Prime and super-prime residential property in the UK
From Grade I listed villas overlooking Regent’s Park to modern apartments on the banks of the River Thames, homes in London – and many other parts of the UK – attract buyers from around the world.
In the prime London property market, strong demand has produced returns of almost 300% over the past 20 years1. That’s three-and-a-half times more than global equities, for example, according to research for Barclays Private Bank by the global real estate agent Knight Frank2. It defines prime property as the top 10% of any local market, while super prime covers properties worth more than £10m in London, and more than £5m in the rest of the country.
Political headwinds have buffeted the UK’s residential property market in recent years, including the UK’s vote to leave the European Union, while tax reforms have also had an impact3.
Now, the outlook is improving. After years of falling prices, conditions stabilised in the first half of this year. Despite the wider market uncertainty, buyers from the UK, Europe, the Middle East and Asia continue to be drawn to the Capital as a place to call home, to use while their children go to school, or to own as part of a carefully-planned strategy of portfolio diversification.
“There may be volatility in prices over the short to medium term, but residential property is likely to remain an appealing asset for many investors,” says Syed Raza, Head of Global Banking and Credit Solutions at Barclays Private Bank. “While the political upheaval of recent years has certainly given buyers pause for thought, the low cost of borrowing continues to underpin the market – and, for overseas buyers, the depreciation of sterling has offered significantly increased value.”
Stability returns to London’s super-prime market
The last four years has seen a slide in both prices and the number of transactions in London’s super-prime market. In Chelsea, for example, prices at all levels fell by 15.5% between August 2015 and March of this year in sterling terms4.
However, prices appear to be at a turning point. In the first quarter of 2018, the number of new prospective buyers registering for properties worth £10m or more was 7% higher than in the same quarter of last year, Knight Frank says5.
One reason for this levelling out of the market is that sellers have become more realistic about pricing. In particular, agents say that many are adjusting their asking prices to take account of the recent substantial increases in stamp duty, which were introduced by the government in December 2014 and then again in April 2016. These changes particularly affected the most valuable transactions.
Another factor is the fall in the value of sterling, triggered by the UK’s vote in 2016 to exit the European Union. International buyers account for around three-quarters of all super-prime sales in the Capital, with many benefiting from the increased purchasing power of their domestic currency6.
This doesn’t mean that headwinds in London’s super-prime market have disappeared. The continuing uncertainty over the precise terms of how the UK will leave the European Union is one factor which might worry buyers.
Nevertheless, the outlook for the super-prime segment of the London property market now looks more positive than it has done for some time. The recent slowdown has left London looking better value compared to other international cities popular with super-prime buyers, while its traditional attractions also remain in place.
“Drivers such as London’s status as a global financial centre and the quality of its schools are as strong as ever,” argues Tom Bill, Head of London Residential Research at Knight Frank. Indeed, non-British pupils now account for 5.4% of all children at independent schools according to the Independent Schools Council; the number of Chinese pupils studying in the UK, for example, has almost trebled since 20077.
Buyers hunt for a bargain in the prime London market
The trends seen in the super-prime market in London are also evident in the Capital’s prime market. Stamp duty reform and political uncertainty have both had an impact on confidence, although some momentum is now returning, with prices potentially rising in the second half of this year.
“Buyers seem to be returning to the market,” says Knight Frank’s Paddy Dring. “In the prime market, those moving for specific needs – to upsize or downsize, for example, or for their children’s educational needs – are driving the market again.”
Land Registry data suggests prime sales volumes are now recovering8. There have been marginal annual increases in the number of both £1m-plus and £2m-plus properties sold outside Zone 1 in recent months for the first time since 20169.
Like the super-prime market, the adjustment made by sellers on stamp duty has helped. The cost of the tax is now mitigated at least in part by lower asking prices. Nevertheless, buyers continue to drive a hard bargain. In April 2018, the typical prime central London property took 25% longer to go under offer than in January 2016, even though viewings were up 35% over the same period10.
That value is important, both to buyers looking primarily for a place to live and those more focused on investment. Knight Frank calculates that the yield on prime central London property currently stands at around 3.2%, close to a six-year high and a 2 percentage point premium over 10-year government bond yields11.
“Aside from the hard calculations, London retains its appeal on the international stage, despite the Brexit debate,” says Syed Raza, Head of Global Banking and Credit Solutions at Barclays Private Bank. “The recent Global Power City Index still rated London as the world’s most attractive city, and for the sixth year running, on the basis of its economic prospects, but also the lifestyle it offers.12
Gross yields for prime central London property
Source: Knight Frank Residential Research for Barclays Private Bank, June 2018
While the market for prime property outside the UK capital has lagged behind its prime central London counterpart for most of the last decade, its fortunes have reversed recently.
Prices remain below previous peaks. By March 2018, the price of prime property in rural areas was 11% lower than in 2007, according to Knight Frank, while property in prime town and city locations was 5% higher13.
However, in the first three months of 2018, countryside properties slowly started to catch up. Knight Frank figures show that prime rural markets rose by 0.5% over the course of the quarter14.
The main areas of the prime country market that attract international buyers are in the west of London, such as northern Surrey and the Cotswolds, as well as towns and cities like Bath and Oxford.
The potential early signs of recovery in the country market is also hinted at by data from the Land Registry, which shows there was a 10% increase in the number of £1m-plus sales completed outside London last year15. Underlying demand for prime countryside property, in other words, now appears to be strengthening.
As in other parts of the prime and super-prime market, the Brexit and the stamp duty changes of four years ago have had a significant impact on the country house sector.
Nevertheless, Knight Frank’s data suggests demand for prime property outside London is now picking up. More viewings were conducted during the first few months of 2018 and numbers of offers are increasing, particularly where sellers are taking a pragmatic view on pricing that reflects the cost of stamp duty.
“Buyers are focused on achieving value, so they may be in the market for longer and be more cautious than in the past,” says Knight Frank’s Paddy Dring. “But while they’re keen to make the right decision for the long-term and to cast the net wider, they are now buying.”
Performance of prime country property
Rent or buy?
In the prime lettings sector, Knight Frank predicts rental value growth will make a return this year following a difficult period. In London, for example, it is forecasting growth of 0.5% during 2018; by contrast, rents were falling at rates of around 4% to 5% for much of last year16. On countryside properties, meanwhile, Knight Frank also sees increasing demand, with more buyers opting to rent before making a purchase17.
The slowdown in the prime lettings sector in recent years is primarily due to high levels of stock. This is the result of more owners deciding to let their property until the future trajectory for house prices becomes clearer, against the backdrop of Brexit and stamp duty hikes.
The Brexit vote has prompted some corporate tenants to think hard about committing to tenancy agreements or to trim budgets. In the financial services industry in particular, there is widespread nervousness about the terms of the UK’s departure from the EU, with warnings that there could be an outflow of executives to other European financial centres18.
While these headwinds have inhibited rental value growth, some landlords are now moving out of the sector following a series of taxation reforms announced by the government. Landlords are losing the right to set mortgage interest payments against tax, for example.
Knight Frank says there was a 15% decline in the number of prime London properties listed for rent over the 12 months to April this year19. This contraction is now feeding through into upwards pressure on rents.
Still, investors will need to pick the right part of the market to benefit from this trend. Knight Frank’s London data shows that while the number of tenancies agreed at more than £5,000 a week rose by 24% over the year to April, tenancies worth between £1,000 and £5,000 grew at just 1%20.
Outlook for 2018 and beyond
It appears that stability has returned to the prime and super-prime residential property markets. The outlook is more encouraging, with continuing low interest rates and demand from a diverse range of domestic and international buyers underpinning prices in the future.
Knight Frank predicts that prime central London house prices will rise 0.5% in 2018 and 1.5% in 201921. By 2022, it predicts prime central London properties in the east of the city will have increased 13.1%, while those to the west will have grown by 12.6%22.
For prime property in England and Wales as a whole, it expects 1.5% growth in 2018, 2% in 2019 and 9.9% up to 202223.
Purchasers continue to be in the driving seat and are determined to secure good value as they buy for the long-term, often with one eye on passing property on to the next generation. However, sellers willing to be realistic about pricing are securing sales.
The political questions facing the UK could still change the picture, particularly if the Brexit negotiations do not reach a satisfactory conclusion. Nevertheless, optimism is now the predominant emotion in the sector.
“Low interest rates, the value offered by sterling, and London’s attractiveness to a global audience are all important positives,” says Barclays’ Syed Raza. “High-value UK property will continue to attract buyers motivated by the need to move home and those seeking exposure to property as they look to diversify their investment portfolios beyond equities, bonds and other assets. It’s clear the fundamentals of the London property market remain resilient against the current backdrop.”
Barclays Private Bank can help make your property purchase a reality. For everything from support identifying the right property, to getting specialist finance, please contact your Private Banker or read more on our banking and credit solutions page.
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