Outlook for prime central London property market in 2023 appears rosy

As such, making grand predictions about the future of the housing market in 2023 is an increasingly difficult task.

Looking back, despite the various challenges faced in 2022, the UK property market performed admirably. December’s house price index data from mortgage provider Halifax, for example, showed that while the annual rate of increase slowed, it was still up by 4.7 per cent in 2022.

When comparing with 2021 data from the Office for National Statistics, the average property value has grown by more than £10,000 and prices continue to sit above pre-pandemic levels. 

In the prime central London property market, performance was similarly robust. According to estate agency Savills, demand and activity levels were strong across this sector of the market in 2022.

Indeed, figures from November 2022 show that sales of £5m-plus properties hit their highest level in the first nine months of a year since 2006 and PCL property values have grown by 2.4 per cent since March 2020. 

There will of course be further difficulties for the housing market to contend with given the current macroeconomic backdrop, so what is the outlook for the prime London property market for 2023?

A cooling off period for the wider market

With inflation in double digits (10.7 per cent) and interest rates rising (2.9 basis points since December 2021), buying power has been greatly diminished in recent months. Consequently, the impact of these economic factors on the UK market as a whole is that house prices are expected to fall in 2023; indeed, they are already on the decline. 

Data from mortgage provider Nationwide in December, for instance, shows that prices dropped for the fourth month in a row, while growth slowed to its lowest level since mid-2020.

The prime central London segment of the market outperformed the wider UK property market in the fourth quarter of 2022 in the face of some particularly challenging economic headwinds

Following the economic turmoil under Liz Truss’s short-term stewardship of No 10 Downing Street, a weakened currency and rising mortgage costs contributed to this slowdown. 

As a result of a decline in buying power and rising rates, the Office for Budget Responsibility forecasts a 9 per cent drop in prices. Estate agency Knight Frank, however, predicts a fall of just 5 per cent, so forecasts do differ and should not be taken as a true indication.

Optimism for the PCL market

Despite a drop in prices more widely, the PCL segment of the market has always operated somewhat independently. For example, data from Savills shows the sector outperformed the wider UK property market in the fourth quarter of 2022 in the face of some particularly challenging economic headwinds. As such, the outlook for PCL in 2023 appears to be more positive, but why?

To start with, wealthy buyers are less likely to feel the harsh effects of the cost of living crisis.

Consequently, while the lower-to-middle echelons of the market could see a decline in activity due to a lack of buying power, the PCL market – which is driven more by global equity – should be insulated to a greater extent from any domestic economic turmoil by the nature of the buyers within it.

Contributing to this trend is the increasing presence of foreign investors in the PCL market, who are encouraged to invest given the weaker pound. Indeed, estate agency Carter Jonas says that property was 25 per cent less expensive at the end of September last year than it was in June 2021 for overseas investors.

As such, foreign buyers are capitalising on this trend and were responsible for 57 per cent of the investment into London property in 2022. This should continue, as favourable exchange rates could provide more relative bargains to foreign investors. 

Another key factor that insulates the PCL market is the lack of supply. A shortage of stock continues to drive competition among buyers, particularly in the super-prime market.

Figures from agency Beauchamp Estates, for instance, forecast that demand for properties priced above £15m will grow by 30 per cent. Accordingly, values in the top echelons of the market will either remain flat or grow marginally by 1 per cent to 2 per cent, rather than falling like the rest of the market.

Another trend that could attract an influx of PCL buyers is rising rents. Indeed, many PCL buyers are buy-to-let landlords, and hence the prospect of higher yields is likely to attract more investors, particularly because demand is so high.

The challenges faced by the property sector in 2022 remain, interest rates will rise further and continued economic and political uncertainty is highly likely. Yet, the appeal of PCL property has not diminished

In fact, according to Knight Frank, the demand from new prospective prime tenants sat at 26.7 per cent above the five-year average in November 2022. As a result, PCL rental values enjoyed a 17.8 per cent rise in 2022.

Since the start of the pandemic, this represents a 23.2 per cent increase and growth is set to continue into 2023 – forecasts suggest 6 per cent in the PCL rental market, regardless of the wider economic landscape.

Final thoughts

Of course, the challenges faced by the property sector in 2022 remain, interest rates will rise further and continued economic and political uncertainty is highly likely. Yet, the appeal of PCL property has not diminished, keeping demand high against perennially low supply. The PCL market remains robust, and this should continue in 2023.

To help homeowners and investors prepare for the year ahead, whether they are domestic or international, lenders must be ready to anticipate and support their needs.

Indeed, this will require flexibility, and the lenders who can provide this are the ones who will be best placed to harness the opportunities of what could be a promising year for the PCL market.

Alpa Bhakta is chief executive of  Butterfield Mortgages