There is just cause for optimism, after all: consecutive records have been broken for the volume of transactions in the market, alongside a meteoric rate of house price growth.
The success has not, as many predicted with the end of the Stamp Duty Land Tax (SDLT) holiday, begun to abate. Nationwide reported the strongest start to a year in the property market since 2005, with an annual rate of price growth of 11.2% in January 2022.
Meanwhile, London’s Prime Central market is writing its own success story, with healthy levels of demand coupled with low levels of stock leading to price increases, as we edge back towards normality. Knight Frank reported, for the first time since the 2016 Brexit referendum, six consecutive months of price growth in PCL in the second half of 2021.
The outlook for 2022 looks even more impressive. Savills has forecast an 8% price increase for the year ahead and anticipate a 23.9% growth to the end of 2027.
Following a quiet few years, many will see this as a turn of the page for PCL – albeit one which will depend on how various emerging trends come to pass. The easing of travel restrictions, and the continuation of the race for space, for instance, should be significant drivers of demand which should steer the market in a positive direction.
Return of international investors
When discussing the higher echelons of premium London property, it is difficult to ignore the significance of overseas investment in driving the market forward. The travel restrictions in place in the last few years have been critical in dampening demand levels in PCL. For a market that is intrinsically global, the marked absence of international buyers had a direct impact on transactional levels.
As these restrictions now appear to be receding into the past, we should now anticipate the pent-up demand that has steadily accumulated to be released into the market, which could fuel competition for prime properties. The lack of stock against the high levels of demand is also expected to exert further pressure on prices.
It is clear that the pandemic has not diminished London’s status as an international economic and cultural hub. The PCL market carries incomparable global recognition and prestige, and given its impressive resilience in the face of global economic turmoil and reliable investment conditions, foreign investors are likely to seek safe haven in London’s prime property
It’s safe to say that the radical lifestyle changes prompted by the pandemic and the normalisation of remote working patterns have had lasting consequences for buyer preferences in the UK property market – for instance, property space has risen in priority.
Transactions at the top end of the market have also been driven by this trend. In 2021, data from Savills found that the price of six or more bedroom homes in prime west London rose by 10.4% during the past year and by 15.1% since March 2020.
With hybrid working patterns here to stay and given the exclusivity and low stock levels of these types of properties, this rush in demand is likely to continue fuelling growth in the market.
Interest rates and taxation
We must, in turn, pay close attention to trends that could hamper the longer-term growth trajectory of the market, depending on certain variables.
For instance, in light of rising inflation, the Bank of England has moved to raise interest rates, most recently from 0.25% to 0.5% - with further increases anticipated throughout 2022. Naturally, any increase in the cost of borrowing could precipitate decreased demand and thinned transactional volume. Accordingly, depending on the scale and timing of the hikes, we could see slower growth in PCL in the long term.
Nevertheless, it is important to note that prime real estate isn’t always governed by the same forces as the property market as a whole, given low supply of stock and sustained and rising demand. Anything short of an unexpectedly dramatic interest rate hike is unlikely to shock the market too severely.
In parallel, future reforms to stamp duties which could result in additional surcharges affecting property investors could also impact the expected growth trajectory of the market. For example, prior to the Autumn Budget 2021, there was speculation that the SDLT surcharge on second home purchases might increase from 3% to 4%. Should this, or other similar cost-raising reforms come to pass in future budgets, the market activity and prices could be impacted through decreased demand.
The PCL market is certain to garner more attention in the coming months, as its recovery breaks into stride. Of course, in property, it is always unwise to make firm predictions about the future – though in the case of London’s prime property, it is fair to say there are encouraging signs that the market will heat up over the course of this year as these trends run their course.
