Prime London house prices have recorded an unprecedented two and a half years of steady growth,  according to latest analysis from international real estate adviser, Savills.  The firm’s prime London residential property index has recorded single-digit annual price growth for the tenth quarter in a row, marking a period of stability not seen since the index was established in 1979.

Double digit annual price growth has not been seen across the all prime London market since the heady days of 2009/10 when the world’s wealthiest individuals transferred their assets from stocks and shares into real assets. Since then, demand for prime London property has been strong, from both wealthy Londoners and the 34 per cent of prime London buyers who are from overseas, but has not resulted in overheating.  Transaction numbers are still below their previous long-term average and balanced supply and demand dynamics signal a steady market, Savills says.

Average price growth across all prime London has totalled a relatively modest 17.6 per cent since the end of 2010.  Annual price growth trended down marginally in 2012 and now stands at 4.7 per cent, but growth in the first three months of 2013, at 2.2 per cent, was up from 0.8 per cent seen in the final quarter of 2012.

“In historic terms, this rate of growth looks steady for a prime residential market and much less volatile than some other prime world markets,” says Yolande Barnes, director of Savills World research.  “It flies in the face of those who claim the market is overheating.”

“We had expected values to flatline this year, but the market, having for now absorbed the impact of new and increased taxation and the uncertainty concerning any possible future increases, continues to focus on London leading to a steady rate of quarterly growth in the first three months of this year.  Unexpected falls in the value of sterling mean that London still looks relatively cheap on the world stage, particularly set against rises in the costs of buying and owning in other world cities.  Continued, modest levels of price growth across prime London now look sustainable.”
Prime central London underperforms – unexpected growth in outer prime
Prime central London has marginally underperformed the wider prime London markets over the last 12 months, with total growth of just 3.0 per cent but this is where previous growth was strongest as the result of asset transfer after 2008 by ultra high net worth individuals.  Value growth in super prime (£5m+) sector of the market means prices now stand 33.5 per cent above peak.

Meanwhile, the outer prime markets of the South West (like Richmond, Putney, Wandsworth) have started to catch up with the centre. Prices here are 17 per cent above their former peak but now being driven by domestic purchasers who are either making money in the private financial sector in the West End (where bonuses are less of a rarity than in the City) or by sellers from prime central areas who are moving out of the core. This ripple effect has led to annual house price growth in the prime southwest of 5.6 per cent which significantly outperforms other areas and which seems to be accelerating, with 3 per cent seen in the first quarter of this year alone.

Barnes says that her team underestimated the continued demand for southwest London homes and did not expect values to rise this year.  “All the City of London indicators and forecasts on bonuses looked bleak, but there is still a burgeoning and successful, non-corporate financial services industry in London and wealth generated in this sector has been fuelling London’s non-core prime areas.”

Shift to income investment
“There has also been a shift in the nature of demand over recent months,” says Barnes. “We sense an increasing demand for income-generating assets, particularly from those who are already fully-invested in ‘trophy’ and ‘safe store of wealth’ assets.

“This may take buyers to more peripheral, higher-yielding locations in London, as already seen in the east of City markets of Canary Wharf and Wapping over the past 12 months.  These locations are very popular amongst young financial sector renters and have attracted investors, notably from Asia, drawn to new build stock at relatively low unit prices.  We expect new wealth, arising in both the UK and emerging world economies to continue acquiring real global assets, including London residential property.”