Prime Central London and the overseas buyer

Within Prime Central London, transaction levels over the past year have been running at approximately 80% of their 2006/07 peak, having fallen to just 25% in the first quarter of 2009. A higher than normal proportion of this demand (55%) has come from overseas buyers in the past year. This compares with 45% at the peak of the market.

The weakness of sterling and the subsequently strong purchasing power of foreign currency buyers undoubtedly fuelled this rise. Whereas sterling prices were 10% lower than their peak by the end of March 2010; in US dollar and euro terms they remained 33% and 30% below their peak over the past year respectively (See Graph 1).

Foreign buyers have traditionally been most active in the top tiers of the market, but their presence has been most significant in the middle and lower tiers of the Prime Central London market over the past year. This marks a shift towards investment-related purchases which have driven price growth of 16.9% during the 12 months to the end of March, even though price growth slowed during the first quarter of 2010 (3.0%).

International traffic

By contrast, in the ultra prime market (where values average around £15million), buyers have been rebuilding wealth.
Transactions over the past 12 months have been slower to recover and price growth has been more subdued than in the lower tiers of prime.

The buying opportunity presented by the weakness of sterling has disincentivised existing overseas owners from bringing their property to the market. Stock shortages, a feature of the market for the past year, remain, despite easing in other prime London markets.

The tax changes for non-doms have done little to bring stock to the market. Any global city will see a certain amount of international traffic both in and out of its prime residential markets, and London is no exception. Around 8% of prime London residential property sellers were looking to leave the UK in 2008/09.

This figure increases to 11.5% in the more international markets over £4million and 17% over £8million. These percentages have not changed much since 2006/07, which means that we continue to see a net inflow of overseas buyers to the Prime Central London market (See Graph 2).

Outlook

Stock shortages and continued overseas demand (given that the value of sterling may fall with the current political instability) will protect prices in the short term and drive market-leading growth in 2011 and beyond.