Prime Central London’s (PCL) housing market has often been the first to lead the charge after a downturn. However, changes to lifestyle preferences resulted in an increasing number of people moving out of urban cities. This, as well as a lack of international travel during Covid, put a dampener on the country's most exclusive housing market. But as life in London begins to return to its new normal, there are signs that the PCL market is beginning to pick up pace once again.
PCL’s rental market was the first to bounce back. After 19 consecutive months of falls since Covid began, rents in Inner London returned to growth in November 2021. At their lowest, the average rent in London’s 13 most central boroughs cost 24% less than on the eve of the pandemic. Since then, the return to international travel combined with the reopening of offices alongside all the other amenities central London has to offer, has fuelled demand for rental accommodation.
By the beginning of 2022, Inner London recorded the strongest rental growth in Great Britain. Last month, the average rent of a home in Inner London cost £2,513 pcm, back to pre-pandemic times. A shortage of homes seems set to continue fuelling rents over the coming months. However, given that rents were already recovering towards the end of 2021, future growth is likely to slow as the year progresses. Even so, PCL is likely to be the top-performing area for rental growth this year, welcome news to investors who have endured some tough times over the last couple of years.
It also means that yields are on the rise with rents outperforming house prices. The average gross yield in Prime Central London rose to 5.6% in the second half of 2021, the highest return in more than half a decade.
It's also been an encouraging start to 2022 for the sales market. While prospective buyer numbers are on the rise again (up 19% compared to April 2019), demand for London’s most exclusive property is nowhere near its 2014 heyday. Given that purchases in this prime market tend to be discretionary, global sentiment plays an important role. While demand for PCL property is picking up from its Covid-lows, it’s likely to be dampened by the war in Ukraine as well as rising inflation and interest rate hikes across the world.
Even so, a lack of stock has meant that 13% of homes sold in PCL so far this year sold above their asking price, the highest share since 2014. As a result, the average seller achieved 97.1% of their asking price, up from 96.1% this time last year and 93.8% pre-Covid in 2019. However, the average home in PCL took 70 days to sell last month, more than double the time it took at the peak of the market in 2014.
International buyers are slowly returning to town but are nowhere near pre-Covid levels. During the first three months of the year, international buyers bought 40% of homes sold in PCL. This figure is up from the record low of 28% in Q1 2021 but remains a fraction of the 51% recorded three years ago. Buyers from Asia and Australia have picked up the most, while interest from the EU and the Middle East remains muted. The lack of international demand is weighing heaviest on traditional hotspots such as Knightsbridge, Belgravia and Chelsea where prices remain below their pre-pandemic highs.
Domestic buyers continue to dominate the market, a rare sight in PCL’s history. And more of them are coming from out of town - a record 18% of domestic of buyers moved into PCL this year from outside the capital, more than double the pre-Covid norm. The same is true for tenants, yet it seems the footloose nature of many jobs today means that it’s culture and lifestyle rather than employment that are becoming the capital’s biggest draw.
PCL’s market was poised for recovery this year and beyond, but there are a growing number of risks on the horizon. It’s hard to know what impact spiralling inflation and rising interest rates will have on PCL buyers. On one hand, wealthier households are likely to be most immune from the rising costs of goods, services and in particular, energy bills. However, on the other hand, rising interest rates make property debt more expensive to service and it also opens up other opportunities for people to invest their money.
On balance, PCL’s housing market will likely see a solid, rather than spectacular year in 2022. But in 2023, we could see the tempo change, ready for when a new housing cycle may dawn in 2024 as prices begin to accelerate once again. We forecast house prices in PCL to rise 1.0% in 2022, 2.0% in 2023 and 4.0% in 2024.