Of all the world cities, London has the most mature and, correspondingly, the broadest and deepest super-prime housing market. In 2012, more than 400 properties worth over £5 million changed hands. Together they had a value in excess of £4.1 billion.

UK nationals typically account for around 45% of all buyers across the whole of the prime market of central London, but this falls dramatically in the higher price brackets and newly built schemes of over £5 million.

We estimate that in the past decade some £23 billion of bonus money generated in the capital’s financial and insurance sectors has been invested in the housing markets of London, but in the past five years the prime and ultra-prime markets have been much more dependent on international money.

These buyers come from a broad range of nationalities across Western Europe, Eastern Europe and the CIS, the Middle East, North Africa and Asia. Though North American buyers remain a relative rarity, they are a strong source of demand for rental property contributing to a diverse international demand profile.

Safe haven investment

In the post credit crunch environment, overseas buyers have been attracted to an established “safe haven” market that is transparent and stable, with good title and a compelling lifestyle. Although investors were initially attracted by discounted values and weak sterling after 2007, more recent demand has been underpinned by strong market fundamentals and wealth preservation credentials, which has continued to attract investment from an expanding pool of UHNWIs.

This demand has contributed to strong price growth, though not at the levels witnessed in Asia. Across all of the subsectors that make up the prime housing markets of central London, prices are some 24% above the levels seen at the last market peak, immediately before the credit crunch.

Some £7 billion has been invested in properties worth more than £10 million since the first quarter of 2009, which is when the market bottomed out in the wake of the financial crisis. This caused even stronger price growth in the ultra-prime market. Here, prices are some 36% above levels seen at the previous zenith in the third quarter of 2007.

Meeting a supply gap

Despite the size of this market relative to that of other cities, stock remains relatively constrained. The tradeable pool of existing ultra-prime stock in the core neighbourhoods of Knightsbridge, Belgravia, Kensington, Chelsea and Mayfair, which accounts for around three quarters of the ultra-prime market, has a tendency to shrink as it goes into overseas ownership. This is because new overseas owners hold property for longer periods than current UK owners, thereby reducing the numbers of units available and traded each year.

This has presented an opportunity for developers to meet a supply gap. In doing so they set new standards for the provision of accommodation to the global elite and unlock the potential of locations both within and on the fringes of the core prime market. In 2012, around one in six of the properties sold for more than £5 million were newly built. This figure rises to one in four for properties over £10 million.

Despite a short-term shortage of new build product, there is a strong pipeline of prime new build developments that will accommodate further expansion of the sector. We expect this expansion to be accompanied by an increase in high value areas beyond the core part of central London. Already we have seen a growth of £5 million plus transactions into areas such as St John’s Wood, Notting Hill and Bayswater — a trend which we expect to see increase over the next five to 10 years.

Strong demand

As we look forward, we believe the fundamentals of demand for ultraprime property will be strong, though perhaps less assured in the now fully valued market than it was. The extent to which the market can capitalise on the forecast increase in global wealth depends on it retaining an edge in the global arena. London must remain a global financial and business centre and provide a competitive tax environment that encourages international investment in prime real estate. Given our expectations that price growth will total more than 25% over the next five years, we expect that the £4.1 billion per annum currently invested in super-prime stock could rise to £5.1 billion by 2017.

Taxing times

In the UK, much as in other countries, the taxation of high value property has been the source of considerable political debate in an age of national austerity. In 2012, stamp duty rates were increased and provisions introduced to prevent properties from being shielded from the UK tax system. The market responded by a slowing in price growth and a fall in transactions in the price bands between £2-£5 million. Yet still the debate over taxation continues, with two of the main political parties touting the idea of a “mansion tax”, perpetuating the myth that high value property makes an insufficient contribution to the overall tax take. In reality, during 2011-12 £1 million plus sales, which accounted for under 2% of the UK housing market, generated 26% of all stamp duty land tax receipts from residential property — some £1.11 billion. The two London boroughs of the City and Westminster and Kensington and Chelsea delivered £550 million of stamp duty receipt, a sum broadly equivalent to the aggregate receipts from Scotland, Wales and the three regions in the North of England put together.

Taken from
Candy Global Prime Sector Report