Prices in prime central London rise despite higher interest rates

By Timothy Tay

/ EdgeProp Singapore |

July 27, 2023 7:00 AM SGT

The Other House South Kensington by London Central Portfolio. (Pictures by: London Central Portfolio)

SINGAPORE (EDGEPROP) - Last month, overall property prices in prime central London rose 0.6% m-o-m and increased 3.6% on a half-yearly basis, according to research by London Central Portfolio (LCP), a London-based real estate buying and investment agency.

A surge in transaction volumes over the next few months will start to accelerate price growth from its current trough as buyers overcome the uncertainty prevalent in the market since 2022, adds Naomi Heaton, founder and chair of LCP.

Since 2015, the prime central London market has faced challenges due to rising property taxes and Brexit uncertainty, says Heaton.

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She observes that the general election in 2019, which ushered in a new Conservative government, coincided with a rebound in the central London property market. “We knew this would come because it had been so suppressed for a prolonged period and there was a lot of pent-up demand. But the recovery was interrupted by the Covid-19 pandemic,” she adds.

Heaton says that there was a virtual standstill in the London market during the pandemic years, as price growth and transaction volumes stagnated. The real estate investment market was especially hard-hit, she adds.

Investors were spooked again when the war in Ukraine erupted in February 2022, but when she spoke to EdgeProp Singapore in June this year, she noted that prices and transactions were gradually picking up.

Even the higher interest rate environment is unlikely to dampen the pent-up level of investor demand, she reckons, as most of these buyers are not dependent on loans to finance their purchases.

Foreign buyers unimpeded by high interest rates

Until September last year, local UK buyers had enjoyed relatively low interest rates as well as stamp duty holidays to buy new homes. “But higher interest rates [now] will have the most impact on local buyers. People will come to the end of their fixed mortgages over the next two to five years and this will have a huge impact on domestic buyers,” says Liam Monaghan, managing director of LCP.

Meanwhile, overseas buyers feel confident to resume buying activities again in central London. There has been a huge amount of buying interest among Asia Pacific-based investors who want to resume their investment activities in central London, notes Heaton.

Monaghan and Heaton travelled to Singapore last month as part of a whirlwind tour of the region to visit clients in the city-state as well as Kuala Lumpur and Hong Kong. “There is a real appetite [for properties] and a significant number of people we have reconnected with are keen to start investing again,” she says.

In prime central London, flat prices recorded the strongest price gain, moving up 3.8% on a half-yearly basis in June 2023. This is also a 2.7% gain over a three-month period. In comparison, houses in prime central London gained 2.3% over a six-month period and increased 1.8% over a three-month period, based on research by LCP.

“The prime central London market is definitely showing signs of weathering the current storm when compared to the wider market, despite mortgage rate rises and high inflation,” says Monaghan. “This is partly due to buyers mainly purchasing in cash or with little financing and being therefore immune to interest rate hikes.”

A priority among most of the clients she met was to purchase homes for their children. “These clients are looking to buy property in London that their children can stay in during their university days. We also find that parents start this process when the children are still very young,” says Heaton.

Thus, education continues to be a primary motivator for buyers of central London properties. Securing a stable investment asset is a close second on their list, she says.

She has also noticed a shift among Hong Kong-based buyers who previously saw central London properties as expanding their global investment exposure. However, in recent years, many more are buying for their own use, she says, adding that the uncertain social-political environment that has shadowed the Chinese city in recent years is spurring some Hong Kongers to consider relocating.

Rise in prices accompanies surge in transactions

The majority of buyers LCP helps tend to have a budget that ranges from GBP1 million ($1.71 million) to GBP2 million, Heaton says. “Most transactions in central London are for smaller-sized units. But part of this is because there aren’t that many large units or houses on the market now.”

According to Heaton, investor activity has only just started to pick up. “My personal view is that pricing in London is as low as it will get in the current market conditions, and it has been at the same level for about three years,” she says.

“But the moment the weight of investor traffic increases, you’ll start to see multiple bids on available properties. That is the point where we will see prices go up,” she adds.

Monaghan believes that prime central London prices are at about 5.9% below their 2015 historic peak, with flats selling at an average of 6.7% under the 2015 peak and houses at about 0.5% below the peak.

“With rental values rising substantially and in many cases being the same as a monthly mortgage repayment or more, parents are seeing the benefit of helping their children get onto the [property] ladder now,” he says.

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Since Heaton established LCP as a buying agency in 1990, the company has diversified its services in the central London market. It now has a team of in-house architects and interior designers to refurbish investment assets acquired by its clients for their own stay or to lease out, anchored by its own letting and property management departments.

The expansion in its services grew organically over the years as client profiles became more sophisticated, says Heaton. “When we started, most of our overseas clients would go to exhibitions marketing new builds,” she recalls.

But as investors become more knowledgeable and sophisticated, and as a new generation enters the market, they realise that most of the prime properties are the heritage properties in central London, she says. “I think there is a greater sophistication in the market of understanding that being in the centre of London is where there is the most long-term value.”

The Other House

The company’s newest direction, led by Heaton, capitalises on its forte in interior design, leasing, and property management in opening a new line of luxury, serviced pied-à-terre homes in central London. This new concept is called The Other House.

“The inspiration for The Other House comes from our observation of the trends in the private rental sector in London. We manage a large rental portfolio of properties in prime central London on behalf of our clients,” says Heaton.

She adds that over the years, she has observed that tenants have been opting for smaller units and have been more willing to sacrifice space for a more central location. At the same time, tenants are prioritising houses with good interior design, and successfully leased-out properties tend to offer an aspirational lifestyle as the lettings market becomes more sophisticated.

The private club, Hogsmire, in The Other House.

“I realised that what these tenants want is a hotel lifestyle. This prompted me to look at the concept of a long-stay hotel to combine their desire for a central location, hotel-like services, club facilities, and apartment-style living,” says Heaton.

The Other House opened its first property in Harrington Gardens, South Kensington, in July 2022. The property, designed by London-based Bergman Design, features 11 Victorian townhouses comprising 237 apartments, private meeting rooms, dining rooms, and event spaces. Apartments range from studio-style flats to three-bedders of 247 to 656 sq ft. There are also options to connect up to four flats for a large space of about 1,238 sq ft.

A private club for residents features two bars, a screening room, and several wellness and well-being spaces such as a vitality pool, a gym, and a meditation hub. F&B offerings are anchored by the all-day street café The Other Kitchen and a signature cocktail bar called The Owl and Monkey.

“Working with heritage architecture brings its challenges and there have been unexpected discoveries as well as some delightful surprises, in many cases not uncovered until the strip-out process in the early stages,” says Heaton. “Restoring historic buildings is incredibly rewarding and is what will make our Residents’ Clubs individual, unique and embedded with history.”

The all-day street café, The Other Kitchen, at The Other House.

Heaton says that LCP plans to launch another collection of apartments under The Other House located in Covent Garden in November 2024, as well as a future property in Belgravia. She is also eyeing potential opportunities to bring the brand into key gateway cities around the world over the coming years.

Meanwhile, she remains optimistic about the prime central London market. “Overall, the local [prime central London] market is doing well in comparison to England and Wales but it is still in the balance. The market hasn’t dropped since Covid-19, so I am confident that it will remain this way, but we may see a reduction in transactions, particularly at the lower end of the market where [local] buyers are affected by soaring mortgage rates,” says Heaton.

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