Prices in prime central London rose for the first time in five months in February, boosted by price growth in markets with a higher proportion of properties that would not be subject to a proposed ‘mansion tax’.

A marginal increase of 0.1% was the first time the index has risen since September 2014 in a market where activity has been kept in check by the potential of a ‘mansion tax’ on properties worth more than £2 million after May’s general election.

Annual growth slowed to 4%, which is half of the 2014 average of 8.1%.

Stronger-performing markets included Islington and the City & Fringe in the eastern area of prime central London, where prices grew by 1.3% and 1% respectively in February. Both recorded annual growth of 9.1%.

The Riverside market, which was included in the index six months ago to reflect the high quality of developments in areas like Battersea and Vauxhall, has also risen 0.4% this year.

Elsewhere, there were declines in more

traditional prime markets with higher-value properties, including -0.8% in Chelsea, -0.2% in Notting Hill and -0.2% in South Kensington.

The existence of a two-speed market was underlined by the fact values for properties worth in excess of £5 million and £10 million declined by -0.1% in February. Meanwhile, prices in the £1 million to £2 million price bracket grew 0.4% in February, up 6.8% in the last year.

We estimate that 46% of £2 million-plus properties are located in the prime central London boroughs of Westminster and Kensington & Chelsea. However, eight out of ten properties on the £2 million ‘mansion tax’ threshold would be located outside the two boroughs in areas of suburban London and the Home Counties, research shows.

Though any tax would be lower in value and there is more clarity on the potential levy for properties worth between £2 million and £3 million, it underlines there is a mistaken belief the mansion tax would start to bite in prime central London.

FEBRUARY 2015Prices rose by 0.1% in February as Islington and City & Fringe performed strongly

Annual growth slowed to 4%, half of the 2014 average of 8.1%

Prices declined -0.1% in February for £5 million-plus properties while there was growth of 0.4% in the £1 million to £2 million price band

There were declines of -0.8% in Chelsea, -0.2% in Notting Hill and -0.2% in South Kensington

Eight out of ten properties on the £2 million ‘mansion tax’ threshold are located outside Westminster and Kensington & Chelsea

TOM BILL Head of London Residential Research

“It underlines the mistaken belief the mansion tax would start to bite in prime central London.” Follow Tom at @TomBill_KF

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

MANSION TAX UNCERTAINTY CREATES A TWO-SPEED MARKET IN PRIME CENTRAL LONDONMarkets with a higher proportion of properties not subject to a proposed ‘mansion tax’ are outperforming the prime central London average, says Tom Bill

RESIDENTIAL RESEARCH

PRIME CENTRALLONDON SALES INDEX

FIGURE 1 ‘New’ outperforms ‘old’ in prime central London

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

FIGURE 2 Price growth by price bracket (Two years to February 2015)

96

98

100

102

104

106

108

110

112

Feb-

13

Apr-1

3

Jun-

13

Aug-

13

Oct

-13

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14

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-14

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Feb-

15

£1m to £2m £2m to £5m £5m to £10m over £10m

Islington City & Fringe South Bank

Notting Hill Chelsea Kensington

18.8%

10.2%

6.3%

4.2%

£10,000,000

£5,000,000

£3,000,000

£1,000,000

£1,188,000

£3,306,000

£5,315,000

£10,420,000

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 2015 - 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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LONDON RESIDENTIAL REVIEWLONG-TERM REWARDS, SHORT-TERM UNCERTAINTY WINTER 2015

THE GLOBAL PERSPECTIVE ON PRIME PROPERTY AND WEALTH

thewealthreport2014

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-98

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-12

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-14

-3%

-2%

-1%

0%

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2%

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4%

5%

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-14

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-14

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Rental values in prime central London continued their recovery in February, recording their twelfth consecutive month without a decline.

An increase of 0.2% matched the rise in January and took annual growth to 4%, which was the highest level in more than three years.

As May’s general election approaches, there is a degree of uncertainty in the sales market that has dampened activity due to the potential of a ‘mansion tax’ on properties worth more than £2 million.

It has benefitted the lettings market to some extent as a small but growing number of buyers and vendors hedge their bets on the outcome of the election and move into the rentals market.

However, the dominant mood in the prime central London lettings market in February was also one of caution as election campaigning gathered pace, which resulted in low stock levels in some areas.

In higher-value price brackets, the mood of caution has led some landlords and tenants to explore option-to-buy clauses in tenancy agreements when it is mutually beneficial.

Though not prevalent, there is anecdotal evidence to suggest tenants have examined the ‘try-before-you-buy’ option in order to hedge against short-term political uncertainty, enabling them to initially rent and buy once there is greater clarity surrounding the outcome of the election.

Despite the hesitancy, there are grounds for optimism, including the fact new tenant registrations, viewings and the number of tenancies agreed remain strong.

The buoyancy of world stock markets in February is also likely to underpin demand, as figure 2 shows.

The performance of the prime central London rental index has broadly tracked global stock markets in recent years and the current record levels being set, including the FTSE100, indicate the positive upwards momentum will continue.

The recent strong performance is linked to indications from the Federal Reserve that it will not rush to raise interest rates, the low oil price and the agreement between Greece and the euro zone, among other factors.

FEBRUARY 2015Rental values rose 0.2% in February, which matched an increase in January

Annual growth was 4%, which was the highest level in more than three years

Caution dominated the market ahead of the general election, leading to low stock levels in some areas

Anecdotal evidence to suggest some tenants are exploring right to buy options to hedge against political uncertainty

Record global stock market performance suggests a positive medium-term outlook

TOM BILL Head of London Residential Research

“There is anecdotal evidence to suggest tenants have explored the ‘try-before-you-buy’ option in order to hedge against short-term political uncertainty” Follow Tom at @TomBill_KF

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

LANDLORDS AND TENANTS HEDGE THEIR BETS IN PRIME CENTRAL LONDON AS ELECTION LOOMSThe uncertainty that has dampened demand in the sales market is curbing activity in the lettings market though the medium-term outlook is positive, says Tom Bill

RESIDENTIAL RESEARCH

PRIME CENTRALLONDON RENTAL INDEX

FIGURE 1 Twelve months in positive territory

FIGURE 2 Prime central London rental values and global stock market performance (rebased to 100)

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

DO

WN

Annual Growth Monthly Growth

MSCI, World Mid & Large Cap Equity Index Prime central London rental index

FIGURE 3 Price growth in prime central London by area in the year to February 2015

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

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%Jan-15 6,319.5 4.6% 0.4% -0.4% -0.1%Feb-15 6,328.1 4.0% 0.1% 0.0% 0.1%

Source: Knight Frank Residential Research

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RESIDENTIAL RESEARCH