Londons Growth Surge - Demand is King

Tuesday, April 24, 2012 by Douglas And Gordon

After another tumultuous year in the markets, spring is finally here. With the end of the tax year over and the budget announced it is time to look ahead. The sun is shining, London is gearing up for the Olympics and the property market in the capital is showing signs of growing strength.

Values in the first quarter of 2012 surged ahead by 4.3% – the strongest quarterly growth since the summer of 2010. Prime Central London (PCL – Belgravia, Chelsea, Kensington and Notting Hill), led the way with a 5% increase in property values, with the rest of Douglas & Gordon areas (covering south west London, stretching from Shepherd’s Bush to Southfields and Balham), recording a healthy 4.1% increase.

International buyers continue to be significant in both markets but show real increase in the PCL areas, where the rate of growth for more than a decade (see Capital Value Index chart) has, until 2010, underperformed the outlying D&G areas.

The rental market paints a different picture, showing an overall fall of 1.09% for the quarter to the end of March, for the second consecutive quarter, despite the overall balance of supply (properties available) and demand (applicants registering) remaining largely unaltered. In contrast with capital values, movements in rental values are a reflection of economic activity as a whole, which, as we’re all aware, has been at a low ebb over the last six months and beyond.

Although the ratio of applicants per property available has reduced only marginally from six (Spring 2011), to 5.5 in 2012, the combination of continued growth in capital values and flatlining/marginal falls in rental values has inevitably put a strain on yields (see Gross Capital Yield graph). This is especially true in the PCL areas, where average gross yields have declined by 15% over the last 12 months. In contrast, D&G’s non-PCL areas have showed a much more gentle decline of just over 3%. In other words, the continued strong growth of property values in the PCL areas coupled with relatively smaller growth in rental rates has suppressed the overall yields in those areas.

The big news for the property market from the latest budget is the jump in stamp duty for properties over £2m from 5% to 7%. According to Prime Location, of the approximately 610,000 house sales recorded in England in 2011, 1,600 were for properties of over £2m, of which four out of five were in London. This is a massive deal for Londoners who are disproportionately likely to own homes in that bracket.

Home owners thinking of moving on may reconsider when faced with the prospect of paying a 7% tax on their next home. It’s possible that those with homes around £2m will discount price to avoid the tax hike, but with demand
for accommodation in central London remaining high, overall values could remain unaffected.

There may be some interesting nuances to the effect of this tax hike outside of the PCL areas. Properties in the immediate £2m to £2.5m bracket may soften in price as prospective purchasers look to buy comparable properties in the £1m to £2m bracket, perhaps in a slightly more fringe location. This in itself may well lead to stronger-than-average growth in those areas.
Only time will tell.

Less headline grabbing but arguably more significant for the economy, particularly the London economy, is the introduction of a 15% stamp duty rate for ‘non natural persons’ who purchase properties over £2m, together with
the proposal to levy, from April 2013, an annual charge on these properties and
also to bring them into the

Capital Gains Tax regime from which they are currently exempted. The Chancellor has stated that this is designed to penalise people who use corporate vehicles to avoid or minimise tax. However, for a government that is seeking to encourage institutional investment in residential property (the Montagu Commission is charged to report on ways of achieving this in the summer), effectively excluding part of the market by making corporate investors liable for double the tax of ‘ordinary’ purchasers, this is not a good message. And for the world’s rich for whom London has been the city of choice for decades, to the benefit of the London economy and the Exchequer’s coffers, what
is the message?