What should statistically be the peak period for transaction activity in London's prime central property market is turning out to be somewhat disappointing. Property advisor Huntly Hooper discusses how May's election has distorted supply and demand dynamics in this market.

The unexpectedly conclusive result of the UK's General Election raised hopes in the upper end of London's property market. But in spite of a Conservative victory, which banished threats of a "mansion tax", the market has failed to live up to expectations. In this article, Oliver Hooper, founder and director of Huntly Hooper, explores why it has been an unusually sluggish season for prime properties in central London and what the market may have in store. The views expressed here are those of the author, but WealthBriefing is pleased to share them. If readers wish to respond, they should email the editor at tom.burroughes@wealthbriefing.com

The market for residential property in the most desirable parts of Central London, a favourite investment asset for the world’s wealthy, has been abnormally subdued for a time of year that is usually the peak period for transaction activity. 

A total of 1,412 homes located mainly in the boroughs of Westminster and Kensington & Chelsea sold in the first six months, a 27 per cent drop from the same period last year. In May alone, the annual decline in transaction volumes was 40 per cent and preliminary figures for June indicate a 30 per cent drop from a year ago. In a market where the average home in what is known as Prime Central London costs in excess of £2 million ($3.1 million), prices levelled off in May and in June fell 2.9 per cent to £1,487 per square foot. We expect prices to fall further through the summer before stabilising and resuming modest growth in the autumn.
 
The frenzied buying activity and bounce in prices that some predicted in the days that followed 7 May, when the Conservative Party won an unexpected parliamentary majority, has not materialised. Indeed, the peak buying season in Prime Central London is shaping up to be wiped out this year, even though the electoral defeat of the Labour Party removed the threat of a mansion tax and of an end to non-domiciled tax status, two manifesto pledges that have overshadowed the market. 

The UK General Election has distorted the drivers of supply and demand with inevitable consequences for pricing. The number of homes placed on the market increased by 25 per cent during May as the political uncertainty lifted and owners sought to capture the predicted jump in prices that was widely reported in the media. On the demand side, talk of higher values has deterred prospective buyers, who are still digesting the hike in stamp duty introduced at the end of last year. Our research shows that the mismatch in expectations since the election has in fact amplified seasonal patterns that depress prices, so the slowdown in activity is unsurprising. 

July is statistically the best month in which to buy a property in Prime Central London, we found: it is when there is the most stock for sale, demand tails off as the summer holiday period approaches and values fall 3.3 per cent below yearly average asking prices. When we factor in the month required for an exchange of contracts, the cumulative dip in prices in July-August means that buyers can avoid paying for any of the average gains registered earlier in the year. 

Putting off a purchase until after the summer means, therefore, that buyers are potentially missing out on the weaker pricing that five years of transaction data show occurs in the third quarter. We anticipate that the softening in July and August will be more pronounced this year because of the distortions to the drivers of supply and demand after the election. Anecdotally, the only participants at a recent property viewing that I attended were fellow professional property buyers, who are clearly not waiting for the rumble of the herd to do their deals and are using a weaker market to acquire good assets at better prices.

It is important to understand how seasonality affects the Prime Central London market, particularly since these properties serve increasingly as a financial asset for investors. It is axiomatic that the best investment returns hinge on when an asset is bought and sold; high-end property is no different, which is why we analysed the impact of seasonality on pricing so that we can achieve the 10-15 per cent IRRs each year that we target for our investors. 

An apartment or house in Central London is an excellent investment. The inherent supply constraints, reinforced by strict planning and conservation rules, and the enduring appeal of owning a property in the British capital mean owners have enjoyed stellar returns: the average price per square foot rose by 103 per cent from 2006 through 2014. The longer-term returns are equally compelling and lie behind the steady transformation of the Prime Central London market into one dominated increasingly by investors.

In Mayfair, South Kensington, Fitzrovia and Marylebone, households of renters outnumber those of owner-occupiers, according to the most recent National Census. We expect this rising investment trend to transform other parts of the city’s prime residential market as well. 

The best advice for the growing ranks of investors is to use the market’s seasonal variations to enhance returns by buying and selling well. Closer examination of these seasonal price trends in light of the market’s strong gains would also have silenced the pundits, whose predictions of an “election premium” will inevitably lead to disappointment for those vendors with unrealistic price expectations this summer.

Biography:

Oliver Hooper, a member of the Royal Institution of Chartered Surveyors, founded Huntly Hooper in 2007 to advise private clients, trusts and family offices on investing in residential properties in Central London with a value in excess of £2 million.