London prime real estate shows its resilience
Please note: The external views expressed in this article are not the views of Barclays Private Bank, and forecasts are not a reliable indicator of future performance. Professional advice should always be sought when selling or buying property.
After the pandemic-induced lull, international buyers are once again returning in greater numbers to London’s trophy postcodes – attracted by a market that’s gaining real momentum.
Property prices in the exclusive neighbourhoods of Belgravia, Chelsea, Mayfair, Knightsbridge and Kensington have remained somewhat subdued since 20141 – unlike much of the rest of the UK, which has experienced 13 years of near-uninterrupted house price growth2.
Global buyers are back in town
The prime central London (PCL) market is like no other in the UK, with overseas buyers now thought to account for almost half of all purchases3.
Demand for homes there tends to reflect global political and economic trends. A series of hard-to-call general elections, the Brexit referendum, a global pandemic and subsequent ban on international travel, as well as the more recent war in Ukraine, have all conspired to keep PCL property prices in check for the best part of a decade.
But local factors are also important, as well as the draw of London itself. A magnificent metropolis that has everything – from its history and culture, right through to its Michelin-starred fine dining and vibrant nightlife, not to mention the great schools, its property safe-haven status and world-renowned financial hub – London remains one of the world’s most-loved cities.
“The much-needed return of both commuters and international buyers to central London has given the prime London property market a welcome boost,” says Stephen Moroukian, Head of Product and Proposition for Real Estate Financing at Barclays Private Bank.
So, too, the weaker pound (especially when compared with the US dollar), which continues to discount UK property prices for overseas buyers.
“We’re seeing a market led by North American and Middle Eastern buyers – the two strongest buyer groups in prime central London – but we’re also starting to see an increase from other countries, including the Asian hubs,” adds Moroukian.
A cooling-off period?
The UK’s housing market is gearing up for a pivotal 2023. With a spike in the cost of mortgage borrowing and a challenging economic backdrop to contend with, estate agents are forecasting house price falls for the first time since the 2008 financial crisis – Savills expects the national average to fall by 10% this year4. But both they and their industry peer Knight Frank see the PCL market playing out very differently, with more modest falls expected of just 2%5 and 3%6 respectively.
“I see distinct differences between the two markets,” says Lucian Cook, Head of Residential Research at Savills. “The mainstream UK housing market is facing a squeeze on mortgage costs that’s now affecting the purchasing power of buyers – and its fortunes are heavily linked to the cost of debt.
“Whereas the PCL market is far more driven by what’s going on with overseas equity. PCL is also somewhat insulated from debt issues, as many buyers there are cash rich, or tend to use debt on a fairly discretionary basis – to suit their financial circumstances – rather than as a necessity to fund purchases.
“Equally, we shouldn’t forget that the PCL and UK mainstream markets are at very different points in their trajectory. That strong burst of house price growth, which we saw from June 2020 to September 2022 in the mainstream market, just hasn’t been replicated in the PCL market – due to all the restrictions we’ve had on international buyers.
“But these international buyers are now coming back to London and it’s bringing overseas equity into that part of the market – and we’re already seeing it deliver stronger performance.”
Prices “holding firm”
Jo Eccles, Founder and Managing Director of prime central London buying agency Eccord, agrees: “Top prices are being paid for genuine best-in-class properties and in super prime, where we’ve seen a flurry of high-value transactions.
“And while sellers are more open-minded compared to six-to-eight months ago, the discretionary nature of many family home sellers in the wealthiest neighbourhoods of London means prices are holding firm.”
Transactional data backs these viewpoints up, too. There are signs of a nascent recovery in PCL, with activity now up 48% on pre-COVID levels, according to the latest data released by Savills and property lender CapitalRise7. By contrast, property transactions for the rest of the UK grew by just 9% in the same period (comparing the first six months of 2019 and 2022).
“The more central you get within PCL – the areas of Belgravia, Knightsbridge and Mayfair – and the higher the price, the more relative activity there is,” says Stuart Bailey, Head of London Prime Sales at Knight Frank. “We’re very much seeing a flight to quality, as well as a flight to the safety of London as an investment.
“There are also a lot of cash buyers entering the PCL market, as well as there being fewer mortgage buyers around, so there’s less competition – and it’s obviously a pretty good time to be buying right now with the odd price reduction to be found.
“And as much as anyone uses the term “discretionary buyer” in the PCL market, there are also “discretionary sellers” – those owners who no longer need to hold on to their properties if they’re seeing mortgage costs rise steeply.
“So, it means we’re in a nice moment where there are currently both motivated buyers and incentivised sellers.”
It’s worth nothing here that while cash buyers are very much king in the current market, for people buying properties from outside the UK, considerations about taking on debt shouldn’t just be about liquidity – it can also be about structuring your tax affairs in the right way. But professional advice should always be sought when buying or selling a property.
How high could rents go?
A scarcity of rental properties across PCL has led to fast-rising rents – with average rental values now 24% higher than pre-pandemic levels, according to Knight Frank8. But there are signs that these supply-demand imbalances are slowly reducing, with supply picking up and prices moderating.
“All the chatter is about more stock coming on to the market,” adds Bailey. “After having a complete dearth of stock – with prices shooting away – we’re now seeing a lot more rentals. A lot of this stock is coming from “accidental landlords” who don’t want to sell in the existing market, but instead want to sit it out and get some income from their property.”
London’s enduring appeal
Despite losing some of its shine during the pandemic-induced lockdowns of 2020 and 2021 – driven by the so-called “race for space” as buyers searched farther afield for bigger homes and gardens – London never really lost its lustre.
It’s a similar story for property prices in equity-rich PCL, which look primed to recover ahead of the mainstream, and heavily-mortgaged, UK market – and central London has history on its side, too. Research from Savills shows that following every economic downturn in the last 50 years, PCL prices have always bounced back significantly further and faster than the wider London or UK property markets9. (Please remember that past performance is never a guarantee of future performance).
“London’s enduring appeal, and its coveted real estate, remain as big a draw as ever for international property buyers,” concludes Moroukian at Barclays Private Bank.
“Of course, conditions aren’t perfect, but when you consider the tricky global climate, and tensions that we’re seeing in certain pockets, then it’s testament to London’s resilience that buyers still see it as a place to be.”
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