Perception and reality in Prime London

It is over three years since prices in the prime London market bottomed out. Over this period there has been a strong rebound in prices such that on average they are 21% above their 2007 peak in central London.

However, there are signs that price growth is starting to level off in the face of renewed economic uncertainty and the changed tax environment.

In the core areas of central London prices continued to rise in the second quarter of the year with values in locations such as Chelsea, Mayfair, Belgravia and Knightsbridge up by over 1%. However, in Marylebone, Notting Hill, Kensington and Holland Park they fell marginally.

The wider benefits

While international buyers have been a familiar feature of the prime London markets over the 30 years that we have been monitoring them, they have been particularly crucial to the market over the recent past. By contrast, there has been precious little sign of domestic bonus money since the downturn.

In 2011 and 2012 overseas buyers accounted for one third of buyers of all prime London property and 59% in central London (78% in the new build markets over £5 million).

There is a common perception that the majority of such buyers sit in and out of London, avoiding spending 90 days in the country and thereby remaining non-resident for tax purposes. But our latest analysis shows that two thirds of overseas buyers across prime London are purchasing their main residence. In central London the figure is just under half. For these buyers, it has not just been about a safe haven purchase or an exchange rate play, although both have clearly played their part in initiating and sustaining the recovery.

The wider benefits of London as a place to live and work are just as important. This is influenced by, though not entirely dependent on the UK tax environment which has been favourable. Yet there is little doubt that the stamp duty and associated tax changes for properties worth over £2 million have made it more difficult to structure transactions in a way that protects the occupier’s tax position.

Push and pull factors

It is also clear tax changes have contributed to a slowdown in activity, and that it will take time for the market to absorb the higher tax burden associated with the ownership of prime London property. This indicates a lull in the market that we built into our forecasts for 2012 and 2013 published back in November last year.

But this does not indicate that the market will be destabilised. The strong cultural, economic and political ‘pull’ factors of London remain unaffected.

Education is also an important pull factor that can impact on the nature of international demand in a specific location. For example, it accounts for strong demand among French buyers around the lycées of Kensington and Fulham.

The ‘push’ factors driving buyers to London change, affecting who is buying, where and what. In the 1970’s demand was dominated by Middle Eastern oil money before the arrival of US bankers and brokers in the early 1980’s.

In the early nineties money from the Asia Pacific region took advantage of a weak sterling while in the mid-noughties wealth generated across Western and Eastern Europe flowed into the prime markets of London.

Currently the biggest net inflows of international buyers are from Russia, Italy, France, China and India.

Pausing for breath

The very wealthy from these countries have ensured that sales of £5 million+ property have remained strong despite a recent lack of urgency among buyers in other parts of the prime market.

In the second quarter of this year there were more than 100 sales of £5 million+ property in London. Aggregate proceeds of these sales exceeded £1 billion for only the fourth time in the past five years. New build stock tailored to the needs of these buyers has fared particularly well, accounting for 15% of such sales.

This high-end activity indicates that the fundamentals of the prime London markets look sound. This should underpin medium-term price forecasts. However, lead indicators of demand, such as applicant registrations, suggest a cooling in demand and a period where the market as a whole pauses for breath.

Taken from
Residential Property Focus Q3 2012