Prices in prime central London softened for the second consecutive month in December against an increasingly unpredictable political backdrop.

A decline of -0.1% was smaller than the -0.2% registered in November and annual growth eased to 5.1%. Though the annual rate was the lowest in five years, prices have risen 52% over that period.

At the start of December, Chancellor George Osborne increased stamp duty for properties above £937,500 in a move designed to outmanoeuvre his political opponents five months from the general election.

Following a spike in transactions before the new system came into effect at midnight on 3 December, there has been a period of tougher negotiation between buyers and vendors that in some instances has led to prices adjusting downwards slightly to account for the new higher charge.

Some sellers and buyers opted to split the difference between the old and new charges and overall there has been minimal evidence to date of deals falling through.

Firstly, it indicates how likely the prime central London market is to absorb the changes in

the short to medium term.

The market has reacted in a largely level-headed manner to previous similar changes, including a rise in stamp duty to 7% from 5% for properties over £2 million in March 2012. Despite negative forecasts at the time, prices have since grown 17% in the £2 million to £5 million price bracket, as figure 2 shows.

Second, there has been a debate surrounding the taxation of high-value residential property, including the proposed mansion tax, for more than five years. The composed initial reaction to the stamp duty changes and the fact annual growth has been moderating for three years indicate the market has priced in some form of political intervention.

However, that is only true up to a point and uncertainty remains over the possibility of further property taxes after the election. After December’s stamp duty changes and an OECD report this month showing UK property taxes as a proportion of total tax revenues are already the highest in the world, the case for further property taxation is significantly weaker than it was in November.

DECEMBER 2014Prices declined -0.1% in December, which meant annual growth slowed to 5.1%

Annual growth is the lowest in five years but prices have risen 52% since the end of 2009

The market has begun to absorb stamp duty changes and in some instances prices have moderated slightly to reflect the new charges

Prices have risen 17% since the last time stamp duty rates were raised for high-value properties

OECD report findings raise questions over the viability of further property taxation in the UK

TOM BILL Head of London Residential Research

“The composed initial reaction to the stamp duty changes and the fact annual growth has been moderating for three years indicate the market has priced in some form of political intervention.” Follow Tom at @TomBill_KF

For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

THE PRIME CENTRAL LONDON MARKET STARTS TO ABSORB STAMP DUTY CHANGESThe restrained initial reaction to December’s stamp duty changes suggests the market had been braced for some form of political intervention, says Tom Bill

RESIDENTIAL RESEARCH

PRIME CENTRALLONDON SALES INDEX

FIGURE 1 Prime central London price growth in December 2014

Source: Knight Frank Residential Research Source: Knight Frank Residential Research

Monthly growth 3-month growth 6-month growth Annual growth

90

95

100

105

110

115

120

Mar

-12

May

-12

Jul-1

2Se

p-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep-

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ov-1

3Ja

n-14

Mar

-14

May

-14

Jul-1

4Se

p-14

Nov

-14

0

50

100

150

2013

2012

2014

Price growth (rebased) Sales volumes (rebased)

5.1%

-0.3%

-0.1%

0.7%

FIGURE 2 Price and transaction growth following the march 2012 stamp duty changes

RESIDENTIAL RESEARCHTom Bill Head of London Residential Research +44 20 7861 1492 tom.bill@knightfrank.com

PRESS OFFICE Daisy Ziegler +44 20 7861 1031 daisy.ziegler@knightfrank.com

© Knight Frank LLP 2014 - This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank LLP for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material does not necessarily represent the view of Knight Frank LLP in relation to particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank LLP to the form and content within which it appears. Knight Frank LLP is a limited liability partnership registered in England with registered number OC305934. Our registered office is 55 Baker Street, London, W1U 8AN, where you may look at a list of members’ names.

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thewealthreport2014

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14

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Prime central London

Hedge funds (HFRI

composite index)

Commododities (S&P GSCI index)

Shares (FTSE 100

total return index

9% 3.7% -21.4% 5.6%

Rental values in prime central London were flat for the second consecutive month in December as a seasonal year-end slowdown and the impact of global economic uncertainty dampened demand.

Though monthly growth slowed to zero by the end of the year, the annual increase in rental values was 3.3%, which was the highest rate in three years.

Annual growth has been climbing steadily since July as the UK economy improves and some buyers switch to the rental market while political uncertainty surrounds the outcome of the general election and the prospect of further property taxes remains.

However, while the UK’s economic indicators have improved, caution surrounded the world economy in the last quarter of the year, including falling oil prices and the economic outlook in China and the euro zone.

The result is that companies or individuals are more likely to postpone decision-making while they wait for clarity.

As figure 2 shows, global economic unpredictability rose in December. The VIX

index measures volatility on the US stock market and the spike in December is linked to the recent drop in oil prices, which has unnerved investors due to its pace and impact on oil-exporting countries like Russia.

It followed a spike in October linked to events in Syria and Hong Kong as well as the Ebola outbreak and concerns the Federal Reserve was going to raise interest rates sooner than expected.

Despite this uncertain global economic and political backdrop, prime central London residential property remained a sound investment in 2014, as figure 2 shows.

Total returns, which include rental income and capital value growth, outperformed a series of other asset classes in the year to November, proving its resilience as an investment.

For example, while commodity prices have fallen markedly, partly due to concerns over the Chinese economy, demand among Chinese tenants and buyers for prime central London property has increased, buoyed by its safe haven appeal. This is underlined by the fact the number of Chinese tenants increased by almost fourfold in 2014 compared to 2013.

DECEMBER 2014Rental value growth was flat for the second consecutive month in December

Annual growth hit a three-year high of 3.3% as the UK recovery continued

Some buyers have opted to rent due to the possibility of further property taxation after the general election

Prime central London property outperformed other asset classes in 2014 despite global economic volatility

The number of Chinese tenants rose fourfold between 2013 and 2014 in spite of China’s economic slowdown

TOM BILL Head of London Residential Research

“While commodity prices have fallen markedly, partly due to concerns over the Chinese economy, demand among Chinese tenants and buyers for prime central London property has increased” Follow Tom at @TomBill_KF For the latest news, views and analysis on the world of prime property, visit Global Briefing or @kfglobalbrief

RENTAL GROWTH HITS A THREE-YEAR HIGH AS ECONOMIC UNCERTAINTY RISESThe recovery in the prime central London rental market continued in December despite the impact of wider economic uncertainty in the final quarter of the year, says Tom Bill

RESIDENTIAL RESEARCH

PRIME CENTRALLONDON RENTAL INDEX

FIGURE 1 Prime central London rental value growth in December 2014

FIGURE 2 Prime central London property outperforms other asset classes in a volatile year (12 months to November 2014)

Source: Knight Frank Residential Research Source: Knight Frank Residential Research

DO

WN

Monthly growth 3-month growth 6-month growth Annual growth

VIX volatility index

3.3%0.5%0%

1.7%

FIGURE 3 Price growth in prime central London by area in the year to December 2014

DATA DIGESTThe Knight Frank Prime Central London Index, established in 1976, is the longest running and most comprehensive index covering the prime central London residential marketplace. The index is based on a repeat valuation methodology that tracks capital values of prime central London residential property. ‘Prime central London’ is defined in the index as covering: Belgravia, Chelsea, Hyde Park, Islington, Kensington, Knightsbridge, Marylebone, Mayfair, Notting Hill, South Kensington, St John’s Wood, Riverside* the City and the City Fringe. ‘Prime London’ comprises all areas in prime central London, as well as Barnes, Canary Wharf, Chiswick, Clapham, Fulham, Hampstead, Richmond, Wandsworth, Wapping and Wimbledon.* Riverside in prime central London covers the Thames riverfront from Battersea Bridge in the west to Tower Bridge in the east, including London’s South Bank. The City Fringe encompasses the half-mile fringe surrounding most of the City including Clerkenwell and Farringdon in the west and Shoreditch and Whitechapel in the east.

Knight Frank Prime Central London Index

KF Prime Central London

Index

12-month % change

6-month % change

3-month % change

Monthly % change

Dec-13 6,017.9 7.7% 3.6% 1.9% 0.8%Jan-14 6,043.6 7.8% 3.6% 1.5% 0.4%Feb-14 6,083.4 7.5% 3.7% 1.9% 0.7%Mar-14 6,135.1 7.5% 3.8% 1.9% 0.8%Apr-14 6,182.4 7.5% 3.8% 2.3% 0.8%May-14 6,231.2 7.8% 4.4% 2.4% 0.8%Jun-14 6,278.7 8.1% 4.3% 2.3% 0.8%Jul-14 6,297.3 7.9% 4.2% 1.9% 0.3%Aug-14 6,318.9 7.7% 3.9% 1.4% 0.3%Sep-14 6,343.4 7.4% 3.4% 1.0% 0.4%Oct-14 6,343.4 6.5% 2.6% 0.7% 0.0%Nov-14 6,330.7 6.1% 1.6% 0.2% -0.2%Dec-14 6,323.7 5.1% 0.7% -0.3% -0.1%

Source: Knight Frank Residential Research