uncertainty still remains.

For now, as we go to press, the Bank base rate, at 5.25%, remains at its highest level since 2008.

But typically, central London buyers aren’t reliant on mortgage debt. Indeed, in the first 5 months of this year, more than 70% of our buyers funded their purchase with cash, up from 58% in 2022. This highlights the discretionary use of debt during the long period of exceptionally low rates and underscores the extent to which this part of the market is insulated against some of the pressures impacting the wider housing market.

FROM A GLOBAL PERSPECTIVE

More broadly, some reversal of the substantial wealth gains of the past few years are likely to take place as some countries face slower growth and even recession. But the five-year outlook is for global wealth to continue growing. An increase of US$ 173 trillion or 38% between 2022 and 2027, according to the 2023 UBS Global Wealth Report.

The number of ultra-high-net-worth individuals (UHNWIs), a key buyer group for central London homes, is also expected to reach 372,000 by 2027, rising by 129,000, or 53%, in five years.

And despite some concerns surrounding the UK capital’s standing in a global context post-Brexit, London remains an international hub for business and has a rapidly growing tech sector in particular. The UK capital attracted by far the most venture capital in Europe last year (US$12.2 billion) and this has helped to cement its position as Europe’s premier tech city.

This suggests that central London’s potential buyer base is set to continue expanding, with a more diverse mix of where their wealth has been generated.

POLITICAL UNCERTAINTIES

History tells us that a pending general election – which in the case of the UK must be held no later than 24th January 2025 – leads to uncertainty in the housing market. Given the highly discretionary nature of prime central London, we could see both buyers and sellers adopting a ‘wait and see approach’.

Regardless of political party; wealthier, higher earning households are most likely to be affected by any changes to taxation.

More specifically, the Labour party has stated that it would abolish non-dom tax status. Data from HMRC suggests there were 55,000 resident non-doms who paid tax in the UK in 2021/22, two-thirds of whom were London based.

BUT WOULD THIS LEAD TO A FLIGHT FROM THE CITY?

A report published by the London School of Economics (LSE) in September 2022 projected that the abolition of non-dom status would raise £3.2 billion in additional tax per year. This accounts for any additional tax planning, loss of revenue from the existing ‘remittance basis charge’ paid by some non-doms and for any subsequent emigration.

In this regard, the report concludes that very few people would actually leave the UK as a result of the abolition of non-dom tax status. As evidence, the reforms made in 2017 that were intended to “abolish permanent non-dom status” led to just 0.2% of long-term non-doms leaving the UK, despite the changes reducing the share of income they could keep by 8.8%.

The bigger question is whether such a change might reduce the appeal of the UK, and London in particular, as a place for the global wealthy to settle and do business.

SUPPLY SHORTAGES

At the same time, supply of good quality stock is likely to remain constrained, particularly given the planning policy changes that have been implemented by Westminster City Council limiting the size of any new home to 200 square metres. Kensington and Chelsea is expected to introduce restrictions although details have yet to be published. This means that supply is finite – at current rates of sale, we estimate that there is just five years’ supply of these larger, new build homes.

There are currently 38 schemes set to market units worth more than £5 million in the next five years, with most already complete or under construction and only a handful with planning permission. So what is currently for sale at this price point is likely to be all that there will be for the foreseeable, particularly as developers struggle with the pressures of high land and build costs.

CONCLUSION

Despite central London’s resilience, price sensitivity and buyer caution is likely to continue into 2024, particularly as we approach the next general election. That is likely to trigger questions around potential policy changes, particularly on non-dom tax arrangements.

There are clear headwinds, but we continue to expect prime central London to outperform all other UK residential markets, not least because of its standing in an international context and that global wealth generation is expected to continue growing.

For the rental markets, while there has been some improvement in the levels of available stock over recent months, the imbalance between supply and demand remains significant and will take time to unwind, especially given impending regulatory changes. So rental growth is likely to continue but at a slower rate, particularly for the more discretionary higher end.