This slowdown comes on the back of high price rises since 2009, which have completely bucked the trend in the rest of the country and leave prime central London values 22% above their 2007 peak, according to the latest five year forecast from real estate providers Savills.
‘Prime London is an equity driven, volatile market which experiences regular, short lived adjustments when it is fully valued. After such strong growth, we now expect prices to plateau in 2013,’ said Yolande Barnes, director of Savills world research.
‘Increased taxation, including the stamp duty levy, strengthening Sterling and a weakened global economic outlook could all provide catalysts for a slowdown, but the fundamentals in prime London remain strong so we expect that growth will resume in 2014,’ she added.
Prime central London has seen price growth of 53% since bottoming out in the first quarter of 2009, rising to 58.4% for ultra prime, that is property worth over £15 million.
Savills says that this growth has been driven primarily by inflows of international equity and net new money flowing into this market has totalled an estimated £19.5 billion since 2007. London remains a major world city destination for real asset investment and this is likely to continue after the brief lull expected in 2013.
Prime central London is expected to outperform all other market sectors over the mid term, with price growth totalling 26% by the end of 2017. The very best ultra prime properties and high spec new developments are expected to continue to buck wider economic trends and outperform the prime central London average.
‘It became clear last year that the UK’s residential property market had polarised between prime London and the rest, and this distinction has become increasingly entrenched. We knew there would be a lull in prime central London price growth, but were not sure what the trigger would be. Increased taxation could prove to be the catalyst and it certainly will take time for the market to absorb the change,’ said Barnes.
‘There are still clear global reasons to invest in real assets and we are confident that London will remain on the shopping list of world city buyers. Yields remain solid, the market remains stock constrained and the prospects for global wealth generation amongst core buyer groups are sound over the medium term,’ she explained.
‘We have, however, noticed less urgency among buyers of late and even a stalling of purchasing plans until the rules surrounding taxation and stamp duty are made clearer. Sellers may need to reduce their expectations for all but the very best properties in 2013,’ she added.
Beyond the prime central locations, London’s other prime markets have traditionally been more heavily dependent on domestic wealth generation, particularly in the past from the financial sector. Prices recently have been boosted by a recycling of domestic wealth from buyers reluctant to relocate out to the commuter zone and some displacement of international wealth from prime central London.
Prime property values in areas such as southwest and north London are now 12% above their previous peak levels. They are expected to plateau in 2013, rise by 3.5% in 2014 and grow by 22.1% by the end of 2017.
‘In the absence of significant new City wealth generation, we expect these prime outer London prime locations to be increasingly reliant on the displacement of wealth from prime central London. Evidence of this trend is already clear in Fulham, for example, where international buyers now account for around 44% of the market compared to just 20% two years ago,’ Barnes said.
Beyond London commuter hotspots are set to see growth in 2013. Savills says that rarely, if ever, has there been a bigger gap between what is happening in prime London and what is happening in prime markets outside London. The weak economic recovery has continued to suppress sentiment across the prime regional markets, with key commuter hotspots only a very recent exception.
Savills expects the long-awaited ripple of wealth to be seen in the prime commuter zone around London next year, meaning locations such as Sevenoaks, Guildford and Beaconsfield will see values rise by 1%, making this the only part of the prime market to see any price growth in 2013. Five year price growth will total 21% in the prime inner commuter zone and 19% in the outer commuter zone.
Further afield, prime regional markets will begin to bottom out in 2013, before resuming growth in 2014, but the further they are from London, the weaker the expected growth will be. Consequently, Savills expects many prime regional markets will perform closer to the mainstream market.
‘Although the gap between prime London and prime regional prices has never been wider, buyers have lacked the confidence during the recession to exploit this gap,’ said Barnes.
‘As the economy, and particularly confidence improves, we expect that this will begin to change, but it will require London and the prime suburbs to remain active and it could be 2016 before the effects of wealth migration are felt right across the UK’s prime markets,’ she concluded.
