Supply and demand imbalnce continues to shape London's prime property market

Property Reporter
10th February 2022
Prime London 551

Once again, high demand and low supply was the driving force in the capital's prime property market at the start of the year.

According to the latest data released by Knight Frank, prospective buyer numbers were 72% above the five-year average, while the number of sales instructions was down by 12% in January.

This doesn't look likely to change in the short term. Instead, a return to more balanced conditions is predicted to happen following an uptick of international buyers who are likely to arrive in greater numbers from the spring. However, it is unlikely that normal service will resume among overseas buyers for the reasons discussed here.

In the meantime, supply is building gradually. The number of new market valuation appraisals, a leading indicator of supply, was 6% above the five-year average in January. That compares to an equivalent decline of 30% in January 2021 as the UK locked down.

While the shelves are re-stocking at a relatively normal pace for the time of year, demand remains unrelenting, an imbalance that could be exacerbated by the arrival of more overseas buyers.

Tom Bill, head of UK residential research at Knight Frank, comments: “Supply chain disruptions have prevented normality returning in various sectors of the economy including the property market. A supply/demand imbalance has produced gravity-defying UK house price growth and there may be a similar bounce later this year in prime central London.

“The extent of any uptick will depend on how quickly different countries are able to suppress the effects of Covid-19 and how easy outwards and inwards travel becomes. The lifting of travel restrictions in the UK last October is only one part of this global puzzle.”

Meanwhile, the problem of low supply will take a period of time to resolve. Prospective sellers are often discouraged by a lack of purchase options, which produces a vicious circle of low listings. Prices in prime London have so far been largely flat throughout the pandemic but are gradually increasing.

Average prices in the year to January grew by 1.5% in prime central London, the highest annual rate since August 2015. In prime outer London, average prices increased 3.5%, the largest annual growth since June 2015.

A series of moving parts, including supply, demand and the return of international buyers, will need to align, but both figures appear likely to rise this year.

Prime central London's rental market

Rental values in London and the Home Counties have climbed to 5% above their pre-pandemic level in March 2020.

The annual change in prime central London reached 19.8% in January, which was the largest jump since the index began in 1995. In prime outer London, the change was 16.6%, the largest increase over the same period.

The increases are the result of a readjustment to both indices to reflect the steep nature of the rises that took place last year. Rental values in PCL fell 14.3% in the year to March 2021 as a flood of short-let properties hit the market and demand dried up. The situation reversed as lockdown restrictions were relaxed, producing the dramatic reversal.

Tom Bill, comments: “The unprecedented backdrop of the pandemic led to exceptional rental value growth last year. It has tailed off in recent months as the supply and demand imbalance corrects itself but that process still has some way left to run, which will keep upward pressure on rents this year.”

Gary Hall, head of lettings at Knight Frank, adds: “It’s a tough time to be a tenant at the moment. Rents are rising and the availability of stock is low, which means transaction volumes are lower. That said, we believe stock levels should start to improve later this year.”

As an indication of how strong demand remains, the number of new prospective buyers in London and the Home Counties in January was 62% above the five-year average.

Furthermore, the number of enquiries from corporate relocation companies in January this year was the highest it has been since January 2020.

In recent weeks, there have been signs that supply is gradually picking up, in part as a result of sellers failing to achieve asking prices, a trend more noticeable in prime central London.

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