LONDON RESIDENTIAL REVIEW - LONG-TERM REWARDS, SHORT-TERM UNCERTAINTY WINTER 2015
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RESIDENTIAL RESEARCH
LONDON
RESIDENTIAL
REVIEW
LONG-TERM REWARDS,
SHORT-TERM UNCERTAINTY
WINTER 2015
IMPACT OF TAX CHANGES MANSION TAX AND AREAS OF
THE LETTINGS MARKET OUTPERFORMANCE
KEY FINDINGS LONG-TERM REWARDS
New stamp duty changes add
OUTWEIGH SHORT-TERM RISKS
to short-term uncertainties but Growing uncertainty has caused demand to become more
are outweighed by strong longer-
term fundamentals subdued in the prime London market. As high-value property
comes under political focus in the short-term, the grounds
Annual growth in prime central for longer-term optimism remain strong, says Tom Bill.
London eased to 6.1% in
November, with the strongest At the start of 2014, the prime London Accordingly, the stamp duty changes have
increases away from traditional
residential property market was largely put a significant question-mark over the
prime areas
unaffected by the prospect of the viability of the mansion tax proposal.
upcoming UK general election. By the
With opinion polls indicating that a
Price growth of 9% in prime end of year, it was operating wholly in
majority government is unlikely in May,
outer London was led by the its shadow.
the uncertainty looks likely to continue in
eastern areas of Canary Wharf
and Wapping The impact of the election became the first half of 2015.
notable by Q2 2014, causing demand to
Whatever the result of the election,
become more subdued as uncertainty
Knight Frank analysis shows growth is unlikely to be as headline-
grew over the prospect of tax changes.
there are approximately 20,000 grabbing over the next five years as the
rental properties in London By November prices had begun to last five. This fact, however, should be put
with a capital value of more soften and in December Chancellor in the context of an exceptionally strong
than £2 million George Osborne increased stamp duty and prolonged period of growth that has
for properties above £937,500 in a produced a 73% rise in prime central
move designed to outflank his political London since the post-Lehman Brothers
Total returns for prime London
opponents five months from the election. low point in March 2009.
property far exceeded other
asset classes in the year to In the short-term, the stamp duty We forecast cumulative growth of 22%
October 2014 changes will lead to some harder between 2015 and 2019 as demand
negotiations between buyers and continues to exceed supply. Forecasts
vendors and instances where values may indicate the London population will grow
adjust downwards slightly to account for by in excess of 100,000 every year for the
the new higher charge. next ten years while it remains the city of
choice for the global wealthy.
Given the phlegmatic way in which the
London property market has reacted These longer-term fundamentals of the
to previous similar changes, history prime London property market are likely to
indicates it will absorb the changes in continue to underpin its future performance.
the short to medium-term.
However, the stamp duty changes have
FIGURE 1
also redrawn the parameters of a long-
standing debate surrounding the taxation Price growth in the year to
November 2014 (Rebased to 100)
of high-value residential property.
After numerous changes in recent years
110
that include capital gains tax reform
for overseas-based buyers and higher 108
taxation on ‘enveloped dwellings’, the
106
stamp duty changes mean it is now
TOM BILL difficult to argue that high-value property 104
Head of London Residential Research is under-taxed.
102
“The stamp duty changes A comparison of taxation in New York, PRIME OUTER LONDON
100
have redrawn the parameters Paris, Singapore and Hong Kong shows UK
PRIME CENTRAL LONDON
of a long-standing debate London is in the middle of the pack in 98
terms of property taxation. Stamp duty is
May 14
Nov 13
Nov 14
Dec 13
Aug 14
Sep 14
Mar 14
Feb 14
Jun 14
Jan 14
Oct 14
Apr 14
Jul 14
surrounding the taxation of
higher in both Asian markets while, unlike
high-value residential property.” London, New York residents are taxed on Source: Knight Frank Residential Research /
their global wealth. Nationwide
2LONDON REVIEW WINTER 2015 RESIDENTIAL RESEARCH
HAMPSTEAD
SALES RENTS
PRIME LONDON
3-month
Prime London sales and rental market performance, 1.6% 0.9% price change ISLINGTON
year to November 2014 SALES RENTS
12-month
4.9% -7.5% price change 3-month
0.0% -0.8% price change MARKET
Prime gross yield: 2.52% 12-month
11.2% 0.8% price change PERFORMANCE
NOTTING HILL Annual growth in prime central London was
SALES RENTS ST JOHN’S WOOD MARYLEBONE 6.1% in November, driven by residential
3-month SALES RENTS SALES RENTS
-3.5% 1.1% price change markets north of Hyde Park as well as
3-month
0.2% 2.1% price change
3-month CITY & FRINGE
-0.3% -0.1% price change Islington and City & Fringe in the east.
12-month SALES RENTS
6.6% 0.4% price change 3-month
12-month 12-month Buyers are seeking value away from
2.6% 9.5% price change 5.9% 10.9% price change 1.1% 0.7% price change
Prime gross yield: 2.97% traditional prime postcodes to the immediate
Prime gross yield: 3.66% Prime gross yield: 3.09% 12-month west, south and east of the park due to strong
10.8% 3.1% price change WAPPING growth in these areas which has driven prices
KENSINGTON SALES RENTS
higher in areas like the Hyde Park Estate.
SALES RENTS HYDE PARK ESTATE MAYFAIR 1.0%
3-month
0.7% price change
3-month SALES RENTS SALES RENTS We forecast cumulative growth of 22%
-1.5% 3.1% price change
3-month 3-month 12-month between 2015 and 2019 as demand
1.4% 0.0% price change 1.0% -0.5% price change 12.7% 3.9% price change
SOUTH KENSINGTON 1.4%
12-month
5.3% price change continues to exceed supply. However, a
SALES RENTS 12-month 12-month Prime gross yield: 3.10% trend among buyers to focus increasingly
12.9% 1.3% price change
3-month Prime gross yield: 2.62%
3.3% -4.1% price change CANARY WHARF on the right specification and facilities and
-0.6% 2.4% price change SALES RENTS
Prime gross yield: 2.69% less narrowly on the right postcode suggests
Prime gross yield: 2.01% 3-month
12-month 1.9% 1.4% price change overlooked residential areas like Bayswater,
5.8% 6.0% price change
Victoria, the City and the Midtown district,
12-month
Prime gross yield: 3.04% 13.9% 4.3% price change which includes Holborn, Covent Garden and
Bloomsbury, are likely to outperform the
Prime gross yield: 4.23%
prime central London average due to the
high-quality new-build pipeline in these areas.
KNIGHTSBRIDGE
SALES RENTS In prime outer London, growth in the eastern
3-month districts of Wapping and Canary Wharf
0.3% -0.1% price change
exceeded that in south-west London or
12-month Hampstead. Both eastern areas benefit
5.5% 0.2% price change
from their relative proximity to London’s
Prime gross yield: 2.41% RIVERSIDE two financial centres of the City and Canary
SOUTH BANK
SALES RENTS SALES Wharf, a series of high-quality new-build
CHELSEA 3-month 3-month schemes and the fact they have fewer
2.1% 0.0% price change 1.6% price change £2 million-plus properties that could be
SALES RENTS
3-month 12-month 12-month subject to a mansion tax.
0.9% 0.7% price change 10.9% -2.7% price change 10.2% price change
BELGRAVIA For the same reason, prices in Fulham have
12-month SALES RENTS
3.0% 1.3% price change Prime gross yield: 3.47% softened in recent months due to its high
3-month
0.9% 1.1% price change proportion of family homes between
Prime gross yield: 3.32% £2 million and £4 million.
RICHMOND 2.2%
12-month
1.8% price change
SALES Further afield in south-west London, prices
3-month Prime gross yield: 2.84% continue to be underpinned by a flow of
0.1% price change
FULHAM buyers from more central areas like Notting
12-month SALES RENTS Hill and Kensington seeking more space for
5.6% price change
3-month
-4.2% -0.2% price change their money.
BATTERSEA
12-month SALES RENTS
2.0% -0.4% price change
3-month
2.0% -1.2% price change
Prime gross yield: 2.97%
12-month
11.6% -4.1% price change PRIME CENTRAL PRIME OUTER
LONDON LONDON
SALES RENTS SALES RENTS
WANDSWORTH
& CLAPHAM 0.2% 0.7% 3-month 3-month
0.6% 0.1% price change
WIMBLEDON SALES
price change
SALES RENTS
3-month 12-month 12-month
3-month 0.9% price change 6.1% 2.9% price change 9.0% -0.3% price change
0.2% -1.4% price change
12-month
12-month 13.9% price change Prime gross yield: 2.92% Prime gross yield: 3.59%
6.3% 3.6% price change
Prime gross yield: 4.48%LONDON REVIEW WINTER 2015 RESIDENTIAL RESEARCH
MANSION TAX AND Tim Hyatt,
Head of Lettings
THE LETTINGS MARKET There has not been any clarification
as to whether the proposed
mansion tax would be the
In the five years since the possibility of a in the form of higher rents as landlords responsibility of the landlord or
mansion tax was first raised, the debate make their investment viable as opposed the tenant but our assumption is
surrounding its impact on the London to reducing maintenance budgets or that it will be the landlord.
property market has grown. trading out of the sector. Some landlords
However, there is a degree of
Politicians from all parties have criticised may re-invest in less expensive property,
uncertainty in the run-up to the
the plan for its disproportionate impact a move that could potentially drive
election and we are aware of
on London and Knight Frank analysis prices higher in lower price brackets instances of tenants asking to be
shows 74% of all £2 million-plus and impact affordability. protected from any liability arising
properties in Greater London are either The impact of higher costs would be from a possible mansion tax and
flats or terraced houses, demonstrating felt more strongly by young professional for that to be written into the
the mismatch between perception, in renters who have chosen to share tenancy contract.
particular the term ‘mansion’, and the
a house in areas like Wandsworth From a landlord’s point of view,
reality of the London property market.
or Clapham because of affordability any hit on their gross to net yield
After recent increases in stamp duty constraints in the sales market. calculations will be a deterrent,
for properties over £937,500, the particularly bearing in mind that
While the mansion tax debate has
questions over the feasibility of the yields in many instances are
remained in the realm of theory over only marginally higher than their
proposal have grown louder.
the last five years, strong price growth all-time lows.
Here, we examine the potential impact in areas like Wandsworth and Clapham
of a mansion tax on the London during the same period means many The impact in terms of pricing for
lettings market, which raises its own more properties are now in the £2 million- rental stock and to what extent costs
questions in terms of the proposal’s are passed on remains to be seen
plus price bracket.
unintended consequences. and will be dependent on the supply/
In both the sales and lettings market, demand dynamic at the time.
Knight Frank analysis shows there the uncertainty is likely to mount as the
are about 20,000 rental properties in election approaches.
London worth £2 million or more, which
represents about a fifth of the UK’s
housing stock in the price bracket.
FIGURE 2
As the map in figure 2 shows, the highest Location of £2 million-plus rental properties in London
concentration is in the prime central
London boroughs of Westminster and
Kensington & Chelsea and there are
clusters in Camden and an area of
south-west London that stretches from
Hammersmith & Fulham to Richmond.
While the widespread assumption is
that any cost would be met by the
landlord, a degree of uncertainty will
inevitably surround the drafting of
lettings contracts until any new
legislation is enacted.
For landlords, any additional annual
cost would make their investment less
viable. This is especially true in prime
London, where the contribution of the
rental income is outweighed by capital
value growth in terms of calculating
total returns.
Rental properties worth £2m+
The impact would be particularly marked (% of total housing stock worth £2m+
by postcode sector)
when, as is often the case, landlords are High (Max: 36%)
also paying a mortgage on the property.
Anecdotally, some are suggesting Low
Less than 0.04%
tenants may ultimately absorb the cost Source: Knight Frank Residential Research
5GLOBAL BRIEFING
For the latest news, views and analysis
on the world of prime property, visit
KnightFrankblog.com/global-briefing
RENTALS AND INVESTMENT RESIDENTIAL RESEARCH
MARKET FOCUS Tom Bill
Head of London Residential Research
+44 20 7861 1492
The prime central London lettings market to bolster their loan books after the
tom.bill@knightfrank.com
has been in recovery mode since the start introduction of stricter lending criteria earlier
of 2014, with rental values rising 3.3% this year slowed the pace of loan approvals. HEAD OF LONDON RESIDENTIAL
between January and November.
Rental values above £1,500 per week in Noel Flint
It follows a shallow two-year decline against prime central London grew 3.8% between +44 20 7861 5020
the backdrop of a faltering economy and a January and November, while the figure was noel.flint@knightfrank.com
surging sales market. 2.9% for properties below £1,500 per week,
HEAD OF LETTINGS
reflecting how properties in higher price
In prime outer London, an annual decline Tim Hyatt
brackets are performing better.
of -0.7% in November 2013 had eased to +44 20 7861 5044
-0.3% by November this year though values The super-prime market, which covers tim.hyatt@knightfrank.com
remained largely flat over the 12 months. rental values of £5,000 per week and above,
is buoyant versus last year and indicates
Prime central London rental values have how relocation budgets are growing for the
been rising this year as the UK economy most senior positions in companies.
improved, though growth was zero in
November due to a seasonal slowdown Demand has also recovered strongly
and a degree of caution over economic since last year, as figure 4 shows, with
conditions in other parts of the world. the number of viewings, new prospective
tenants and contracts started and agreed
China cut interest rates for the first time in all rising strongly in the year to November
more than two years in November and there 2014 compared to the previous twelve-
is speculation the European Central Bank month period.
is getting closer to full-blown quantitative
easing, both of which will support their Rental yields in prime central London
respective economies. rose to 2.92% in November, continuing a
climb back towards 3%, a figure they last
Next May’s general election is adding to a surpassed 18 months ago. Meanwhile in
sense of uncertainty and wider optimism prime outer London, yields were 3.59%,
among companies is tempered to some their highest level in seven months.
extent by a number of profit warnings
Prime London property remained an
and regulatory uncertainty in the financial
attractive proposition for investors in
services sector. Knight Frank Residential Research provides
2014, with total returns in prime central
In a further move that may dampen short- and prime outer London markedly higher strategic advice, consultancy services and
term demand, mortgage lenders have than other asset classes despite the forecasting to a wide range of clients worldwide
cut rates as the likelihood of an imminent backdrop of global economic uncertainties, including developers, investors, funding
interest rate rise recedes and they attempt as figure 3 shows. organisations, corporate institutions and the
1.6% public sector. All our clients recognise the need
for expert independent advice customised to
FIGURE 3 FIGURE 4 The rental recovery their specific needs.
Prime London property outperforms Year to November (2014 vs 2013)
other asset classes Knight Frank Research Reports are available at
Total return (year to October 2014) KnightFrank.com/Research
43.8% 43.8%
39.513.9%
% 39.5%
9.4%
3.5% © Knight Frank LLP 2014
0.7%
22.4% 22.4% This report is published for general information only and not to
19.9% 19.9% be relied upon in any way. Although high standards have been
used in the preparation of the information, analysis, views
and projections presented in this report, no responsibility
or liability whatsoever can be accepted by Knight Frank LLP
for any loss or damage resultant from any use of, reliance on
PRIME PRIME HEDGE SHARES or reference to the contents of this document. As a general
CENTRAL OUTER FUNDS (FTSE100
LONDON LONDON (HFRI -10.5% total return report, this material does not necessarily represent the view
1.6% composite
index) COMMODITIES
index) of Knight Frank LLP in relation to particular properties or
(S&P GSCI index) projects. Reproduction of this report in whole or in part is not
allowed without prior written approval of Knight Frank LLP to
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