Demand for high quality residential properties in prime London remains strong despite the uncertainty surrounding the wider economy …

The riots in London set a sombre mood in the capital earlier this year. Alongside this America was downgraded amid concerns that the government is not doing enough to balance the books. The biggest issue at the moment however is the Eurozone crisis which continues to cause significant concern in the markets and dominate the news. The recovery from the recession was being bolstered by growth in the emerging economies but even this has begun to slow.
Forecasts for growth in the UK economy have been steadily falling over the past six months and the consensus is now for growth of just 1% in 2011, in contrast to the 2% being forecast at the start of the year. Forecasts for just 1% over the whole of 2011 would require only slight growth in the final quarter. The preliminary estimate for GDP growth in the third quarter of 2011 was 0.5% which was higher than some expectations.
Forecasts for growth in 2012 have been dramatically downgraded in recent months. In August commentators were still forecasting growth of 2% for 2012 but this has been revised down and now the consensus is for growth of just 1% next year as well. However this median position hides a wide range of opinions, with some forecasters expecting less than 1% growth and others forecasting closer to 2% growth. In reality all this really tells us is that considerable uncertainty exists at the moment.
However, despite this very uncertain outlook for the UK economy with economic performance being, at best, mediocre in 2011, prime residential property has still seen incredibly strong returns up until the end of the third quarter.
Despite national house prices remaining stagnant in 2011, London prices are 3.9% up so far in 2011 and as much as 8.4% in prime parts of the capital such as Westminster. House prices nationally remain 11% below their pre-recession peak levels, prices across London have returned to their previous peak but prices in Westminster and Kensington & Chelsea are now up to 13% higher.
Indeed transactions of prime properties in London priced £2m-£5m have hit record levels every quarter this year and Volterra now expect that prices will finish the year at least 6-8% above 2010 levels with growth exceeding this in the really prime central parts of London.
It is clear that the prime central London housing market is very different from the rest of the UK. While in most regions of the UK prices are mainly driven by the performance of the regional economy and the availability of mortgages, this is less true in central London. The prime central London market sees considerable numbers of cash purchases, largely because it attracts international investors. Therefore it depends more on the global economy than that in the UK and, despite the UK economy not being the strongest, it is still perceived as a safe haven for property investment especially with the current concerns over the health of the Euro. Buyers from emerging economies are growing in importance and this has been particularly evident in prime locations such as Knightsbridge where international demand and cash purchasers are much more prevalent.
There remains a shortage of good quality stock in prime locations. Demand is being driven by predominantly overseas, equity rich purchasers, particularly for higher value properties.

The uncertainty around troubles in Europe and wider economic concerns are now resulting in a more nervous sentiment which suggests that we may see a relatively stagnant final quarter; however, this does not take away from the fact that the market has still been one of the best performing sectors in an otherwise difficult economy.

By Ellie Evans