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The extent of what qualifies as the prime London market has grown over time. Back in 1979 – the start point of our prime indices – it was confined to core central London locations. However, since then, prime London has grown organically along wealth corridors that run to the south west and north and which have extended eastwards along the banks of the Thames, propelled by regeneration. This leaves us with a core market where demand has been driven by inward investment in to a truly international global city market and a series of affluent, largely domestic, suburbs where values have been driven by the wealth generated from the London economy itself.

Wealth corridor

The prime London markets beyond central London are characterised by high levels of employment in financial and insurance and professional, scientific and technological industries. The wealth generated from these sectors pervades into both the prime and mainstream tiers of these outer prime locations. The total £190 billion of housing stock in the four main outer prime boroughs, which run down the ‘south west wealth corridor’, matches that of Westminster and Kensington and Chelsea and is more than the value of Wales in its entirety.

These prime markets have struggled to match the stellar growth of PCL in the past eight years, though all have outperformed the mainstream market of London as a whole. Indeed, the markets of prime south west and north west London have delivered growth between two and a half and three times the average for the capital.

Only Fulham has been able to match the price growth of central London, reflecting the fact that, more than any other area beyond the core, it has become more international in nature. While it has not seen anything like the same injection of overseas equity as the submarkets of prime central London, it has attracted demand from wealthy buyers from Europe and the Commonwealth countries in particular seeking family homes in London.

Drivers of price growth

These markets have been driven by a migration of wealth from higher value to lower value properties and from core to periphery referred to as the champagne tower effect.

New equity has also been pumped into the markets from bonus money over a number of years, though latterly less from the corporate banking and now more from a wide variety of financial and other enterprises. We estimate that, over the past 10 years, £9 billion of bonus money has been injected into the housing markets of 10 boroughs beyond central London, from Camden to Barnet and Wandsworth to Richmond upon Thames.

Since the 2008 downturn, there has been a significant recycling of existing property wealth from those delaying a decision move into the prime commuter zone and beyond. Evidence suggests that upsizers have been prepared to reallocate more of their existing wealth to long-term family homes in the prime inner suburbs rather than moving out of London.

Without these affluent family buyers, the prime east of City markets have performed much less strongly. As a consequence, average price growth has been more in line with the average for Greater London as a whole. Interestingly, the converted warehouses around Wapping have outperformed the new build towers of Canary Wharf. For investors this under performance has been partly offset by higher income yields.

What next?

Looking forward, the strength of outer prime markets will be dictated by the creation of new wealth from the London economy and the flows of wealth between prime markets.

Generally, over the next five years, London and the south east are expected to lead the economic recovery. In London, the economic growth from the all-important financial and insurance sector is likely to be on a par with the average for the capital. The highest economic growth is forecast from the professional scientific and technical and information and communication sectors.

These sectors will, like financial services before them, also attract international investment and human capital which is expected to be reflected in overseas demand for housing. This is likely to widen the profile of buyers and support underlying housing demand for prime property beyond central London. An increased proportion of prime demand is likely to be focused on the commuter zone given the gap between pricing in these markets and prime domestic London.

So we expect to see a continued displacement of wealth from the PCL markets into other parts of prime London and beyond. The markets in closest proximity to PCL will see continued overseas buying activity, mainly from full time residents in the capital. This means the PCL and other prime markets will remain linked.

All prime but not equal

Measuring price per square foot

Over the past 10 years buyers have become much more conscious of values per square foot. However, our analysis of second hand sales over 2012 and 2013 indicates that these can vary dramatically, meaning averages only tell part of the picture (see Graph 2.2 below).

The high (75th percentile) and low (25th percentile) figures typically can be 20% above and below the average – resulting in a range of between £510 and £850 per sq ft in an area such as south west London. In PCL the difference between a high and very high figure is almost 40%, with the 90th percentile of second hand stock achieving a value of £3,000 per sq ft.

Whilst there is much less of an identifiable ultra prime market beyond central London, the top 10% of the market in an area such as Islington still exceeds £1,000 per sq ft (ignoring any new build premium), 35% above the average.

Taken from
Spotlight: Prime London Residential Market - Autumn 2013

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