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London Property Monitor - Q1 2014

Thu 24 Apr 2014

  • Growth in Outer Prime London continues to outpace Prime Central London with a 14% annual rise. Growth has been particularly strong in the areas of Balham, Clapham and Brook Green, which have experienced annual growth of 17% or more
  • One-bedroom properties in Outer Prime London increased in value by 26% in a year equivalent to 104,009
  • There has been a marked decrease in the number of overseas and foreign nationality buyers, particularly in Prime Central London, where this group made up just 21% of purchases in Q1 2014 a two-year low


Outer Prime still outpacing central areas

Property prices in all Prime London have risen by nearly 13% over the last year. The average price of property in Prime London has now reached over 1.5m, following a 4.3% quarterly increase during Q1 2014.

But it is once again the popular areas of Outer Prime London which have experienced the fastest rate of house price growth, showing a 14.1% annual uplift in property values.

The areas of Outer Prime London with the highest levels of annual growth over the course of Q1 2014 were Balham (26%), Clapham (25%) and Brook Green (17%). With the average property price in Outer Prime London around 70% of that in Prime Central London, these areas are popular with those who may have been priced out of more central areas. These London villages have their own unique character and a strong community atmosphere, which make them highly desirable among UK buyers with young families.

In Prime Central London, the average price of property now stands at 2,192,849, following an 11.9% annual rise in property prices. The areas with the highest annual growth in this part of the capital were Kensington and Notting Hill, reporting a 15% and 13% rise respectively. Highly desirable, new-build developments in these areas, such as Holland Green in Kensington, are commanding record prices as high as 4,000 per square foot, and creating new benchmarks for the area.

Million Pound Homes

Prop propsOver half (54%) of all property in Prime London is now worth more than 1m. This follows a 2% rise in the number of million pound homes in Prime London compared to last quarter, and an 8% increase on a year ago. In the more expensive areas of Prime Central London, over two thirds (70%) of all property is now worth 1m or more. However, the volume of 1m homes has increased at a faster pace in Outer Prime London, with a 9% increase in the past twelve months, compared to 6% growth in Prime Central London.

Across all Prime London, properties in the 2m+ price bracket have increased at only half the rate of 1m+ homes, with just 4% more properties in this price bracket than at the same time last year. Higher levels of stamp duty are still slowing growth in this section of the market, and the recurring threat of a possible mansion tax continues to quell demand among higher-end buyers. The fact that almost a quarter (24%) of all properties in Prime London are worth 2m or more demonstrates the huge tax burden already being placed on property owners in the capital. Recent HMRC data found that people living in Britains 10 richest constituencies, including Kensington and Chelsea, pay almost 10 per cent of the total tax paid throughout the UK more than the whole of Scotland, Northern Ireland and most English regions.

Property type breakdown

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In terms of a breakdown by size, the properties with the fastest annual growth were one-bedroom properties in Outer Prime London. These appreciated in value by over a quarter (26%) in a year equivalent to 104,009 in the past twelve months. Following close behind, three-bedroom properties in Prime Central London appreciated by 18% in a year, equivalent to 384,622 in value. With capital gains like these, its little wonder that Prime Central London property has retained its place as a haven for family and pension fund investors in particular.

The premium paid for Prime Central London property, compared to all Prime London, has fallen to a record low of 42%. This represents a fall of 2% from the same time last year, illustrated in the graph below. This reflects greater levels of demand in the more affordable areas of Outer Prime London, and hence prices are increasing at a faster rate than the more central areas. However, the third quarter of 2013 saw prices in Prime Central London surge ahead once more, and this trend could continue again later in the year.

Supply versus Demand

ratio buyers propertyGrowing levels of demand in the face of an all-time low of available property has led to fierce competition among buyers and to some of the sharpest price increases in recent years. Compared to the same point last year, there has been a 20% increase in demand and a 25% fall in the supply of properties. Such a strong sellers market led to some extraordinary conditions at the beginning of the year. In January, properties were selling in record time, with over a third (34%) being sold within two weeks of being put on the market.

However, as we predicted at the beginning of the year, this trend is beginning to stabilise. More sellers are marketing their property for sale during the busier spring season, and the supply shortage is easing. In Prime London overall, the number of registered buyers per property has decreased from 24 in January, to 23 in February, to 20 in March. As a result, buyers are being given a bit more breathing space.

If this trend continues into the summer, we expect to see the emergence of a healthier and more sustainable property market, and an easing of the frenzied conditions which marked the start of the year.

The lettings market

Rental rates in Prime London overall have remained relatively static over the past year, with a slight growth of 0.8% recorded in the last quarter. The average weekly rent in Prime London now stands at 594.91, while in Prime Central London areas, the average is 675.75.

However, growth has been faster in parts of Prime Central London, which have recorded a 1.7% growth over the past twelve months. This can partly be attributed to the improved economic mood, which has created positivity among city firms and boosted the thriving corporate lettings sector. Three-bedroom properties in central areas such as Kensington and Chelsea have seen the biggest increases, with a 5.1% increase in rental rates in the last quarter. These areas are popular locations for city workers and foreign nationals living and working in London.

UK and overseas buyers

In the last quarter, there has been a surge of UK buyers and a marked decrease in the number of overseas and foreign nationality buyers. In Prime London overall, UK buyers made up 78% of all purchases in Q1 2014. In Prime Central London, typically a stronghold for non-UK buyers, the proportion of purchases by overseas and foreign nationality buyers has fallen to a two-year low, with just over a fifth (21%) of purchases made by this group. This is considerably less than the medium term average - during 2012 and 2013, overseas and foreign nationality buyers accounted for around 40% of all purchases.

Measures to increase taxation aimed at property investors have affected the Prime London market and threaten to blemish the UKs reputation as being open for international business. For example, the enhanced Capital Gains Tax for overseas buyers announced in last years Autumn Statement is causing considerable uncertainty in local markets, particularly as the Government is yet to clarify how, or from what date, the capital growth will be calculated. This, together with the punitive rates of stamp duty being charged on any unoccupied properties purchased by overseas investors, announced in last months Budget, threatens to dent inward investment to the UK. The reality is that, until other forms of investment become more attractive, Prime London property will continue to be seen as a rock solid investment and akin to a global reserve currency. However, markets change and in a less generous market, these measures could be harmful in ensuring London retains this reputation.

Cash buyers and investors

In Prime London overall, 39% of purchases were made by cash buyers in Q1 2014. This was a 2% increase on the last quarter and a 0.5% increase on the previous year.

Over a quarter (26%) of total purchases in Prime London in the last quarter were made by investors, a 1% increase on the previous year. In addition, 17% of buyers purchased property as an additional residence 6% more than the previous quarter.

Across Prime London overall, there has been an increase in family or pension investors, who are buying with their childrens future in mind and tend to look for long-term capital growth rather than short-term rental yields. However from next April, when pension reforms announced in the recent budget begin to take effect, we may see a marked increase in pension investors releasing funds from their pension pots in search of high rental returns from Prime London property.

Looking forward...

looking forwardSome commentators have sparked fears about the London property market, stating that rising interest rates, a strengthening of the pound and the end of easy money on global capital markets could cause Londons market to decline as the influx of foreign buyers dries up. But until other types of investments become more competitive, the Prime London property market will continue to be a highly desirable opportunity for investors from both home and abroad. In addition, with the 2015 general election on the horizon, any interest rate changes which do come into effect are likely to be modest and controlled, and designed to avoid sending shockwaves through the mortgage market.

Methodology

The Prime Market Monitor uses a repeat valuation methodology that tracks values in a robust mix-adjusted basket of properties across all Prime London in the main areas in which Marsh & Parsons operates. Prime Central London comprises representative baskets of properties covering Chelsea, Kensington, Notting Hill, Holland Park and Pimlico. Outer Prime London comprises outer areas such as Clapham, Balham, Battersea, Barnes, Little Venice, Fulham and Brook Green. Prime London is used to describe all these areas combined including Prime Central London and Outer Prime London.

Supply and demand statistics are based on an audit of Marsh & Parsons registrations and instructions during the quarter. Buyer profile information taken from Marsh & Parsons quarterly MI data. Lending data is taken from the latest CML statistics available.

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