Next May’s general election has dominated the fortunes of the prime central London sales market in 2014.
Tom Bill from Knight Frank said: "The prospect of a mansion tax has contributed towards slowing demand, though annual price growth has not deviated far from an average of 7.9% over the last two years. Our view is that will change next year, when we forecast zero growth.
If the threat of a mansion tax recedes, some degree of recovery is likely in the second half of 2015, as pent-up demand is released. To what extent the tax would be absorbed by the market if introduced is currently difficult to assess given the lack of detail.
Whatever the outcome of the election, our view is that growth will be less marked over the next five years than the last five, when prime central London’s safe-haven appeal during the financial crisis contributed to a cumulative rise of 61%.
We forecast 4.5% growth in 2016 with a steady rise towards 6% in 2019, underpinned by the fact demand will continue to exceed supply.
However, there will be areas of outperformance, which could be particularly marked away from traditional prime markets as demand becomes increasingly focussed on the quality of the property and amenities and not simply the postcode.
Such overlooked residential markets include Bayswater, Fitzrovia and Midtown. Meanwhile, a series of developments around the City and fringe areas like Shoreditch is likely to keep above-average upwards pressure on prices in this evolving prime market.
The effect of this focus on property and amenities is demonstrated in Mayfair, where a high-quality new-build development pipeline means record prices are likely to be set over the next several years in what is an established super-prime market.
Elsewhere in 2014, there was double-digit annual growth in the area north of Hyde Park that extends from Notting Hill in the west to Islington in the east as buyers sought more value away from traditional markets. It suggests growth here is likely to outperform the average and a recent rise in demand for property near Regent’s Park should continue.
Infrastructure will continue to play a key role and our view is that property located close to Crossrail stations will continue to outperform local markets.
The effect will be felt in east London, underpinned by a number of new schemes that will cement the area’s reputation as a prime residential market.
Rental values in prime central London returned to growth at the start of 2014 as the UK economic recovery took hold.
The number of tenancies agreed rose 48% in the first nine months of the year compared to 2013 and annual growth is nearing 2%. In addition to this positive momentum, the rental market is likely to see a short-term gain from the sense of uncertainty that will moderate demand in the sales market in the run-up to the general election.
In the longer-term, rental value growth should accompany the recovery taking place in the economy as companies hire more staff and, in particular, the financial services sector recovers.
The prime London lettings market will also benefit from the city’s young and growing tech workforce and an increased openness to renting after strong growth in the sales market.
As with the sales market, rental values will be supported by a series of high-quality schemes in prime central London. A similar effect is likely in areas of prime outer London where institutional investors are becoming more active in the private rented sector.
We forecast cumulative rental value growth of 17% in both prime central and prime outer London between 2015 and 2019."
source: Knight Frank Residential Research
