Demand from overseas has – and will – support demand in the PCL property market

Alpa Bhakta, CEO, Butterfield Mortgages, explores the current level of demand being seen for prime London properties among overseas buyers and the ongoing economic factors that could affect this.

Related topics:  Property,  Housing,  PCL,  Prime Central London
Alpa Bhakta | Butterfield Mortgages Limited 
19th September 2023
alpa bhakta
"Evidently, in the face of significant domestic economic upheaval, the ultra-wealthy still perceive London as an alluring and secure destination for their investments"
- Alpa Bhakta - Butterfield Mortgages Limited 

For many years, properties in London’s real estate market have long been a magnetic force, drawing significant amounts of investment from foreign investors in particular.

As noted recently by Savills’ Alex Christian, buyers are “attracted by the lifestyle London offers – a compelling combination of quality schools, culture, green space, history and architecture”.

So attractive is the capital as a destination in which foreign buyers want to invest or live, that official figures from last year show that more than half (57%) of property acquisitions in the capital were made by non-UK residents. Largely, these investments occur in prime central London locations, so the investors tend to be high-net-worth individuals who operate in the market’s higher echelons.

However, significant challenges have emerged in recent years that have made it more difficult for overseas buyers to enter London’s market: higher stamp duty for second homes and non-UK residents; the fallout from the Brexit referendum; the travel restrictions that were implemented during Covid-19 pandemic; and the economic turbulence of the last 19 months are the most significant that come to mind.

Yet, while many of these challenges continue to confront the market, demand from overseas remains strong, and the data suggests that the PCL property market is outperforming the rest of the UK.

PCL robustness stems from its strong international demand

The PCL market has showcased its remarkable staying power over the past year. Despite contending with elevated inflation and a noteworthy rapid ascent in interest rates, price levels have only exhibited a subtle downward correction.

According to Knight Frank's analysis, prime central London property prices registered a modest 0.9% decline in the year leading up to July 2023. This performance surpasses the broader UK housing market, as indicated by Halifax's data, which reported an average decrease of 2.4% in house prices outside of London during the corresponding period.

Moreover, the data also highlights that certain pockets within the PCL sector have defied the overall trend and indeed witnessed growth in the year leading up to July 2023. For instance, in Knightsbridge, sale prices saw a notable increase of 3.3%.

This kind of stability – and indeed overperformance – is not only a consequence of but also a driving force behind the ongoing international demand for property in London’s prime postcodes.

According to additional data from Knight Frank, the resurgence of global travel post-pandemic and a depreciated GBP have powered the PCL market in the first third of this year, while HNW brokers have witnessed a boom in demand from US and Asian buyers who have been keen to capitalise on a strong US dollar in recent months.

The recent sale of a flat near Green Park for £22 million to a buyer based in the Far East provides the perfect illustration of this trend. As noted by the co-owner of luxury home estate agent Oliver Bernard, Harvey Cyzer, the return of foreign investment and these kinds of sales have been accelerated by the departure of super-rich Russian investors amidst the war in Ukraine.

Demand is on an upward trend

Evidently, in the face of significant domestic economic upheaval, the ultra-wealthy still perceive London as an alluring and secure destination for their investments.

Its reputation as a desirable place to live, work, study or holiday is well-known. But the simple transaction processes, coupled with the transparency of the UK's legal system, also continue to bolster the longstanding resilience and demand in the capital's property market.

It is also important to take into account the influence of the Bank of England's cycle of interest rate hikes. As noted above, the pound has faced notable downward pressure over the past 12 months, enabling numerous buyers to enter the PCL property market at a relatively lower cost due to favourable exchange rates.

Policymakers have recently indicated that the base rate will rise again at the central bank’s next meeting, while growth fears have simultaneously started to creep in. As a result, many analysts expect the pound to weaken further in the final few months of 2023, which could see another influx of international buyers looking to capitalise on the relative bargains that the exchange rates could provide.

Elsewhere, as the next general election creeps into view, we are likely to see both major political parties begin to lay out their plans for managing the UK’s property market. From reforming planning laws to adjusting stamp duty rates, any manifesto commitments made in the coming months will be of the utmost importance to investors. In turn, we could see investment levels rise in the lead-up to the election from overseas buyers who are keen to enter the market ahead of any possible reforms.

Whichever way one looks at the current situation, the argument that foreign investment is likely to grow in the coming months is a compelling one.

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