The prime residential market has subdivided into three increasingly distinct categories that Yolande Barnes, head of the company’s research team is calling London’s ‘prime global’ and ‘prime domestic’ markets, and the ‘prime domestic’ market outside of the capital. Prime regional properties are offering increasing value for money.
‘The key to the current disparity between London and the regions is whether equity is flowing out of London or not. Prospects for future recovery of the regional prime property markets will depend on either the strength of local economies and wealth generated from them or the extent to which incomers are bringing London equity with them or a combination of both,’ said Barnes.
The speed of price growth in prime central London has been surprising, bringing forward growth Savills had forecast for 2012. As a result Savills has revised its forecast for 2011 up from -1% to 8%, while prime regional values are now expected to fall by 3.0% across the year, compared to an original forecast of -0.1%.
Prime central London, London’s ‘global’ market has seen growth of 6.3% in the first six months of this year, taking annual growth to 9.6%, according to Savills research while prime south west London, where domestic buyers dominate, has risen by 3.5% year to date and 4.8% in the past year. Average prime regional values have fallen by 0.7% year to date and 1.8% in the past year. Prime second homes markets of South West remain down 24% from peak.
‘Prices in prime central London are being propelled by international equity, while displaced domestic wealth is pushing up values beyond the centre, most notably through prime south west London wealth belt running from Battersea to Wimbledon. We would normally expect this to trigger a ripple of domestic wealth out of the capital but this is only so far being seen in a few key commuter hotspots,’ explained Barnes.
The result is that prime London house prices are at or close to peak, with signs that further growth will be seen this year, while regional markets are offering buyers increasing value relative to the capital and relative to peak. ‘This is especially true of those markets, most notably the second homes locations of the South West of England, that were boosted by discretionary buyers using equity generated in the financial sector. Here values, though not asking prices, and this an important factor stalling the market, remain some 24% below peak,’ she said.
‘Realistic pricing, pegged to today’s conditions and without reference to peak values, will be required to get many markets moving. We had expected a volatile recovery for all markets, with a softening of values before renewed growth. But in prime London we’ve now seen almost two years of sustained price growth,’ added Barnes.
For the first time Savills is also forecasting prime central London and prime London separately, anticipating a slightly lower 6% price growth over the course of 2011 for locations dominated by domestic buyers. Stock is less constrained than in the very central locations and the opportunity for domestic buyers to stretch prime by gentrifying new locations on the fringes of existing prime will act as a moderator of prices.
For prime regional property, the short terms risks are on the downside until the London ripple takes hold. Until then, the markets will rely primarily on a smaller number of local equity rich buyers so the 2011 prime regional forecast has been downgraded to -3% from -1%.
But Barnes points out that this average masks strong regional differences in performance, with some prime regional centres having recovered to within a few percentage points of peak. As an average the market is currently 15.1% below peak.
‘Forecasting the short term, particularly for prime central London, is risky and volatility cannot be discounted. On the upside, global turmoil should continue to drive inward investment, while contagion from the crisis in Greece could have a real downside risk. Notwithstanding short term volatility, the average five year forecast remains bullish and unchanged at 33.4%. The priming of London is expected to continue as domestic wealth is increasingly displaced from central locations thus gentrifying new locations and underpinning price growth,’ explained Barnes.
‘The big question is when the ripple will kick in regionally, with just the earliest signs of this happening on the outskirts of London. The elastic linking the London and regional markets is being stretched but it will only stretch so far. Sooner or later a tipping point will be reached as buyers respond to the regions looking increasingly good value compared to London. As such our five year regional forecast remains unchanged, but for now, the more divorced a market is from the global equity that is driving prime central London, the weaker its performance both in terms of value and turnover,’ she added.
