The pipeline of transactions in prime London residential markets expanded further in July as supply continued its game of catch-up with demand, according to Knight Frank’s latest prime London sales report.
Data found that the number of offers accepted across the capital last month was the highest figure in a decade. Knight Frank head of UK residential research Tom Bill says this underlines the current strength of appetite for higher-value property in London.
A combination of factors has made the pipeline stronger than it was in the final months of the stamp duty holiday in 2021, including the resumption of international travel.
Other factors include prime London markets being “relatively good value” as buyers continue to reassess how and where they live after Covid.
While all the attention was on the escape to the country trend during the pandemic, price growth in London was lacklustre, even after six subdued years.
Average prices in prime central London are still 15% down on their previous peak seven years ago.
There is also a creeping sense that investors are looking more closely at safe-haven assets, which have traditionally benefitted the prime London property market.
Bill says investors’ nerves have been clearly on display in 2022 as central banks attempt to avoid stagflation.
After steep declines this year due to a strengthening US dollar, the gold price has risen modestly since mid-July against a backdrop of geopolitical tension.
There are risks for the market on the horizon, but they are not yet looming large, including the changing rate environment.
However, the impact has not yet had a material impact on UK property markets, with mortgage offers standing for six months and most people on fixed-rate mortgages.
Rising mortgage rates are one of the reasons prime prices have slowed down in global markets, but prime London markets are also likely to be more insulated from rising borrowing costs than other UK locations due to higher levels of affluence.
While average price growth in a prime central location (PCL) was 2.8% in the year to July and 5.2% in prime outer London, the performance was stronger in higher price brackets.
Another unknown is the identity of the new prime minister in September, however, Bill says that a new UK government that will be in ‘pre-election mode’ is “unlikely to represent much of a short-term risk to the market”.
London lettings data
The prime London lettings market remains a long way from normality, according to Bill.
While demand is robust as the economy re-opens and tenants reassess how and where they live, supply remains tight.
Bill explains that there have been tentative signs of stock levels rising in pockets of London but not to the extent that it is anything other than a landlord’s market still.
Meanwhile, the imbalance between supply and demand widened in July. A flood of short-let properties came onto the market last year due to staycation restrictions, which drove down rental values.
As the economy re-opened, supply subsequently fell and demand spiked, causing rents to spike and the arrival of international students and corporate tenants this summer will also fuel the imbalance.
Bill says it is “unlikely the situation will change meaningfully” while the sales market in London remains so robust.
Strong trading activity has led to the absence of so-called ‘accidental landlords’, or owners who let out their property after failing to achieve the asking price.
However, following the Bank of England’s 50 basis point interest rate rise last week, there will be further upwards pressure on mortgage rates, which we expect to cool demand later this year.
Bill explains that there remains strong upwards pressure on rental values. Average rents in PCL rose 22.2% in the year to July, a rate that has narrowed from a peak of 29.2% in April. In POL, the annual rise fell to 17.3% from 23.5% in April.
