Prime London Residential Markets

Prime London Residential Markets
 
Challenges & Opportunities

21 September 2016, by Lucian Cook

With the prime London housing market facing a number of challenges, buyers and sellers will be keener than ever to ensure they act wisely

 

Here we look at five different types of buyer whose decisions will shape the market over the next five years:

 

 

Typically confined to the most central and expensive streets of prime central London (PCL), the ultra high net worth trophy hunters have experienced a more volatile market than perhaps any other in the past five years. They have been most affected by changes in UK taxation but, given their wide international profile, now have the most to gain from weaker sterling.

The buyer of a £10m house for use as a second home, will have seen the stamp duty on that property double in two years. However the tax inclusive cost of purchase will have fallen by 19% in US dollar terms over that period.

Despite uncertainty around the vote to leave the EU, we expect them to continue to view London as a safe haven in a global context. Increased exposure to stamp duty, capital gains tax and inheritance tax is, however, likely to temper their exuberance and focus their activity on the very best addresses.

 

 

These buyers are the mainstay of the more domestic prime family housing markets such as those of South West and West London. Though they have accumulated significant levels of equity in the past decade, they have seen broadly flat prices in the past two years. This reflects the increased stamp duty burden on buying a larger home and the effect of mortgage regulation on their ability to take on any additional debt needed to trade up the ladder.

On the flipside, a low interest rate environment means that securing a decent fixed rate or tracker mortgage now makes upsizing more affordable, where buyers can do so without overstretching themselves on loan-to-income multiples.

Over the next five years we expect this buyer group to trade less often in what is expected to become more of a needs-based housing market. Buyers will have a close eye on the impact of the referendum result on the London economy, with the prospect that demand from those employed in the financial and business services sector becomes less dominant.

 

 

Investors are a key component of demand in the prime London markets, especially in central London and East of City markets where overseas investment activity is strong.

In the past 10 years investors have seen strong capital growth but progressively lower income yields. Gross income yields now stand at 3.0% in central London, though there remains significant variation around this. For example, yields in Canary Wharf are at 4.2%. In the future we expect investors to become more yield focused.

Specifically with an additional 3% stamp duty now charged on the purchase of investment properties and modest prospects for rental and capital growth, we expect investors to become increasingly selective in what and where they buy.

Overseas investors have historically played an important part in kick-starting the prime London markets when they sense a buying opportunity. Accordingly, they will be a key barometer of future turning points in the market.

 

 

One of the features of the past 10 years has been a reduction in the number of families selling in London and moving out of the capital. However that started to change in 2014. In the first six months of this year buyers from London accounted for nearly a third of all buyers in the prime suburban and commuter markets.

Of these relocators from London, 48% were aged between 30 and 39 and further 39% aged 40-49. Half had two or more children.

The value gap between London and the suburbs, though very wide in historic terms is now narrowing. Together with affluent urban locations in the commuter zones, they are now showing stronger price growth than prime London and are likely to continue to do so.

For those wishing to take advantage of the ability to buy more space in the country, realistic pricing of their London property will be key.

 

 

The prospect of low interest rates and a generally less competitive buying environment will present opportunities for affluent households looking to get a foot on the housing ladder, albeit subject to their funding requirements.

Now more typically in their mid thirties than twenties, in the past five to ten years this group have typically widened their search into London’s emerging prime markets where they can more easily find good quality accommodation with at least two bedrooms.

These locations have broadly fallen into two categories. The first are those on the fringes of established areas – such as Earls Court, Marylebone or Pimlico in central London or Kings Cross and Highbury in North London. The second are areas such as Shoreditch and Aldgate, which have benefited from the rise of East London.

In the next five years we expect the extent to which affluent first-time buyers explore new markets to slow. As a result, their activity will be concentrated in locations that have already been pioneered.

 

 
The value gap between London and the suburbs is narrowing

▲ The value gap between London and the suburbs is narrowing

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