The UK is home to some 550,000 high net worth individuals (HNWIs) according to the 2015 CAP Gemini/ Royal Bank of Canada World Wealth Report, putting it in the top five globally behind the US, Japan, Germany and China.

Many of these individuals, from both the UK and overseas, will own a main residence in London as well as investing in property to let out. This article identifies these individuals and establishes the sources of equity that will underwrite future demand for prime London housing.

Depth of the market

Our own assessment is that there are 399,000 homes worth over £1m in the UK, of which some 70%, or 275,200, are located in London. Land Registry records indicate that 20% of all £1m+ homes in the UK are located in the two central London boroughs of Westminster and Kensington & Chelsea.

A further 24% are located across the five boroughs of Wandsworth, Camden, Hammersmith & Fulham, Richmond and Islington, where the markets are predominantly domestic.

Sales of homes worth £1m+ reached a new peak of 19,000 in 2014 according to HMRC figures, having tripled in number over 10 years and exceeded their 2007 level for the first time since the credit crunch. These statistics reflect both the level of wealth generated globally and domestically over the past 10 years.

A high plateau?

Some of the tax changes implemented in the past 12 months probably mean that, for the moment at least, 2014 will represent a high watermark for £1m+ transactions. However, underlying indicators suggest that demand for such property in London is likely to continue to grow, thereby underpinning prices and transaction levels over the medium term.

DOMESTIC DEMAND

British buyers are still the dominant group in every prime London region, making domestic wealth generation critical to the ongoing success of the market. While the capital’s workforce is set to grow by 10% in the 10 years to 2024, the nature of employment and, therefore, wealth generation is evolving.

Historically, the financial and insurance services sector has been responsible for significant levels of domestic wealth generation in the UK capital. The financial and insurance businesses of the City of London and Tower Hamlets (home to Canary Wharf) are expected to account for 11% of London’s economic output and 4% of its workforce in 2015 according to Oxford Economics.

While the workforce in this sector is forecast to contract by a marginal 2% over the next five years, economic output is still set to rise by 12% in real terms over the same period.

Other wealth generating industries, namely the professional, scientific and tech, and information and communication sectors are set to become important drivers of wealth creation. Economic output from these sectors is forecast to rise by 30% in real terms over the next five years, with employment growth of 12%.

As discussed in 'A Shift In Emphasis', this is likely to bring a gradual change in the profile of domestic demand across London’s prime sales and rental markets, both in terms of composition and geography.

In the boroughs of the City of London, Westminster, Tower Hamlets and Camden economic output from the three main wealth generating sectors is expected to increase by 20% in real terms over five years. Meanwhile, across Southwark, Hammersmith & Fulham, Lambeth and Hackney growth is forecast at 27%.

^{Source: Oxford Economics}

INTERNATIONAL DEMAND

Over the past 10 years, the total number of global HNWIs (with net worth of over $1 million) has risen by 77% according to the CAP Gemini/Royal Bank of Canada report. Importantly, this growth has been broadly consistent across various tiers of wealth.

Mid and upper tier millionaires and ultra high net worth individuals (UHNWIs), with net assets of $5m to $10m, $10m to $30m and $30m+ respectively, have a progressively greater propensity to buy prime London residential property.

By contrast, the ‘millionaire next door’ with assets of $1m to $5m, who make up 89% of all global HNWIs, are far less likely to do so, unless they are based in the UK full time, concentrating more on lower value investment stock when they do invest in London residential real estate.

Overall, the wealth of HNWIs is forecast to rise by a further 25% over the next three years according to the CAP Gemini/Royal Bank of Canada report. Meanwhile Wealth-X is forecasting that the number of UHNWIs will grow by 24% over the next five years.

In the prime London property market, the growth of private wealth across the European, Middle Eastern and Asian markets is the most relevant. Therefore, the improving economic forecasts for the Eurozone (concerns around Greece notwithstanding), the emerging markets of Europe and the Middle East & North Africa cast a positive light on future investment in prime London.

In the developing Asian economies, the economic growth forecast for the next five years is lower than the previous five, having regard to the projected slowdown in China. However, it is still forecast to be higher than across other major regions.

Global Wealth In Numbers

The future wealth of HNWIs across the globe

^{Source: Wealth-X}

^{Source: Cap Gemini / Royal Bank of Canada}

^{Source: Cap Gemini / Royal Bank of Canada}

^{Source: IMF (April 2015)}