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Knight Frank - The London Residential Review Q2 2021


Dominic Heaton-Watson, Associate Director of International Residential Project Marketing of Knight Frank Malaysia

7th MAY, KUALA LUMPUR – Prime London Sales Market Insight : Record-breaking activity lays the ground for sustained momentum into the summer as the UK economy reopens.

Dominic Heaton-Watson, Associate Director, International Residential Project Marketing, Knight Frank Malaysia says: “March proved to be a record-breaker in the capital’s sales market. While January and February saw high levels of transactional activity and strong buyer demand, the combination of a stamp duty holiday, positive economic data, and the pace of the vaccine roll-out saw March’s activity reach a new level”.

March saw the highest number of exchanges, offers made, offers accepted, and new prospective buyers registering with Knight Frank, in 10 years in London. It also saw viewings and market valuation appraisals move ahead of the five-year average for the first time in 2021, after a period characterized by limited supply, as sellers held off due to the pressures of homeschooling during the lockdown and concerns about new Covid-19 variants.

Heaton-Watson notes: “The stamp duty holiday, initially due to end in March but deferred by six months with a taper, would have been less of a motivating factor in prime markets in the capital. However, the introduction of a 2% stamp duty surcharge for overseas buyers from April will have driven activity despite travel restrictions (passenger numbers through Heathrow were down 83% on an annual basis in March). Consequently, the number of transactions in prime central London (PCL) was the highest it has been since March 2016, combined LonRes and Knight Frank data shows”.

There was a spike in activity in March 2016 ahead of a 3% stamp duty surcharge that was introduced the following month. Removing that anomaly, the last time sales volumes were as high in PCL was July 2014, six months before a stamp duty increase in December. In prime outer London (POL), transaction numbers also climbed to their highest level since March 2016. The previous high point was September 2015.

Strong activity levels in POL, where there is a higher proportion of domestic buyers, demonstrates how the 2% overseas surcharge was only one of several factors driving activity in PCL. The annual price decline in PCL was 3.5% in March, the smallest decline since the onset of the pandemic. In POL, average prices fell by 1.4%, which was the smallest decline since last February.

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Prime London Sales Market Insight  Rental declines may have bottomed out as demand grows faster than supply for the first time since the start of the pandemic

Dominic Heaton-Watson, Associate Director, International Residential Project Marketing, Knight Frank Malaysia says: “Average rents in prime central London declined 14.3% in the year to March, continuing a pattern established throughout the pandemic. While supply has spiked due to the closure of the short-let market, demand has been curtailed by international travel restrictions. Some signs are beginning to change.

Heaton-Watson notes: “The annual decline of 14.3% in PCL suggests rental value declines are bottoming out. It was the smallest increment in the annual decline since the start of the pandemic 12 months ago, has widened from 14.1% in February. A more significant shift took place in prime outer London. Average rents fell by 11.4% in March, which compared to 11.7% in February” Heaton-Watson says.

It was the first time the annual decline had shrunk since February 2020. Furthermore, demand grew faster than supply in PCL last month for the first time since November 2019. The number of new prospective tenants increased by 167% in March compared to the same month last year. Meanwhile, the number of market valuation appraisals rose by 127% over the same period.

Heaton-Watson says “With the UK economy being gradually reopened and high demand for “staycations” forecast this year, there will be a longer-term reduction in the quantity of stock on the
long-let market, which should help ease downwards pressure on rental values. Meanwhile, the number of tenancies started in the first two months of this year was 5% higher than last year as tenants took advantage of falling rents”.

The travel restrictions that have affected the sales market have also had a marked impact on the superprime (£5,000+/week) lettings market in London. There were 15 tenancies agreed in the first
two months of 2021, which is the quietest start to the year in five years. In 2020, there were 137 superprime tenancies agreed in London, a 11% decline on the previous year (154) due to the impact of Covid-19. However, 87 of these were signed between July and December, making it the second most active equivalent period in the last seven years, LonRes data shows.

London and UK Forecast – 2021 to 2025 – 2021 TO 2025 The stamp duty holiday and the furlough scheme extensions in the Budget in March have changed the landscape for the housing market in 2021, and Knight Frank has revised its forecasts as a result. Knight Frank expects UK house prices to increase by 5% in 2021, rising from a forecast of zero at the start of this year. Heaton-Watson comments “The strength of key market indicators in the first months of this year meant that an upwards revision was likely even before last month’s Budget”.

We now expect residential price growth in the wider UK to outperform Greater London in 2021 as the impact of the tapered stamp duty holiday extension drives demand in lower-value markets more consistently through to the end of September. Our forecasts for prime outer London and prime regional markets have remained largely unchanged as both areas continue to benefit from a drive for more space and greenery. Cumulative growth from 2021 to 2025 still places Prime Central London as the top performer (+25%) in the post-covid boom and remains the preferred destination for Malaysian property buyers says Heaton-Watson who advises Malaysia-based clients on international property.

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