Over the first three months of the year, the sales market in prime London slowed marginally, while rentals in the lettings market rose steadily. Consumer demand waned in Q1 of 2023 as a result of a general economic slowdown, leading to lower sales volumes. However, pre-pandemic trends in sales volume across prime London have generally been maintained.
If buyer demand remains steady, the recent uptick in new instructions, especially in higher-value markets, could portend a pick-up in sales activity in the second half of the year. It's unclear if the current changes signal a return to a 'normal' sales market or the beginning of a slump. Prime London's rental market also saw a drop in Q1, although this is due to supply constraints more than a lack of demand. Over the first three months of the year, rental prices rose again as demand exceeded supply.
In contrast to the rapid increase seen over the preceding 18 months, rental prices have moderated. Tenant rivalry is very intense despite the lack of new available rental units.
Sales Market
Prime London home prices and activity levels dropped in the first quarter of 2023 compared to the same period the previous year. Values on the most recent LonRes Sales Index decreased by 0.4% on an annual basis, while sales volume dropped by 23.0%.
First-quarter activity in the £5m+ market dropped by 32% year over year, bringing it back to 2019 norms. After a record high number of sales at the high end of the market in 2022, this may seem like a huge reduction; nevertheless, it is only a return to prior trends, in accordance with 2019 levels.
Price drops in Q1 2023 add to the overall picture of a cooling market. Average discounts increased to 8.3% from 4.7% in July, and 52% of houses sold in premium London in March had their asking price slashed from the previous month. This comes just before the normally busy spring selling season begins.
There are some encouraging signs, according to broader market statistics.
New instructions are up, and the number of deals that fall through in prime London is down, relative to the first quarter of 2017. Sales at the high end of the market are expected to rise again in Q2 as the number of houses priced at £5 million or more went under offer jumped by 20% in the first quarter.
When compared to the boom years of 2021 and 2022, the outlook for the primary London markets in the remainder of 2023 may appear weaker. First-quarter results, however, show that operations are running ahead of their 2017–2019 averages.
Interest and exchange rates, together with sentiment, are among the primary factors for both buyers and sellers, and their effects on the prime London market will be felt over the longer term.
The headline numbers often hide the true picture. According to the headline numbers, all three LonRes sectors saw a slight yearly price drop in Q1 2023. However, closer inspection of the numbers reveals that prime central London flats fared the worst, with yearly price drops of 1.3%, while prime fringe area properties grew in value by 6.7%. It's worth noting that all of these niche markets are expected to grow in the medium run relative to their Q1 2020 baselines.
Over the past three years, prices for both houses and apartments in prime London have risen by 12.0%. House prices are up 2.9% compared to the previous market top in early 2016, while apartment prices are down 5.0% on the same basis.
Even more diversity can be seen in price changes from one neighborhood to the next. St. John's Wood, Regent's Park, and Primrose Hill have outperformed the rest of the local markets over the past three years, increasing in value by 14.6%. This period begins in the first quarter of 2020. The areas of St. John's Wood, Regent's Park, and Primrose Hill saw some of the highest price increases (+14.6%).
Annual results show greater variation, with most districts experiencing declines in the single digits and only Kensington, Notting Hill, and Holland Park posting gains of +2.6%.
The strongest local markets in terms of transaction volume may not always show the strongest pricing increases.
When compared to the first quarter average from 2017-2019, Q1 2023 saw 25.6% more sales in Chelsea than any of the other key districts. However, prices have been rather stable during that time. There was a 45.1% increase in transactions in neighboring Fulham and Earl's Court on the same basis, again with no commensurate increase in achieved sale prices.
Lettings Market
Although Q1 rental growth in prime London was still high, it was slower than the preceding 18 months. After a quarterly increase of 0.6%, the latest LonRes prime London Rental Index recorded annual growth of 9.3%.
Rents in premier London's outer boroughs climbed by 3.1% in the first quarter of 2022 despite slower annual increases in the second and third quarters of the same year.
Throughout prime London, average yields increased to 4.18% in the first quarter while capital values remained relatively unchanged. This is a huge increase from their low point in Q4 2020 (3.28%) and the highest level since 2012.
Rental activity declined across the board as compared to the same time last year because supply constraints persist. Annually, the number of new lettings instructions dropped by 11.3% in the first quarter, while the number of properties put under offer dropped by 12.3% and the number of new lets agreed upon dropped by 19.2%. All three indicators are currently below their respective apexes from before the pandemic (2017-2019).
Price and activity data still point to a healthy rental market, but average discounts and days on market point to a little slowdown from the previous high point. Tenant demand increased dramatically in the second half of 2022, resulting in an average occupancy rate of 100.5% in September 2022. While March's 97.8% was lower than previous months, it was still above the longer-term average.
Similar trends can be seen in the average number of days on the market, which dropped to a 15-year low of 43.5 days in July 2022 before rising slightly to 47.8 days in March 2023. From a record low of 10% in July 2022 to a record high of 22.5% in March, the percentage of homes where the asking price was cut before being rented has climbed at a faster rate than any other indicator.
With tenants' diminishing affordability being the key issue restricting additional double-digit rental growth in many areas, there is little evidence in the data that we are moving away from the high demand, low supply conditions observed in recent months.
Source: LonRes 2023 Spring Market Report
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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Maiden Capital. The information provided is meant as a general guide only and should not be construed as investment advice. You should always consult your financial, legal and tax advisers regarding private equity and real estate investments