Real estate
July 7, 2022
7 mins

Prime London homes’ revival continues

July 7, 2022
7 mins
Citi Private Bank
SUMMARY

The market for the UK capital’s finer homes has come back strongly since COVID lockdowns. Despite increased economic uncertainty, its resilience may persist.


Against a backdrop of geopolitical upheaval and volatile global economies, prime London property markets are on an upward trajectory. Demand is healthy, international activity is returning, albeit gradually, and prices are increasing.

So, what might the future hold for the capital’s finest homes? Does the recent performance of London’s prime and super-prime markets demonstrate the strength of London’s enduring appeal?

Progress on all fronts

Despite a chequered and subdued past six years, there has been an upswing in momentum in London’s luxury property market recently. According to leading real estate agency Savills, the average price of prime property across London – property valued at £1 million ($1.21m) or above – grew by approximately 3.2% through 2021.1

Last year probably represented the strongest market that I’ve seen since perhaps 2013, says Ollie Marshall, Director at Prime Purchase, a leading property buying agency owned by Savills. It's the first time since then that we’ve really seen the UK market, specifically prime London markets, firing on all cylinders,

Volume transactions are the highest we’ve seen in more than six years, and now that is impacting prices, which are beginning to rise.

Tom Bill, Head of UK Residential Research at Knight Frank, adds: Demand has been very strong across all price brackets, and actually all geographies in the UK property market in the last twelve months or so. The prime London market is no exception.

There are, however, tensions between supply and demand levels, in what is a fragmented property market. Despite supply picking up during real estate calendar’s active spring months, it is still imbalanced2 – a factor that is having a significant impact on pricing.

According to figures from Knight Frank, January 2022 was defined by high demand and low supply – the number of new prospective buyers was 72% above the five-year average.3

The supply-demand ratio is incredibly tight, confirms Mr Marshall. Supply is a massive issue, something that’s especially prevalent in areas such as Notting Hill. I was at a house some weeks ago, priced at around £13 million ($15.75m). There were four offers of around £1 million pounds ($1.217m) above the guide price within a few days.

Examining buyer profiles, Mr Marshall says domestic UK buyers are playing a vital role in prime purchases. However, the relaxation of travel restrictions is seeing a resurgence of international activity within central London’s prime property market.

UK buyers have been typically rarer as they’ve been rather less able to afford it, he says. But obviously as prices have ground lower and people in the UK have become wealthier, UK domestic demand has been somewhat of a driving force in the prime central London markets over the last few years.

Now that travel is opening back up, we are seeing a resurgence in demand from Gulf countries such as Saudi, Qatar, Kuwait, and UAE. We’ve also seen an upswing in activity and inquiries from Asia, China and the Far East; Hong Kong has had a huge political upheaval recently and there’s a lot of wealth looking to move.

And then the US and Canada are benefiting from a strong dollar relation to the pound, which is sitting at about $1.25, which historically has proven an attractive level to buy the pound, he adds.

A series of significant events

The impact of recent major events on property markets has been momentous. Brexit, together with the surrounding political uncertainty, caused a crash in London property activity. Prime central property transactions fell by as much as a fifth in the aftermath, and the morning after the UK’s vote to leave the EU, the pound fell by 10%.4

Combine this with three national lockdowns, and COVID-19’s influence on buying patterns – and it’s clear that prime London markets have faced unprecedented volatility.

But what impact has the pandemic-led ‘race for space’ had on inner-London buying patterns, compared with the British countryside markets?

The country house market was probably the best performing market in terms of price growth over the last couple of years; I haven’t really seen a frenzy like that for as long as I’ve been working, says Mr Marshall.

COVID-19 also caused changes to British stamp duty rates. Stamp duty, a tax levied on property purchase, was not applied to the first £500,000 ($605,000) of a property’s value between July 2020 and July 2021, in a bid to stimulate the market during the pandemic.

Similarly, in considering the impact of recent events, it’s worth noting that the Bank of England’s base interest rate fell to a record low of 0.1 per cent in 2020; making this period a comparably cheap time to borrow. As of early June 2022, it is set at 1.0%.

We had a very active market during the stamp duty holiday, probably some of the busiest months on record in terms of transactions and demand. I think there is a lot of demand left over from then – people who wanted to buy but didn’t,” says Mr Marshall.

There has also been a 2% increase in stamp duty for international buyers, but that hasn’t really had an impact on the market yet because there weren’t many international buyers coming in.”

This increase in international stamp duty came into place in April 2021, signifying a turning point in UK property law – placing domestic and international buyers on different financial playing fields for the first time.*

Changing trends

Buying behaviours have begun to shift since these pandemic-led patterns took hold in 2020. A reversal of COVID-19’s great rural exodus is a key example of today’s changing trends, as London’s prime markets have benefited from a resurgence of buyers seeking out the finest properties in a city that hasn’t lost its appeal.

We’ve seen a trend of boomerang buyers – people who have made that knee-jerk reaction and romanticised moving to the British countryside, been there for six months and decided it's not what they thought it might be. Now, lots of them are trying to come back again, says Mr Marshall.

Other trends include the growth of the turnkey market, inflation and its effect on development prices.

Inflation is becoming a real problem for build costs, which are probably up about 30% over the last year or two. The cost of a project is now a lot more than it was, and I don’t think that has yet been priced into the value of a non-modernised property. So, there will be a push towards turnkey products, as they were refurbished at a period when build costs were lower, says Mr Marshall.

Does the future look bright?

With the rising cost of living, the inflation spike, and geopolitical instability all taken into account, UK prices are forecast for single-digit growth of approximately 5% this year. However, forecasts of 22.2% growth in prime Central London in 2023 reflect the possible impact of the resumption of normal travel.5

Our feeling is that the prime central London market is due a pretty significant relief rally over the next 6-12 months, says Mr Marshall.

When you have a prolonged period of uncertainty, people sit on their hands. But people’s lives move on – they still have to move house, upsize or downsize. So all these transactions stack up and result is a spike of activity in the future. This is from both a domestic and international point of view.

I think there is an overdue period of house price inflation in prime central London. We expect this market to outperform other property markets next year, because it has been subdued over the last six years, adds Mr Bill.

The market is very active at the moment; demand is strong, supply is picking up. It will only get stronger once international travel returns.

Considering the continued resilience of London’s luxury property markets, one thing seems certain: the appeal of the capital is lasting. It has cultivated a reputation as a safe haven; a global city offering solid asset investment options. Considering today’s volatility, this position is becoming increasingly valuable.

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1 ‘Prime London house prices – Q4 2021’, Savills, https://www.savills.co.uk/research_articles/229130/323909-0, January 2022.

2 ‘Price growth on the horizon in Prime London markets’, Knight Frank, https://www.knightfrank.com/research/article/2022-02-09-price-growth-on-the-horizon-in-prime-london-markets, January 2022.

3 Price growth on the horizon in Prime London markets’, Knight Frank, https://www.knightfrank.com/research/article/2022-02-09-price-growth-on-the-horizon-in-prime-london-markets, January 2022.

4 Knight Frank, as of May 2022.

5 ‘UK Residential Market Forecast’, Knight Frank, https://content.knightfrank.com/research/367/documents/en/uk-housing-market-forecast-april-2022-8983.pdf, April 2022.