London Residential – Q2 2022
Price growth rates continued to cool-off in Q2 2022, with concerns around inflation and rising interest rates beginning to take hold. According to JLL, rental growth outpaced prices in the period, with annual growth in rents of 14.4% in Prime Central London (PCL). The sales market saw lower growth in prices, up 1.4% annually. The same applied to Prime Outer London (POL) which we expect to be impacted more as mortgage rates and the cost of living continue to rise.
PCL growth rates are likely to remain subdued until the international market returns in full force, something we do not expect to happen imminently. Given the situation in Ukraine and the extent of some lockdowns in Asia, we would agree with Knight Frank’s view that the return of international buyers is likely to be ‘more gradual than transformational.’ Growth in POL will be more sensitive to the underlying domestic economy which, we suspect, may require some time to re-adjust to the new climate.
While the outlook for the next 12 months remains fairly uncertain, the fundamentals point towards a healthy recovery of growth rates across London in the medium term. The PCL market is still trading at relatively good value following six years of subdued activity – average prices in Q2 2022 were 16% lower than the start of 2016. The same applies to POL to a degree, which remains 9% below its 2016 peak. The London region as a whole was the weakest performing UK market throughout the pandemic and therefore remains the most attractive for investment.
Buyers who are immune to the cost-of-living squeeze and who had previously put their plans on hold as a result of the pandemic are now more likely to consider taking advantage of this relative value. This is evidenced by the surge in buyer interest in the PCL market, with JLL recording the highest number of new PCL applicants registering in Q2 2022 since pre-pandemic, up by 63% on Q2 2021. Specifically, sales of £5m+ houses in London recorded their strongest performance on record this quarter. Considering that international arrivals in the UK were still 15% below their Q2 2019 level, one can assume there will be more of this to come.
Looking ahead, Knight Frank expect average London price growth to be 6% in 2023 with PCL being the top performer in the years to 2026. In the same period, Strutt & Parker see POL and PCL values growing by up to 30% and 35% respectively.