The third quarter of 2022 began well before succumbing to a steady shift in sentiment as rising interest rates and political uncertainty gripped the markets.

While annualised house price growth across the country slowed from the beginning of the period, it was still 11.5% in July and 10% in August, only 0.3% and 1% lower than 2021. Over 114,000 residential transactions were recorded in August (in line with the 2017-19 average) and the number of sales agreed in September were 14% above pre-covid levels. Despite a relatively solid quarter overall, September was the first month of no value growth since July 2021, dropping annual growth into single digits.

In addition to rising interest rates, geopolitical events continue to dampen the inflow of international capital, leaving London’s price growth rate below regional markets. According to Savills, annual price growth in London was 6.7% for September compared to a 9.5% national average. While London is expected to regain its dominance over nationwide performance, it could take some time for foreign buyers to be back in full swing. 

The rental market fared much better, with Prime Central London (PCL) and Prime Outer London (POL) lettings prices increasing by 5.3% and 3.7% respectively in the three months to August. While new supply in August was a third below its five-year average in London, the number of prospective tenants was 75% higher, a mismatch which continued in September. The rental market is likely to see further growth to the end of the year as potential buyers opt to rent in the face of higher borrowing costs. 

Putting the more recent ‘Trussonomics’ saga to one side, it is clear that there is more downwards pressure to come which could result in a reversal of house price growth in the short term. Rapidly rising interest rates coupled with inflation and market uncertainty have led some to suggest prices will fall more than originally anticipated.

Others point to forces in certain markets which offer price support. Lack of supply remains critical, with the number of buyers for quality stock far outstripping availability. This is more prominent in PCL and POL, markets which are also less reliant on borrowing than the mainstream and therefore less susceptible to interest rate rises. Value support is another factor, with PCL and POL values still being 18% and 8% below their 2014 peak, all in the context of a devalued sterling. 

While this may not be enough to counter the effects of a 4% + base rate, it makes a good case for the medium-term outlook of the prime London markets. 

https://www.reuters.com/markets/europe/uk-house-price-growth-slows-weakest-since-july-2020-rics-2022-10-12/

https://www.savills.co.uk/research_articles/229130/334133-0

https://content.knightfrank.com/research/100/documents/en/uk-residential-property-market-update-september-2022-9359.pdf

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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. 

https://residential.jll.co.uk/insights/research/prime-central-london-q2-2022

https://www.struttandparker.com/knowledge-and-research/prime-central-london-rental-market-set-to-rise-by-up-to-10-this-year-according-to-strutt-parker

https://www.knightfrank.com/research/report-library/the-london-review-q2-2022-9030.aspx

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The AmCap Re Greater London Fund is pleased to announce the completion of a new block deal for units in one of London’s most prestigious developments.

The deal is for twelve (12) newly completed residential units in the Legacy Buildings of Embassy Gardens, being the centrepiece of the Nine Elms redevelopment scheme in Battersea. The project was built as a JV between EcoWorld and Ballymore, with the Legacy units designed by Luis Bustamante. The development surrounds the US Embassy near the river and its amenities include two gyms, a spa, offices and board rooms, an events room, a cinema, an indoor pool and the infamous sky pool. Embassy Gardens is a five minute walk from the new Nine Elms underground station, 10 minutes to Vauxhall Station and will eventually benefit from the Nine Elms footbridge, bringing Chelsea and the King’s road even closer.

This deal represents a great Private Rental Sector opportunity and extends our foothold in the Prime Central London market.

Skypool

Interior

Bathroom interior

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Following the record-breaking performance across UK property in Q4 2021, growth rates appear to have cooled off slightly nationwide but performance in London looks positive. 

According to JLL, rents in London rose by 1.1% in Q1 2022, down from a 3.7% quarterly rise at the end of last year but up year on year. The picture is similar in the sales market, with demand across London’s core market outperforming Q1 2021. According to Savills, London price growth is starting to match the country after two years of underperforming – while domestic demand continues in commuter belts, central markets are catching up as workers return to their desks. Prices for London flats increased by 1.4% in the opening quarter of the year, the highest increase since the start of the pandemic and against a backdrop of a 1% increase for the rest of the country. The link to the City is clear as markets such as Canary Wharf, Shoreditch and Islington recorded growth of 3.7%, 3.4% and 3.3% respectively. Institutional demand has certaintly played its part, with build-to-rent investment in the UK up 50% versus Q1 2021, the majority of which is London based.

Prime outer Lonodon has also performed well in the quarter as there continues to be unmet demand for those looking to upsize. Richmond and Primrose Hill for example are up 9.1% and 8.1% on the year respectively. 

While some commentators have suggested that soaring inflation and rising interest rates could lead to darker days ahead, pricing and supply levels indicate further growth in the medium term. Prices in London are still currently 8% below their 2014 peak, with prime central being as much as 18% below such level. Although supply in the housing market is building, it continues to be outpaced by demand – the ratio of new prospective buyers to new instructions climbed to 18.2 in January 2022 from 10.4 in December, representing the highest ratio in nine years. In the prime London market, the number of new prospective buyers was 72% above the five-year average in January while the number of sales instructions was down by 12%. There is also the return of international buyers to the London market to consider, with many foreign investors having paused to reflect on the situation in Ukraine or otherwise been tied up as the pandemic continues to rear its head.

While the impacts of inflation and the situation in Ukraine mean we are unlikely to see growth levels experienced in 2021, the first quarter of 2022 suggests there is room for further growth in the capital.  

https://www.jll.co.uk/en/newsroom/uk-build-to-rent-investment-surges-50–in-q1-2022-https://content.knightfrank.com/research/78/documents/en/the-london-review-q1-2022-8766.pdf

https://www.knightfrank.com/research/article/2022-02-18-supply-continues-to-lag-demand-in-first-month-of-2022

https://www.gov.uk/government/statistics/uk-house-price-index-for-february-2022/uk-house-price-index-summary-february-2022

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The UK Economy grew faster than expected towards the end of 2021, with gross domestic output rising by 1.3% in Q4 and 7.3% over the year. Gross domestic product continued its bounce back in January 2022, increasing by 0.8% and surpassing pre-pandemic levels for the first time.

This economic uplift was also evident in the property market, with annual growth in house prices hitting 14.3% in February 2022, the strongest pace since November 2004. According to Halifax, the average house price in the UK has risen by £27,000 in the last twelve months, the biggest one year cash rise recorded in over 39 years of index history. In London in particular, prices continued to be pushed higher in March by robust demand, limited supply and a strong jobs market.

There is, however, a general consensus that surging inflation coupled with rising interest rates will result in a cooling off of the economy and property market in the coming months. According to Barret Kupelian, senior economist at PwC, UK households are ‘entering a period where they will face a very substantial hit to their living standards with a smaller savings buffer than initially anticipated.’ The conflict in Ukraine has exacerbated inflationary pressures further, with another 30% increase to the energy price cap expected in October 2022 alongside rising food and other commodity prices. To counter this, the Bank of England has already raised interest rates three times in four months – with further hikes expected if the rate of inflation holds.

In terms of outlook for the rest of the year, much will depend on how the conflict in Ukraine unfolds and the how the supply/demand dynamic for energy is managed. While GDP is still expected to grow by 3.8% in the year, in the absence of a positive resolution to the conflict and a pause to the rising cost of debt, we are unlikely to see growth levels similar to those of 2021.

https://www.ft.com/content/24222949-ca7c-484a-903e-6e2f0a5b52d7

https://home.kpmg/uk/en/home/insights/2018/09/uk-economic-outlook.html

https://www.ftadviser.com/mortgages/2022/03/28/uk-housing-market-is-kaput-brokers-claim/

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Much has been made of Russia’s role in London’s property market following the tragic events in Ukraine. Almost all major news outlets have published pieces on the matter with titles ranging from ‘The rise and fall of Londongrad’ to ‘From Russia with cash’.

While Russian wealth has historically poured into London, since the depreciation of the Russian Ruble in 2014, Russians have become far less important to demand. According to Savills, only 1.4% of Central London is Russian owned and under 0.1% of Savills sales came from Russians in 2021. The story is similar on the commercial side, with Legal & General estimating Russian investors to account for just 0.3% of UK commercial real estate purchases since 2015. Any direct impact the Ukraine conflict will have will likely be confined to London’s super-prime market (£10m or above) where, prior to 2014, Russian wealth made up closer to 8% of demand. Even here, there is a general consensus that the gap will quickly be filled by buyers from Europe, the Middle East and Asia as London’s safe heaven credentials are further underlined.

Although the direct effects are currently limited, increased inflationary pressures at a time when basic household costs are already squeezed could lead to a general cooling off of the property market. There is also sentiment to consider with many buyers and sellers pausing for reflection as the situation unfolds. While this uncertainty will likely be short lived, the sudden and drastic increase in transparency of ownership requirements being introduced by the UK Government could have a slight dampening effect on prime transactions in the long term.

The full effect on UK property will ultimately depend on whether there is further escalation or not and at the time of writing this hangs very much in the balance.

https://www.economist.com/britain/2022/03/05/the-rise-and-fall-of-londongrad

https://www.knightfrank.com/research/article/2022-02-28-how-will-the-ukraine-conflict-impact-the-uk-property-market

https://www.lgimblog.com/categories/markets-and-economics/real-assets/ukraine-conflict-uk-real-estate-impacts/#_ftn1

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North London extends from Clerkenwell and Finsbury to Greater London’s boundary with Hertfordshire. From the more built-up areas including Islington and Kentish Town to the desirable open spaces around Hampstead and Hadley Wood, North London offers a wide range of real estate options for all.

Its emergence and popularity owes much to the excellent transport links served by three major underground lines and the overground, as well as King’s Cross and St Pancras stations. Taking in the bustle of Angel, the green spaces of Alexandra Palace and wonderful views of the city from Highgate Hill, it also offers some of London’s most desirable neighbourhoods. Indeed, four of the six areas listed by the Times as the best places to live in London in 2021 are in North London. One of them is Muswell Hill, which benefits from high achieving schools, an enviable high street, beautiful houses and surrounding parks. Another is Primrose Hill which is described as ‘an urban village that looks like a Wes Anderson film and is in walking distance of the West End’.

In light of the above, many parts of the North London market provide good liquidity and high yields for buy-to-let landlords. In the last quarter of 2021, residential yields in Camden, Haringey, Barnet and Enfield were 3.9%, 4.1%, 4.2% and 4.5% respectively, compared to an average of 3.6% across London and 2.9% in Zone 1. Yields are higher for commercial property and range from 5.1% – 8%.

It also provides a wide range of opportunities for value-add growth strategies. Over the last 20 years, the growing demand for space from workers wanting easy and affordable access to the city has given rise to a dramatic increase in property development and repositioning in the area. The conversion of larger Victorian homes and non-prime commercial assets to multi-unit housing is one example of this and something we expect to continue as we emerge from the pandemic. While the bulk of this is aimed at mid-market residential developments, higher end areas such as Beech Hill and Hampstead offer similar opportunities for the development of luxury apartments. Repositioning across both sectors has allowed many investors to enjoy internal rates of return of over 20%.

The AmCap-RE Greater London Fund holds a substantial number of assets in North London, focused on 1-2 bedroom mid-market residential and commercial properties. The average rental yield of its portfolio is 4.9% on fair value with a 95% occupancy rate. In addition, the fund pursues value-add growth strategies in North London through the refurbishment and repositioning of assets. These include the conversion of council and commercial assets to residential and the development of luxury homes.

North London has served the fund’s value and growth strategies very well over the years and management intend to maintain their network and competitive advantage in the region in the long-term.

https://www.thetimes.co.uk/best-places-to-live/london

https://propertydata.co.uk/

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The Borough of Elmbridge is often described as one of the best places to live in the UK. Sitting just 17 miles southwest of central London, this leafy corner of Surrey has been the preferred destination of many city workers and footballers since the mid-1990s.  Indeed, Esher, Cobham, Walton and Weybridge make up the ‘Surrey golden-triangle’ and are home to some of the largest and most desirable modern built houses in the country.

One of the main appeals of Elmbridge is its proximity to London whilst being surrounded by the Surrey countryside. It also offers easy access to both Heathrow and Gatwick airport, some of the country’s top schools, boutique shopping, fine restaurants and quaint village settings. It is particularly well-known for its beautiful landscapes, large homes (the average house has 6.1 bedrooms), generous gardens and celebrity residents. With Chelsea FC’s main training ground in Stoke D’Abernon, it’s no surprise that Cobham and Oxshott hold the title for the ‘villages with the most footballers in England’.

These factors have made Elmbridge the most expensive borough outside of London, with 37% of homes priced at £1m or more and the average price of property in Oxshott standing at £1,432,272. Last year Zoopla declared Elmbridge the third best place in the UK for house price growth over the last 20 years, with house prices having increased almost fourfold since 2000. In the last 10 years alone – since May 2011 – property prices have increased in the borough by an average £220,300. On top of this long-term growth, the last two years have seen the area benefit from many homeowners reassessing how and where they want to live – a trend we expect to continue.

It is also a solid rental market, offering competitive yields, long term tenancies and minimal vacancies (in addition to footballers, many tenants in the golden triangle are international corporate executives who have been relocated on a 3-4 year basis).

The AmCap-RE Greater London Fund remains heavily invested in the Elmbridge residential market, focusing on 4-6 bedroom high end houses and quality long-term tenants. The fund’s properties in the region have an average yield of 3.5% on fair value, average tenancy of 2 years + and a 95% occupancy rate. This approach has served the portfolio’s value strategy well, providing steady returns through the turbulence of 2008, Brexit and the pandemic. As the uncertainty surrounding more recent events is put behind us, the fund intends to pursue more development opportunities in the area (amongst others) to complement its income portfolio.  

Our senior executives have been investing in this market since the early 1980s and management intend to continue leveraging this experience for years to come.

https://www.foxtons.co.uk/living-in/elmbridge/

https://www.zoopla.co.uk/discover/property-news/property-hotspots-top-areas-for-long-term-house-price-growth/

https://www.thetimes.co.uk/article/a3e94a5e-8be6-11ec-b5fe-7fe087ff87b5?shareToken=3c12924b5e5f38b8848e6a180600019c

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The return of foreign buyers, workers and students to central London seen in Q3 continued to be a main factor in the final months of the year.

London’s super prime market has led the way, recording its strongest quarter since Q2 2014 with the number of transactions up 37% from Q3. Savills prime sales index for Q4 revealed that the price of a 6 bedroom plus house in west London rose by 10.4% on the year and 15.1% since March 2020. This performance is particularly impressive considering that the international market was largely on pause for the final few weeks of the year due to Omicron.

Although the growth story is less impressive below the super prime threshold of £5m, it is no surprise that UHNWIs have been the first with the flexibility to return to the buyers’ market and we expect similar levels of success across Prime Central London once Covid-19 disruption has subsided for good.

This is already apparent in the rental market, with prime London values up 6.6% on the year in December 2021 and Q4 recording the strongest quarterly growth in eleven years. Similar rates of growth are expected for 2022 and this will inevitably draw more buy-to-let investors back to the capital. Rental growth for the commuter belt was more subdued at 2% on the quarter, but it saw an 8.1% increase in the year and there remains a severe lack of appropriate stock in some of the best-connected locations such as Weybridge and Cobham.

Notwithstanding the threat of further rate hikes, we expect pent up demand for central space to carry through well into 2022 which will likely have a positive knock-on effect on commuter and Prime Outer London.  

https://www.savills.co.uk/insight-and-opinion/savills-news/323317-0/decade-high-rental-growth-in-closing-months-of-2021-as-renters-return-to-prime-london-market

https://www.savills.co.uk/research_articles/229130/323909-0/prime-london-house-prices—q4-2021

https://www.knightfrank.com/london-report

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